Exclusion Clauses and Unfair Contract Terms - Essay Example

?Exclusion Clause A clause inserted in a contract limiting a party’s actions or liabilities is called an exclusion clause, as in the case of A-Z Financial Services Ltd and Schatz Legal Services that excludes liabilities of Schatz Legal Services from those caused by management staff negligence. For instance, a party can use an exclusion clause relieving itself of liability in case of a breach of contract. This normally happens to ensure that the party that ends up breaching the contract does not compensate the other party for damages in full (Boundy, 2010, p. 68). There are some cases where a party includes an exclusion clause that states that they are exempted from all liability if things do not go as expected, which is under scrutiny because many people have argued that it only works to protect one party (Bradgate and White, 2007, p. 64). There have also been arguments relating to cases where an exclusion clause should be deemed unfair as per UCTA-Unfair Contract Terms Act 1977. The court of appeal in April 15 2008 overruled a high court decision in the case of Regus Ltd v Epcot Solutions Ltd that had suppliers raise their concerns due to an exclusion clause. In this case, the court of appeal came up with factors that should be put into consideration while deciding whether an exclusion clause is valid or not (Hayward, 2011, p. 43). The case facts were that a supplier company Regus relied on an exclusion clause that stated that Regus would be exempted from liabilities that would occur under any circumstances. In addition, another clause limited Regus’ liability to ?50,000 for any other types of damages. Epcot were Regus’ customers and they complained about air conditioning in their offices. Regus did not act and, therefore, Epcot stopped paying for the charges of their services as per the contract. Thus, Regus sued Epcot for the amount that was due, while Epcot on their part argued that when Regus failed to provide air conditioning, it resulted to a breach of contract. They counterclaimed for damages that had resulted from Regus actions for causing low profits, low opportunities for their business, inconvenience and distress because of not having air conditioning. In order for Regus to win, the case held the responsibility of proving that their exclusion clause was enforceable and fair as per Unfair Contract Terms act 1977. The high court judges ruled that even though it may seem theoretically reasonable for Regus to exempt themselves from liability for profit loss, the clause in this case was too wide to be enforceable. The clause did not leave Epcot with any remedy for the service of air conditioning and was, therefore, invalid and unenforceable. Regus appealed arguing that the high court judges were wrong in saying that the exemption clause was unreasonable as per unfair contract terms act of 1977. The court of appeal decided in favour of the defendants, thereby reversing the high court’s decision (Andrews, 2011, p. 76). The UCTA plays the role of protecting parties that are contracting from contractual provisions that are onerous like limitation and exclusion clauses. UCTA states limits to which liability for breach of contract and other types of breach of duty can be avoided through an exemption clause. When an exclusion clause fails to meet the restrictions that are stated in UCTA, it is held to be invalid and, therefore, unenforceable. Such a clause is held to be unreasonable and unfair to the other contracting party. Section 3 of UCTA is, in particular, vital while dealing with business contracts especially where a supplier is involved (Gillies, 2004, p. 93). This section states that a clause that is deemed to exclude liability of a supplier for breaching a contract can only be enforceable if it passes the test of reasonability. Reasonable test is described in section 11 (1) of UCTA as circumstances that are reasonable and that are known or are to be known by the contracting parties. UCTA schedule 2 has a list of factors that are to be used in assessing reasonability, which are normally used by courts to determine reasonableness as stated in section 3 of the same act. One major factor that is used to assess reasonableness is whether the parties had equal bargaining position (Lawson, 2011, p. 85). Another factor that is used is determining whether a party had received any kind of inducement to agree to the contractual terms. The party must have known about the terms and their extent at the time he or she entered into the contract. In the present case, A-Z Financial Services Limited had not been induced by Schatz Legal Services to accept their offer. It can also be deemed reasonable to have that clause since it ensures that Schatz Legal Services does not to pay for extra liabilities caused by their management. The fact that the exclusion clause is clearly stated in the contract means that A-Z Financial Services know about it. In Green v Cade (1978), a buyer had bought potatoes from a seller, which were infected with a virus (Willett, 2007, p. 112). This caused huge losses to the buyer. The courts held that the seller had failed to provide information that those potatoes were not the same as the original potatoes. The seller argued that the buyer had failed to make a complaint about the potato seeds three days after he bought them (Elliott & Quinn, 2009, p. 89). The court held that the buyer could not have known that the seeds had a virus only three days after they were delivered. Therefore, the sellers’ defence on lack of complaint by the buyers three days after the delivery was unfair. There are other cases whereby courts have held for the respondent and