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(^1) L’Estrange v Graucob [1934] 2 KB 394
EXCLUSIONS AND LIMITATIONS OF LIABILITIES
BY DOV OHRENSTEIN, RADCLIFFE CHAMBERS
- It is in the interests of suppliers of goods and services to avoid or minimise any potential liability for breach by them of their supply contracts or for negligence. Suppliers therefore frequently try to rely on express exclusion or limitation clauses in the hope that such clauses are effective. Determination of whether such clauses are effective or not requires issues relating to the following to be considered:
Incorporation
Construction
Statutory controls
Incorporation
- Unsurprisingly, to impact on the liability for contractual loss, the exclusion / limitation term must be part of the parties’ contract. Whether a term is incorporated or not depends upon the parties’ intentions.
Signed Documents
- If a contract is signed by the parties then its terms are expressly agreed and usually no problem of incorporation arises. even if the terms have not been read.
- If the clause appears in a document which has been signed, it is presumed that the party who has signed has read and understood the clause, even if the clause is in small print or in legal jargon.
“The claimant, having put her signature to the document and not having been induced to do so by any fraud or misrepresentation; cannot be heard to say that she is not bound by the terms of the document because she has not read them.”^1
- An exception applies not only if there has been fraud or misrepresentation, but also in cases of oral variation and estoppel:
- A claimant took a wedding dress to the defendant dry cleaners and was asked to sign a ticket headed “ receipt ”, which included a clause stating that clothing “is accepted on condition that the company is not liable for any damage howsoever
(^2) Curtis v Ch emical Cleaning an d Dyeing C o Ltd [1951] 1KB 805 (^3) eg Petrotrade Inc v Texaco Ltd [2002] 1 WLR 947 (^4) British H ire Corp v Ipsw ich Plant H ire [1974] 1 All ER 1059 (^5) [2010] UKSC 14
arising .” Before she signed, however, the claimant was told by the assistant that the document simply excluded liability for certain risks, including the risk of damage to the beads and sequins on the dress. The claimant then signed. When the dress was returned it was stained. It was held that the dry cleaners had misled the Claimant and could only rely on the exclusion clause in relation to beads and sequins not other types of damage. 2
Course of Dealings
- A clause may be incorporated by course of dealing between the parties:
- If on numerous occasions the parties have always contracted on the same terms it may not matter if the terms were not provided on the occasion of the particular contract which is in dispute.^3
Trade Custom
- A clause may be incorporated because both parties are aware that it is the practice of a particular trade to contract subject to standard exempting conditions.
- Where the parties were in the same line of business and the exclusion clause was common, the fact that the defendant had not seen the clause before the work was commenced did not render it ineffective.^4
Agreements by conduct or performance
- In RTS Ltd v Molkerei Alois Muller GmbH & Co^5 the Supreme Court considered a case where the claimant supplier of automated packaging machines negotiated with the defendant to design and install equipment. The defendant sent the claimant a letter of intent setting out a draft contract, providing that the work had to be completed incorporating standard terms and conditions, published by the Institutes of Mechanical Engineers and Electrical Engineers and referred to as MF/1, which contained liquidated damages provisions and limitations on liability but which, by clause 48, provided that the contract would not be binding unless signed and executed by the parties. The parties did not sign or execute that agreement but proceeded with the project. Following completion of the work, and with the claimant having received stage payments amounting to 70% of
(^6) eg M idland Veneers Ltd v Unilock HCP Ltd CA 12/3/98, (^7) eg He rtford F ood s Ltd v Lid l [2001] EWCA Civ 938 (^8) British Road Services v Arthur Crutchley Ltd [1968] 1 AllER 811, Tekdata Interconnections Ltd v A mpheno l Ltd [2009] EWCA Civ 1209 (^9) GH SP v A B Electronic [2010] EWHC 1828 (Comm)
- Where a contract had come into existence not as a result of offer and acceptance but during and as a result of performance, it would be possible to hold that such contract impliedly and retrospectively covered pre-contractual performance
Battle of the Forms
- Problems often arise where no terms are signed. Commercial cases frequently give rise to a “ battle of the forms ” when both the supplier and the customer seek to contract on their own standard terms. The goods or services may then be supplied without either party signing the other’s terms of business. The courts then have the difficult situation of deciding which if any of the parties’ standard contractual terms apply. Various outcomes can follow including:
No contract may be concluded 6 - the customer being left with a restitutionary obligation (“ quantum meruit ”) to pay a reasonable price for the goods or services.
