Contract Law Exemption Clauses 2

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Contra-Proferentem Rule

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This is a rule of interpretation, which requires that if an exclusion clause is open to several meanings, then the court must interpret it against the party relying on it. Thus, any doubt or ambiguity will be interpreted against the person seeking to rely on the clause (proferens).

This rule is also reflected under the EC (Unfair terms in Consumer Contracts) Regulations 1999, which requires that " ... where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail".

In some cases, while the exemption clause may be enough to exclude liability under Law of Contract, the proferens may still be found liable in Tort for negligence. Indeed, this is well illustrated by the case of White v Warwick (1953)
REMEMBER AFTER UCTA 1977 IT IS OF LIMITED APPLICATION

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White v Warwick (1953)

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Where the plaintiff hired bicycles with his wife. The saddle tilted on his wife's bicycle and she was thrown from it. A clause in the agreement stated " ... nothing in the agreement shall render the owners liable for any personal injuries to the riders of the bikes hired".

The plaintiff sought damages on the basis of strict liability (in that the defendants supplied a tricycle that was not reasonably fit for the purpose for which it was required) and negligence. While the limiting clause was held to exclude liability in contract, it was held that such a clause could not oust the rights of the parties to sue in tort.

The claim in tort was independent of the contract and could be established without relying on the contract at all.

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Construction - contra proferentum

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Houghton v Trafalgar Insurance Ltd
An exclusion clause will be interpreted against the user, so any doubt in the wording of the clause will work against him

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Statutory control - UCTA: Scope

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UCTA covers breach of obligations arising:
(a) from things done in the course of a business, or;
(b) from the occupation of premises for the occupiers business use.
(s 1(3) UCTA)

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Statutory control - UCTA: Negligence

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s2(1): Liability for death or personal injury arising from negligence may not be excluded.
s2(2) Liability for loss other than death or personal injury may be excluded so long as the term satisfies the reasonableness test.

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Statutory control - UCTA: Breach

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s3(2): where one party deals as a consumer, liability for breach of contract can only be limited subject to the reasonableness test.

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Statutory control - UCTA: "Dealing as a consumer"

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s2(1) In order to deal as a consumer:
- one party must not make the contract in the course of a business
- the other party must
- In relation to supply of goods or hire purchase, the goods must be ordinarily supplied for private use or consumption.

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Statutory control - UCTA: Sale of Goods

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Regarding terms implied by SGA.
s6(1) provides that liability for the term implied by s12 SGA cannot be excluded
s6(2) provides that liability arising from ss 13; 14; 15 SGA cannot be excluded in consumer contracts

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Statutory control - UCTA: Reasonableness

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s11 UCTA:
(1) Re: contractual term: "shall have been fair and reasonable to be included having regard to the circumstances..."
(3) Must be fair and reasonable to
(4) limitation to a specific sum: pay regard to availability of resources and insurance

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Statutory control - UCTA: Reasonableness (Schedule 2)

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Pay attention to these factors when deciding reasonableness:
- Bargaining positions of the parties
- Whether the customer was induced to agree to the term
- whether the customer knew (or ought to) of the term

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Two cases for Contra Proferentem.

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Wallis, Son & Wells v Pratt & Haynes 1911, Houghton v Trafalgar Insurance Co Ltd 1954.

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Principle of Fundamental Breach

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The general rule is that a proferens may never be exempt from a fundamental breach of the contract, i.e. a breach of a core obligation of the contract. Indeed, in Karsales v Wallis [1956] Lord Denning commented that exempting clauses " ... do not avail him [the proferens] when he is guilty of a breach which goes to the root of the contract".

In England, the House of Lords has since rejected Lord Denning's approach in this respect. In the case of Suisse Atlantique v NV Rodderdamsche [1967] lAC 361 it was made clear that it is possible to exempt for fundamental breach through the use of clear and unequivocal words.

In Harbutts Plasticine v Wczvne Tank Corporation [1970] Lord Denning concluded that his ruling in Karsales had been affirmed by the House of Lords.

However, the rule in relation to fundamental breach was finally clarified in the case of Photo Production Ltd v Securicor Transport Ltd [1980] 2 WLR 283, where the House of Lords stated that it was possible to exclude liability for fundamental breach provided clear enough words were used.

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What is the general rule w.r.t the construction of an EC?

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PROFERENS = PERSON RELYING ON THE CLAUSE
They will be interpreted contra proferentem (this means that if there is any doubt as to the meaning and scope of the EC, the ambiguity will be resolved against the party seeking to rely on it) Remember, judges HATE exemption clauses.
The courts have held that clear words must be used if they are to excuse a party from its liability.

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How is the 'contra proferentem' rule applied when dealing with limitation clauses?

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When dealing with limitation clauses, the courts apply the contra proferentem rule with less rigour than with ECs. (however, if a limitation clause is pretty unreasonable, it will be dealt with more stringently)

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Houghton v Trafalgar Insurance Co. Ltd [1934]

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CASE WHICH SHOWS THAT THE COURTS WILL INTERPRET ECs CONTRA PROFERENTEM & WILL GIVE WORDS THEIR ORDINARY MEANING
(LOAD WAS GIVEN IT'S ORDINARY MEANING OF WEIGHT, RATHER THAN BEING HELD TO = PEOPLE)
D = car insurance company
ec = 'No liability if the car was used in excess of load'
C had given 6 people a lift in a 5 seater-car
Accident happened
D tried to rely on EC
HELD - Load could mean people, but it could also mean weight. As the car could easily carry the weight of all the people, the car was not in excess of load. Therefore, the insurance company had to pay up.

