Reading (Chapter 7)
Introduction
- Common practice for a party to include a term in the contract that seeks either to
exclude or to limit their liability for breach of contract.
- May seem strange that courts are willing to entertain the existence of such clauses,
given their effect is to exclude of limit their liability of one party that may be in
breach of their contractual obligations.
- A contract is based on the principles of consent, provided the parties freely agreed
to enter into the agreement and have freely accepted the terms of that agreement,
then the courts will be very reluctant to interfere with their bargain.
- The principles of freedom of contract would appear to dictate that a party can enter
into a contract with anybody they wish and on any terms they see fit.
- If a party freely agrees to be bound by a clause in a contract which seeks to exclude
or limit the liability of the other party- then the courts will be reluctant to intervene
and regulate the agreement.
However…
- There are instances which the courts will intervene and regulate such clauses,
particularly where these clauses are used to exploit the relative bargaining strength
of the parties or where such clauses are included in the party’s standard terms of
business.
Common law and statutory responses to exclusion clauses
- Courts reluctant to interfere with a freely negotiated bargain, but.
- Other courts seek to prevent one party from abusing this freedom by exploiting a
stronger bargaining position.
- The use of exclusion clauses is one process by which the risk of loss may be
allocated.
- As a result, the parties will be aware of where the risk will lie for breach of an
obligation before such losses are incurred,
- Parties may take out appropriate insurance provisions to reflect this allocation of
risk.
However…
- There is the potential that one party may abuse their position with the introduction
of such clause.
- Exclusion clauses may act as a form of consumer oppression.
- Restrictions have been placed upon the use of the exclusion clauses by the judiciary
and parliament:
o There has been judicial intervention in the process of clause construction and
interpretation
o Parliament has intervened, in the form of the Unfair Contract Terms Act 1977
(UCTA) and Consumer Rights Act 2015.
Three-stage approach to exclusion clauses
Three stages that an exclusion clause must overcome before it will be binding on the
parties:
o The clause must be incorporated into the contract
o The clause must pass the test of ‘’construction’’
o The clause must satisfy the relevant statutory provisions of the Unfair
contract Terms Act 1977 or the Consumer Rights Act 2015
Common law
If a party wishes to rely upon an exclusion clause, they must establish two things:
o That the clause has been incorporated into the contract; and
o Upon true construction of the clause, it covers both the breach and the
resulting loss or damage
If these two stages are satisfied, only then will it be necessary to consider the effects of the
relevant legislation.
Stage 1: incorporation
In order for the clause to be binding on the parties it must have been incorporated into the
contract.
If the clause is not incorporated, then it will not bind the parties and it will have failed at the
first hurdle.
Three primary methods by which a clause can be incorporated:
- Signature
- Notice
- Previous course of dealings
Incorporation by Signature
- A party who signs a contractual document will be bound by the terms contained in
the document.
Demonstrated in the case L’Estrange v F Graucob Ltd
- Claimant took delivery of a defective cigarette vending machine.
- Mrs L’Estrange signed a sales agreement which, printed a very small print, contained
a clause excluding liability for a defective product.
- Claimant discover fault with machine, defendant relied upon clause in the sales
agreement to absolve them of liability.
- Court held; the defendants could rely on the clause on the basis that Mrs L’Estrange
signature was unequivocal evidence of her assent to the terms of the agreement.
- Fact that Mrs L’Estrange did not read the document (so was unaware) was not
relevant consideration for the court.
Scrutton LJ commented:
- When a document containing contractual terms is signed, then in the absence of
fraud or misrepresentation…the party signing it is bound it is wholly irrelevant
whether he has read the document or not.’’
- If the agreement is to be viewed objectively, then it may seem quite unreasonable to
hold a party to a contract that contains such onerous clauses as in L’Estrange v
Graucob where the part would have needed to go to great lengths in order to
discover the existence of the clause because of the positioning and size of the print.
Notice
- In the absence of signature, notice will be the most common process of
incorporating a clause into the contract.
- There is no formal requirement that a contract can be in written form.
- The ability to incorporate a term via notice will be of most relevance to everyday
situations.
There are a number of principles to consider regarding the issue of notice:
o Reasonable notice must be given as to the existence of the clause.
o Reasonable notice must be given before or at the time the contract is made
(but not after).
Reasonable notice must be given as to the existence of the clause
- Only reasonably sufficient notice, not actual notice, is required as to the existence of
the clause.
- If reasonable steps are taken to draw the parties’ attention to the existence of the
clause then whether that party is aware of the precise content is irrelevant.
Reasonable notice must be given before or at the time the contract is made (but not after)
- The party wishing to rely on the exclusion clause give reasonable notice as to the
existence of the clause.
- Must also give this notice before or at the time the contract is formed.
- Courts will not incorporate a term once the contract has been entered into.
- The timing of the notice is important in determining whether a clause has been
validly incorporated.
Olley v Marlborough Court Ltd
- Couple arrived at hotel and paid for a week’s accommodation in advance at
reception.
- Court held the clause excluding liability had not been incorporated into the contract.
The contract had been made at the reception desk so as a result the notice displayed
in the room came too late.
- Defendants could therefore not rely on the exclusion clause.
Unusual clauses and the “red hand rule”
- The more unusual the clause, the greater level of notice is required in order for the
clause to be incorporated.
NOTICE IN A CONTRACTUAL DOCUMENT
- Common that notice is given in a contractual document.
- If a party signs a document, he is bound by the terms contained within the
document.
However…
- There is a requirement that notice must be contained within a contractual
document.
- Some documents such as vouchers or receipts may not be considered to be
contractual documents for the purpose of incorporation.
- The courts apply an objective test to such documents.
- Key test is, would the reasonable man conclude that the document contained terms
and conditions?
Incorporation via a previous course of dealings
- The court may be prepared to infer a clause based on the previous transactions
between the parties.
- Even though there may not have been notice of the clause in the transaction in
question,
the court may still hold that the clause has been incorporated via a previous course
of dealing between the parties.
- The party may not know about the clause in a particular transaction but is taken to
know about its existence as notice of this clause has been given to him on his
previous transaction.
There are requirements that must be met before the courts will infer a term based on a
previous course of dealings:
o There must be sufficient notice of the clause
o There must be consistency in the previous dealings
Stage 2: The clause must pass the test of ‘construction’
- The clause is incorporated it must then pass the common law test of construction
before the courts will give effect to the clause.
- When the courts ‘construe’ a contractual term their intention is to give legal
meaning to the ordinary words that are used.
- Sometimes the legal interpretation the courts arrive at bears little resemblance to
the everyday meaning of such words.
However…
- The tool of construction is used by the courts as a way of avoiding or limiting the
strict effects of freedom of contract.
- It may seek to abuse their bargaining position and exclude liability for the numerous
types of loss or damage.
- The principle of freedom of contract would dictate that such exclusion is valid
providing that the other party freely agreed to them.
- The courts have responded to such problems by developing strict rules of
construction.
- These