A limited contract may be concluded (covering only the basic matters of price, quantity and perhaps delivery date) but not including either party’s standard terms.^7
The “ last past the post ” approach may apply where the party who sent their terms and conditions last may be deemed to have had their terms accepted by the other.^8
- A recent example of the difficulties which can arise is GHSP v AB Electronic^9 where the Claimant manufactured vehicle control systems and ordered electronic pedal sensors from the Defendant for onward sale to Ford Motor Company. Faulty sensors were supplied and the Claimant was faced with a large bill from Ford for the costs of inspection/ replacement of the parts which it wanted to pass on to the Defendant. The Claimant wished to rely on its standard terms of purchase which purported to impose unlimited liability on suppliers while the Defendant wished to rely on its standard terms of sale which restricted its liability. During the negotiations before supply neither party accepted the other’s standard terms. Both parties were hoping that the other would propose an appropriate cap on liability but this never occurred. It was held that the parties did not contract on either side’s standard terms and that the terms of the contract were simply those implied by the Sale of Goods Act 1979.
(^10) Thornton v Shoe Lane Parking [1971] 2 QB 163 (^11) John Snow v DBG Woodcroft [1985] BCLC 54 (^12) Interfoto Picture Library v Stiletto Visual Progra mmes [1988] 1 All ER 348 (^13) Chapleton v Barry UDC [1940 1 KB 532 (^14) Olley v Marlborough Ct [1949] 1KB 532
Sufficient Notice
- The normal rule (where the document is not signed) is that the party affected by the clause will be bound if the party delivering the document has done what may reasonably be considered sufficient to give notice of the clause to persons of the class to which he belongs.^10
- “If the party sought to be bound knew that the document relied upon contained writing or printing but was unaware that it contained terms or conditions he will be taken to have notice of and thus be bound by the term in question, only if the party seeking to bind him has done all that was reasonably sufficient to bring the terms and conditions to his notice”. 11
- What is necessary to bring terms and conditions to a party’s attention depends on a number of factors:^12
The situation of the parties (including the strength of their bargaining positions).
The layout of the document.
The terms of the document (particularly if any term is unusually wide or stringent).
- How and when the terms are provided is important. For example:
Placing the terms on the back of a receipt may be ineffective where the purchaser only receives the receipt after the contract has been agreed and payment provided.^13
Hotels terms which were placed on the back of hotel room door were ineffective to prevent liability for theft of a guest’s fur coat. Such terms would not have come to the client’s attention until after the contract had been entered into at the hotel reception.^14
(^19) M otours Ltd v Eurobell (West Kent) Ltd [2003] All ER (D ) 165 (Jan) (^20) J.Gordon Alilson & Co v Wallsend Shipway (1927) 43 TLR 323 (^21) Photo Production Ltd v Securicor [1980] AC 827 at 850 (^22) Beck & Co v Szymanowski & Co [1924] AC 43
term within the relevant industry. 19
CONSTRUCTION
General Principles
- Exemption clauses must be expressed clearly and without ambiguity:
“if a person was under a legal liability and wished to get rid of it he could only do so by using clear words.”^20
- If an exclusion clause is clear and unambiguous then there is no justification for placing upon the language a strained or artificial meaning so as to avoid its effect. 21
- In addition to the general principle that exemption clauses are construed against the party seeking to rely on them, where there is any ambiguity then the contra proferentem rule applies - the clause will be construed against the party who drafted it.
Clause must cover the event
- For an exclusion clause to be effective, the precise circumstances or loss must be covered by the wording which should not be too narrow. For example:
Provisions that goods are bought “as seen” or exclusion of liability for “latent defects” will not exclude the terms as to quality and fitness for purpose which are implied by the Sale of Goods Act.
The exclusion of implied terms will not cover breach of express terms.