held that the exemption clauses were unfair. In St Albans City v International Computers (1994), it was held that the defendants had breached the contract and they were negligent and the clause was held to be unreasonable. However, in Overland Shoes Ltd v Schenkers (1998), it was held that the defendants had fulfilled the requirements of UCTA 1977; moreover, they appealed and it was held that the clause was neither unreasonable nor unfair. UCTA has gone further and stated various instances where an exemption clause is held to be unreasonable, considering UCTAS4 stating that in the contractual agreement where one of the parties is a consumer and there is an indemnity clause, such a clause is unreasonable and, therefore, unenforceable. UCTAS5 protects consumers from defective consumer goods as it states that in cases where a manufacturer or a supplier exempts his or herself from liability in case the goods are defective, thereby causing consumers’ losses, such a clause is unenforceable. UCTA S6 states that in cases of hire purchase and sales agreement, implied terms on title cannot be exempted by an exclusion clause. Implied terms on goods such as their description sample, quality and fitness cannot be exempted in cases either, where one of the parties is a consumer. In cases where a supplier or a distributor is dealing with a consumer, exclusion clause has to be very reasonable to be enforceable. UCTAS8 states that an exemption from liability that occurs as a result of a party’s misrepresentation is not effective and can only be enforced if it meets other requirements of reasonability. There is another type of an exclusion clause known as entire agreement clause. This clause normally states that everything dealing with a contract is entirely covered in the contractual agreement and that liability is only limited to what is covered in the agreement. This means that other losses that may occur cannot be compensated unless they are directly linked to the products that were involved in the contract (Bhana et al., 2009, p. 107). However, there is limitation to this clause as well since this agreement cannot be used to exclude fraud, for instance, fraudulent statements that are made during the negotiation of the contract. In order for the entire agreement clause to be effective, there must be a statement specifying that the contractual agreement comprises the entire agreement. Moreover, the statement should also state that the agreement supersedes any other agreements that may have been made previously. There should also be a statement indicating that parties will not rely on any kind of representation that has not been set out in the contract (Abbott et al., 2007, p. 86). There should also be an acceptance statement from both parties that the only kind of remedy available is for breach of contract or any other type of remedy stated in the contract. Schatz Legal Services’ exclusion clause is an example of an entire agreement clause in the sense that it prevents A-Z Financial Services from suing for damages caused by their management. It is clear that they are only willing to pay for damages that are directly linked to the contract. Exclusive remedies clause states that a party can only sue for remedy as stated in the contract and cannot apply for other remedies as stated in the common law and statutory law (Hayward, 2011, p. 43). This ensures that the claims that a party can sue for as per the contract are reduced. These remedies clause are very helpful to contract parties who are likely to be on the losing end in case there is unintentional breach of contract as stated in common law. Normally, contracting parties can even sue for tort that is not directly caused by the party. Many parties have found themselves in unclear circumstances as a result of exclusion clause. Here are some issues that parties should put into consideration during the negotiation process of an exclusion clause. The other important point is to identify and put into consideration your financial effects of an exclusion clause. This is because there are businesses that are more likely to suffer from breach of contract caused by the other party, and others may not suffer as much. Therefore, it is vital to consider commercial consequences of the exclusion clause. This will enable parties to figure out the damages that should be recovered and those that are not vital. The second important element that should be put into consideration is the type of losses that should be excluded. Both parties’ positions should be considered so that the clause can be fair and reasonable. The last element that is vital is use of clear words so that the clause can be clear to both parties. Therefore, both A-Z Financial Services and Schatz Legal Services should consider these important factors before finalizing the negotiations. References Elliott, C. & Quinn, F. (2009). Contract Law. Harlow (England): Pearson Longman. Lawson, R. G. (2011). Exclusion Clauses and Unfair Contract Terms. London: Sweet & Maxwell. Bradgate, R. & White, F. (2007).Commercial Law. New York: Oxford University press. Bhana, D., Bonthuys, E. & Nortje, M. (2009). Student's Guide to the Law of Contract. Netherlands: Kluwer. Abbott, K., Pendlebury, N. & Wardman, K. (2007). Business Law. London: Thomson. Gillies, P. (2004). Business Law. Sydney: Federation Press. Hayward, R. et al. (2011). Business Law. United Kingdom: Taylor & Francis. Willett, C. (2007). Fairness in Consumer Contracts: The Case of Unfair Terms. United Kingdom: Ashgate Publishing. Andrews, N. (2011). Contract Law. Cape Town: Cambridge University Press. Boundy, C. (2010). Business Contracts Handbook. Lon Gower: Publishing on, Gower pub. Read More