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What is the 'route' to take when considering construction of an EC?

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1) Contra proferentem? (Y = end)
2) Deals with negligence? (N = end)
3) Canada Steamship test

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If an EC can be interpreted contra proferentem, what happens?

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The EC fails at this point

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If an EC can't be interpreted contra proferentem, and DOESN'T refer to negligence, what happens?

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The EC has passed the construction hurdle

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If an EC can't be interpreted contra proferentem, and DOES refer to negligence, what happens?

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Must apply the Canada Steamship test

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CANADA STEAMSHIP TEST

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1) Does the clause specifically say negligence, or does it refer to a synonym of negligence? (if yes, EC works)
2a) (if 1 = synonym) Is the clause wide enough to cover negligence?
3) Is the clause too wide - in that it could actually be covering something else (as well as negligence)?

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CANADA STEAMSHIP TEST - If you have an EC which specifically uses the word negligence, what happens?

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The EC succeeds in excluding for negligence.

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CANADA STEAMSHIP TEST - If you have an EC which uses a synonym of negligence, what happens?

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The courts will then consider whether, the clause is wide enough to cover negligence.

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CANADA STEAMSHIP TEST - If you have an EC which uses a synonym of negligence, and is wide enough to cover negligence, what happens?

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The courts will then consider if it is too wide, in that it may cover something else as well as negligence. If it is too wide, it will be presumed to cover the other thing, NOT negligence. If it only covers negligence, it will be presumed to cover negligence.

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Aldersade v Hendon Laundry [1945]

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IF THE EC CANNOT COVER FOR ANYTHING OTHER THAN NEGLIGENCE, IT WILL BE TAKEN TO COVER NEGLIGENCE
THE ONLY OPTION WAS NEGLIGENCE - THEREFORE, = NEGLIGENCE.
THE ONLY WAY SOMETHING IN A LAUNDRY COULD BE LOST WOULD BE THROUGH NEGLIGENCE - THEREFORE, THE CLAUSE CLEARLY REFERS TO NEGLIGENCE
(case in which launderette lost handkerchief)
Clause = 'no liability for loss or damage'.
As, the only way in which something could be lost (and it be the proferens fault) would be through negligence, the EC could only possibly cover for negligence. How else would something go missing from a laundrette & it be the laundrette's fault? If the laundrette was robbed, through no fault of the proferens, you wouldn't be able to sue the proferens, the proferens would never under English law be liable. You cannot say that the clause covers for breach of the contractual duty to take care of the goods, as breach of the duty to take care would be negligence. Therefore, in any shape or form, the EC can ONLY cover for negligence.

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White v Warwick [1953]

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IF THE EC COULD POSSIBLY COVER SOMETHING AS WELL AS NEGLIGENCE, IT WILL BE TAKEN TO COVER THAT OTHER THING, NOT NEGLIGENCE
(case in which guy bought bike & bike's seat was negligently fitted)
Clause = no liability for injury.
Potentially, the proferens could provide a bike which was not reasonably fit for puyrpose WITHOUT being negligent…
Therefore, the EC covered him for breach of the contractual duty to provide a bike which was fit for purpose, NOT negligence.

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Wallis, Son and Wells v Pratt and Haynes [1911] AC 394

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A seed sale contract clause said the sellers gave ‘no warranty express or implied’ as to the seeds’ description. The seeds did not match the description. Held, that the clause only applied to a warranty, and the description was actually a condition of the contract. (Remember Contra Proferentem)

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Photo Productions v Securior 1980

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The reports full of cases in which strained constructions placed upon exclusion clauses many cases involved consumer contracts and continued. --> Any need for this kind of judicial distortion of the English language has been banished by Parliaments having made these kinds of contracts subject to the UCTA 1977. Courts said that it will operate any in cases of genuine ambiguity and that in future exclusion clauses should be given a more natural construction.

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Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] 5 points made by Lord Hoffman.

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It laid down that a contextual approach must be taken to interpretation of contracts. Lord Hoffmann set out five principles for interpreting contracts.
1.the right meaning is what the document conveys to a reasonable person
2.this includes everything in the "matrix of fact", or relevant background circumstances
3.prior negotiations are excluded from this (a point which has been much criticised since)
4.the meaning of words is not a literal meaning, but the one reasonably understood from the context
5.the meaning should not contradict a common sense view of what a contract required
(Of course this relates to the construction aspect of clauses)

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Investors Compensation Scheme Ltd v West Bromwich Building Society [1997]

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In ICS Ltd v West Bromwich BS[9] itself, a group of investors had been given negligent advice by various building societies (including West Bromwich BS), financial advisers and solicitors, and so had potential claims for breach of statutory duty. Under the government's Investors Compensation Scheme, the investor could simply get money from the Scheme directly, and the Scheme would carry through the expense of litigation on their behalf. However, in the contract to assign the claims, it said there was an exclusion for,
"Any claim (whether sounding in rescission for undue influence or otherwise)"
Taking a literal approach, this could mean - and the building societies were trying to argue - that any claim to rescind a contract (i.e. have it made void) would not be assigned by investors to the Scheme, whether it was for rescission based on a claim in undue influence, or any other claim. The building societies were trying to argue this, because if there was no valid assignment, then ICS would not be empowered to sue them. ICS Ltd was arguing that in fact (probably through unclear drafting) the clause was really intended to mean that claims for rescission based on undue influence would not be assigned. But others would. Lord Hoffmann and the House of Lords unanimously accepted this interpretation, since it was the correct one given the context in which the contract was signed.