The exclusion of liability for “consequential loss or damage” will not cover direct loss or damage.
A clause providing that “all goods delivered shall be deemed to be in all respects in accordance with the contract” unless the buyer gave notice within 14 days of the arrival of the goods was held not to cover a claim in respect of short delivery, i.e. the term did not apply to goods which were not delivered. 22
(^23) Suisse Atlantique v NV Rotterdamshe Ko len C entrale [1967] 1 AC 361 at 482 (^24) Internet Broadcasting Corporation (t/a Net TV) v Mar LLC [2009] E W HC 8 44 (Ch)
Inconsistency with the purpose of the contract
- The courts will be reluctant to construe an exemption clause so that it has the effect of absolving one party from all duties or obligations:
“One may safely say that the parties cannot, in a contract have contemplated that the cluase should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force: to dos so would be to reduce the contract to a mere declaration of intent.”^23
- In the case of Internet Broadcasting Corporation^24 NetTV provided interactive internet televisions platforms while Mar LLC provided information to hedge funds. The parties entered into a joint venture contract to provide an internet television channel. The agreement could not be terminated for 3 years except if there was a material breach which was not remedied within 30 days. One year into the agreement Net TV wrongfully repudiated the contract but tried to rely on a clause which stated:
“...neither party will be liable to the other for any damage to software, damage to or loss of data, loss of profit, anticipated profit, revenues, anticipated savings, goodwill or business opportunity, or for any indirect or consequential loss or damage.”
It was held that the starting point in interpreting the clause had to be the rebuttable presumption that it was not intended to cover a deliberate repudiatory breach of contract. There would have to be very clear, strong, language to persuade a court that the parties intended the words to cover such a case. Pointing to a mere literal meaning was not enough. The words used in the clause did not contain strong language or a clear statement that deliberate wrongdoing was intended to be covered, let alone deliberate personal and repudiatory wrongdoing. A reasonable businessman, reading the words with an eye to an allocation of insurable risk, would understand that they did not extend to risks which were uninsurable or very unlikely to be insurable, such as losses flowing from a deliberate, personal, repudiatory breach. The literal meaning in the instant case would defeat the main object of the contract. The clause therefore did not cover the deliberate repudiatory breach.
Liability for Negligence
- Subject to statutory provisions, liability for negligence can be restricted or excluded by
(^27) Lamport & Holt Lines v Coubro & Scrutton [1982] 2 Lloyds Rep 42, 50 (^28) Suisse Atlantique v NV R otterdamshe Ko len C entrale [1967] 1 AC 361 (^29) Photo Production Ltd v Securicor [1980] AC 827
or must be deemed to have presented themselves to the contracting parties at the time the contract was made, and ask to what potential liabilities the one to the other did the parties apply their minds, or must they be deemed to have done so.”^27
Fundamental Breaches
- The expression “ fundamental breach ” has been used to refer to two distinct things:
A performance totally different from that which the contract contemplated.
A breach of contract more serious than one which would entitle the other party merely to damages and which (at least) would entitle him to refuse further performance of the contract.
- The Courts used to consider that a party to a contract would be prevented from relying on an exemption clause where that party had been guilty of a fundamental breach of contract or the breach of a fundamental term. This was based on the view that there were certain breaches of contract (“ fundamental breaches ”) which were so totally destructive of the obligations of the party in default that liability for such a breach could in no circumstance be excluded or restricted by means of an exemption clause. Similarly so called fundamental terms were described as those that if not complied with then the performance of the contract became totally different.
- However the House of Lords has made clear that even if a breach is fundamental it can be covered by an appropriate exemption clause. The question is one of construction. 28
- Accordingly where a security guard employed by the defendant deliberately lit a fire in the Claimant’s factory the House of Lords held that the defendants had effectively modified their contractual obligations to one of exercising due diligence in their capacity as employers. The clause apportioned the risk between the parties and the risk of arson was not accepted by the defendants having regard to the nature and cost of the service provided in circumstances where the claimant could readily and economically obtain appropriate insurance.^29 Similarly, the Court of Appeal held in a case concerning allegations of theft of mobile phones from a warehouse by dishonest employees of the warehouse company that limits on liability contained in industry standard terms and
(^30) Frans M aas (UK ) Ltd v Sam sung Electronics (UK ) Ltd [2004] EWHC 1502 (Comm) (^31) Springw ell Navigation Corpn v JP M organ C hase Ba nk & Others [2010] EWCA Civ 1221
conditions were incorporated and enforceable.^30
- Now, if the phrase fundamental breach is to be used it ought to be confined to the situation where a breach is sufficiently serious that it entitles the innocent party to elect to treat the contract as repudiated so that the parties’ primary obligations no longer need to be performed.
