An exemption clause in a contract is one which seeks to exclude or limit in some way one party’s liability toward the other. Over a period of time these clauses had been used in an oppressive way, where a person in a weak bargaining position had little say in the formation of a fair contract. The courts have therefore limited the use of these clauses through case law, and in addition Parliament has made substantial changes to the common law position through statute.
There are two types of exemption clause:
• limitation clauses – where a party limits liability in a contract;
• exclusion clauses – where a party tries to avoid any liability at all in a contract.
‘What are they trying to avoid?’
The management will take no responsibility whatsoever for damage to clients’
property, however caused
Any damage to customers’
property will be limited to the replacement value or £15, whichever
is the lower
An exclusion clause A limitation clause
Figure 8.1
Can you distinguish between the limitation and exclusion clauses above?
We do not take any responsibility for …
The courts’ approach to both types is similar in the procedure followed, so in this chapter the term ‘exemption clauses’, where used, refers to both exclusion and limitation clauses.
To examine the validity of an exemption clause there are three steps traditionally taken by the courts. These are seen in the chart below.
If the exemption clause survives the first ‘hurdle’ and is found to be incorporated, the court then enquires whether the clause can be interpreted to cover the damage. If this is the case, then the relevant statutes will be applied, to see if the clause should stand. This process in logical since, of course, if the term is not incorporated into the contract the other considerations will be irrelevant. In practice, however, the legislation is often the first point of discussion. The traditional route should be followed in analysing problems for examinations, and is pursued in detail here.
Incorporation
The court will ask the question: Is the clause part of the contract? An exemption clause, just like any other term of a contract, must be incorporated into the contract. Incorporation was covered in detail in Chapter 6, but the most relevant issues are that:
• The term must not come too late – Olley v Marlborough Court (1949).
• The term must be brought to the attention of the other party in a reasonable way – Parker v South Eastern Railway (1877).
For both of the above points in a modern setting, see Thornton v Shoe Lane Parking Ltd (1971). In addition, if the term is in a document it should be one which would be regarded as of a contractual nature – see Chapelton v Barry UDC (1940), and the writing must not be obscured – see Sugar v LMS Railway (1941). Remember also that the parties may have formed a
‘course of dealing’ – Hollier v Rambler Motors (1972).
See Chapter 6, pp. 97–101, for details of the cases mentioned above.
1 Incorporation⇒ is the term part of the contract?
2 Construction⇒ can the damage which has occurred be interpreted as falling within the boundaries of the exemption clause?
3 Legislation⇒ is the term allowed within current statute law?
Figure 8.2
Construction
In this context construction means interpretation. The court will ask the question: Can the exemption clause be construed (or interpreted) to cover the damage which has arisen? Two rules are used to help answer the question: the main purpose rule and the contra proferentem rule.
The main purpose rule
The courts will not allow an individual term to defeat the main purpose of the contract. So if an individual term contradicts the very reason for the contract being made, that term will not stand. The following case provides a good example of this.
The contra proferentem rule
Any doubt or ambiguity in an exemption clause will be interpreted against the person seeking to rely on it (or proffering it), as seen in Houghton v Trafalgar Insurance (1954), where the word ‘load’ in a car insurance policy was held not to extend to an excess of passengers.
Other common law principles
An overriding oral statement may contradict an exemption clause, as in the following case.
Glynn v Margetson (1893)
A clause allowed a ship to call at any port in Europe or North Africa.
While under a contract to carry oranges from Malaga to Liverpool, the captain relied on this clause to give him the freedom to go into the Mediterranean to pick up extra cargo. While this would not have mattered if he was carrying non-perishable goods and time was not important, in this case it meant that the oranges deteriorated, so were not ‘in good condition’ as the contract required. The clause would therefore have defeated the purpose of the contract, so was not allowed to stand.
Mendelssohn v Normand (1970)
A garage attendant advised a customer to leave his car unlocked, and items were later stolen from the car. An exclusion clause disclaimed liability for stolen goods, but this was held to be ineffective because of the oral statement of the attendant.
Even if a contradictory statement turns out to be untrue, and therefore a misrepresentation, it can have the same effect on an exemption clause as a true statement.
Legislation
The final step taken by the court is to ask the question: Is there any legislation which affects this clause? The relevant legislation is the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999. This legislation has radically changed the idea of freedom to contract, and has given much needed protection to the consumer.