“Non Reliance” Clauses
- Contracts often include a provision that one party has not entered into the agreement in reliance on any pre-contractual representation. Such provisions are sometimes included even though it is obvious that in fact one party has relied on representations by the other so the term is an attempt to create a legal fiction. In those circumstances is a “non reliance” clause enforceable?
- In 2010 the Court of Appeal in Springwell^31 considered this issue in the context of the purchase of certain complex financial Notes (purchased from JP Morgan. The Terms and Conditions of the Notes contained a statement that “[the Purchaser] has not relied [on] , and acknowledges that [the Vendor] has not made, any representation or warranty with respect to the advisability of purchasing this Note ”.
- The Purchaser argued that such a provision cannot operate as a contractual estoppel if both parties know that representations have in fact been made and that they have in fact been relied on.
- The Court of Appeal rejected the Purchaser’s argument. It held:
(i) Parties can agree to assume that a certain state of affairs is the case at the time a contract is concluded, even if that is not the case; and
(ii) The Purchaser was contractually estopped from asserting that any actionable misrepresentations had been made by the Vendor and from claiming reliance on any such misrepresentations.
(iii) To enforce the estoppel it was not necessary for the Vendor to prove that it would be unconscionable for the Purchaser to resile from the contractual estoppel.
- Any exclusion of liability for causing death or personal injury is entirely ineffective under section 2(1) of UCTA. This applies whether the victim was a consumer or acting in the course of business.
Liability for Negligence (other than death/ personal injury)
- For the purposes of UCTA negligence covers:
- Breach of a contractual obligation to exercise skill and care
- Common law obligation to take reasonable care or use reasonable care
- The duty of care imposed by the Occupier’s liability Act 1957
- Clauses which seek to exclude liability for negligence are not effective unless they satisfy the reasonableness test set out in section 2(2) of UCTA.
Excluding statutory implied terms as to title
- The purpose of a contract of sale is to transfer title from the seller to the buyer. Accordingly (except in rare cases where someone intends to buy the benefit of a mere chance that the seller is the owner) the common law would be reluctant to give effect to a provision that exempts a seller in the event that it cannot pass good title.
- Statute has clarified this. Section 6(1) of the Unfair Contract Terms Act 1977 invalidates (except in the case of international sales) any term exempting the terms about title which are implied by section 12 of the Sale of Goods Act 1979.
Excluding statutory implied terms as to quality/ fitness/ description
- Terms as to quality, fitness for purpose, correspondence with description and sample would all have normally been implied by common law. They are also implied by sections 13 to 15 of the Sale of Goods Act.
- Section 6(2) of UCTA invalidates the exclusion of the terms as to quality, fitness for purpose, correspondence with description and sample if the buyer “ deals as a consumer ”
- For business to business contracts such an exclusion is only enforceable so far as is reasonable.
Substantially different contractual performance
- A term which purports to entitle a party to provide a substantially different contractual performance is subject to the reasonableness test if that term is a standard written term or if the other party is dealing as a consumer.
(^33) R&B Customs Brokers C o Ltd v United Do minions Trust Ltd [1988] 1 WLR 321
Exclusions in manufacturers’ or vendors’ guarantees
- Where goods are of a type usually supplied for private use or consumption then liability cannot be restricted by reference to terms included in guarantee.
What is a “ dealing as a consumer ?”
- Not every contract made by a busines is made “in the course of business”. If the making of the contract was an ancillary transaction not an integral part of the business then the business can be acting as a consumer.
- Where a company which was a freight forwarding agent bought a second hand car for the use of its directors (and had done so on only a few previous occasions) it was held that the since the company had not held itself out as making the contract for the purchase of the car in the course of business, and since, on the facts, the necessary degree of regularity had not been shown, the company was dealing as a consumer within the meaning of section 12(1) of the Unfair Contract Terms Act 1977, and by virtue of section 6(2) of that Act the implied term of fitness for purpose could not be excluded. 33
The reasonableness test
- Schedule 2 of UCTA sets guidelines which courts take into account when determining whether or not a clause is reasonable:
The strength of the bargaining positions of the parties relative to each other taking into account (amongst other things) alternative means by which the customer’s requirements could have been met.
Whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term.
Whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, amongst other things, to any custom of the trade and previous course of dealing between the parties)
Whether the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable
Whether the goods were manufactured processed or adapted to the special order
(^36) Edmund Murray v BSP International Foundations (1992) 33 Con LR 1 (^37) Watford Electronics v Sanderson CFL Ltd [2001] 1 A ll ER Comm 696 at [63], approving Salva ge A ssociation v CA P Financial Services Ltd [1995] FSR 654 at 676 (^38) First Balmoral Group v Borealis (UK) Ltd [2006] E W HC 1 900 (Co mm).
- In Edmund Murray v BSP International Foundations^36 the Court of Appeal considered the provisions in a contract for the supply of a piling rig which provided that the seller would make available certain benefits against a third party manufacturer, in lieu of all warranties, with the exclusion of loss of profits, consequential or special loss or damage. In giving a judgment with which the other members of the court agreed Neil LJ said that the provisions were unreasonable and, in particular, stated:
“Condition 12.6 presents its own difficulty. On the face of it a term excluding consequential loss would appear to be fair and reasonable as between parties contracting at arm's length. But this condition goes further and provided (inter alia) that BSP shall not be liable-
‘for any damage (whether or not consequential) arising from stoppage or breakdown of the goods or in any other way from the performance of the goods in operation.’
Here again, if the failure of performance is proved to be due to a breach of the obligation to provide a rig which complied with the specification or to provide a rig which was fit for the purpose for which EML required it I consider that this condition would not satisfy the requirement of reasonableness.”
- The Court of Appeal has confirmed the following: 37
“Generally speaking, where a party well able to look after itself enters into a commercial contract and, with full knowledge of all relevant circumstances, willingly accepts the terms which provide for apportionment of the financial risks of the transaction, I think it is very likely that those terms will be held to be fair and reasonable.”
- In Balmoral v Borealis^38 a manufacturer of moulded storage tanks (Balmoral) purchased supplies from Borealis but the product supplied (borecene) was unsuitable for use in storage tanks. The tanks started splitting and leaking and Balmoral suffered substantial losses. It was held that the contract was on Borealis’s standard terms. These warranted that the borecene would comply with Borealis's standard specification but that if it did not, Borealis had the option to replace it, repair it, or refund the purchase price. All other conditions and warranties about quality and fitness for purpose were excluded; Borealis accepted no liability for any additional loss or damage which the buyer might suffer; and overall liability was restricted to the purchase price of the goods. Clarke J set out a checklist of relevant factors:
(^39) Bo realis was more successful in King span v Borealis [2012] EWHC 1147 (Comm) where it established that its terms and conditions were governed by Danish Law and as international supply contracts, the UCTA restrictions d id not apply and the terms were in any event reasonable
(^40) Regus (UK) Ltd v Epcot Solutions [2008] EWCA Civ 361
The relative strengths of the parties’ bargaining positions
Would other suppliers have insisted on similar terms?
Was any inducement offered to the purchaser to accept the restriction on the seller’s liability?
The availability of appropriate insurance, and the relative cost to each party of obtaining cover
Had the purchaser contracted on similar terms before?
Was the purchaser relying on the seller’s expertise?
Was the defect within the seller’s expertise?
Was the exclusion clause purporting to totally exclude liability or simply limit it?
- It should be noted that:
Balmoral was a large volume purchaser and had a strong bargaining position and had closed its eyes to the terms and did not try to challenge them.
The parties had not thought about or negotiated the allocation of risk.
Balmoral’s own standard terms contained similar exclusions to those of Borealis.
- Nevertheless, Clarke J concluded that (although the issues were finely balanced) the Borealis terms were unreasonable. The buyer should not have to accept the entire risk of a latent defect pursuant to a blanket exclusion where it had in fact relied on the seller’s expertise.^39
- In Regus v Epcot^40 serviced offices were let by Regus to Epcot. The office air conditioning failed to work propertly and Epcot withheld payment which Regus then sued for. Epcot counterclaimed for loss of business and other losses. The Regus terms and conditions included the following:
“(1) We are not liable for any loss as a result of our failure to provide a service as a
(^41) Kingsw ay H all Hotel v Red Sky [2010] EWHC 965 (TCC) (^42) Lobster Group v Heidelberg & Close Asset Finance [2009] EWHC 1919 (TCC) (^43) Stewart Gill v Horatio Myer [1992] QB 600 at 607 - 608
- A recent illustration of how the reasonableness test is applied is Kingsway Hall Hotel v Red Sky ,^41 a case concerning the provision of computer software to a hotel. The system was not bespoke. The software provided inaccurate information and regularly crashed. After 6 months of complaints which were not resolved the hotel claimed that the software was not of satisfactory quality or fit for purpose. The hotel claimed for the financial losses that it suffered. Red Sky tried to rely on its standard terms which said that all terms as to performance, quality etc were excluded to the fullest extent permitted by law. It was held that the standard terms assumed that a buyer would be able to choose the software by looking at operating documents (which were not supplied) or demonstrations but the Hotel had bought because of a recommendation from a Red Sky employee. The terms were therefore unreasonable and Red Sky was liable for loss of profits, loss of goodwill wasted expenditure etc.
Severance of unreasonable clauses
- In Lobster Group v Heidelberg^42 the Lobster Group claimed damages for defects in a printing press hired from Close Asset Finance who had purchased it from the manufacturer (Heidelberg). Close counterclaimed for hire charges. There were three relevant agreements - the Hire Agreement between Close and Lobster Group which was on Close’s standard terms, Heidelberg’s standard Warranty Agreement provided to Lobster Group, and Heidelberg’s standard Service Agreement entered into with Lobster Group. Each of these contained limits or exclusions on liability. While some of those limits and exclusions were found to be reasonable others were not. It was held that an exclusion of liability clause was unreasonable because one of its three sub-clauses was deemed to be unreasonable. This followed a 1992 High Court decision^43 which adopted the same approach. Nevertheless, the decision in Lobster is contrary to the general view (eg as applied in Regus v Epcot ) that if one sub clause is reasonable it can survive even if another is not.
Unfair Terms in Consumer Regulations 1999
- The 1999 Regulations apply to unfair terms in contracts if
(^44) Spreadex v Colin Cochrane [2012] EWHC (Comm)
- Consumer for these purposes is limited to natural persons
- The Regulations are concerned with terms that are “unfair”. Such terms (so long as they fulfill other criteria) will not be binding on a Consumer.
- The test of what is unfair under the Regulations is:
- Does it, contrary to the requirement of good faith, cause a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.
- The test under the 1999 Regulations of what is unfair in relation to an exclusion or limitation of liability clause is likely to be similar if not identical to the test of reasonableness which applies to exemption clauses in consumer contracts and standard form contracts under section 3 of UCTA.
- In the recent Spreadex case 44 the Court held that if, contrary to the finding that the term on the Spreadex website that the customer “will be deemed to have authorised all trading under [his] account number” did not form part of a contract, such a term was unenforceable pursuant to the 1999 Regulations as “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer”. Relevant factors were that:
The deemed authorisation provision was drafted in absolute terms and, for example, was intended to apply even if the customer could prove that he had not been negligent.
The relevant provision was part of 49 pages of closely typed and complex terms and conditions. “It would have come close to a miracle if [the Customer] had read the second sentence of Clause 10(3) [the deemed authorisation provision] , let alone appreciated its purport or implications, and it would have been quite irrational for the claimant to assume that he had”
Drafting Exclusion Clauses
- Do not exclude liability for:
