Contract Law: Exceptions to Limitation of Liability and Unfair Contract Terms, Lecture notes of Construction

Download Contract Law: Exceptions to Limitation of Liability and Unfair Contract Terms and more Lecture notes Construction in PDF only on Docsity! 1 L’Estrange v Graucob [1934] 2 KB 394 -1- EXCLUSIONS AND LIMITATIONS OF LIABILITIES BY DOV OHRENSTEIN, RADCLIFFE CHAMBERS 1. 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 2. 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 3. 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. 4. 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 5. 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 Chemical Cleaning and Dyeing C o Ltd [1951] 1KB 805 3 eg Petrotrade Inc v Texaco Ltd [2002] 1 WLR 947 4 British Hire Corp v Ipsw ich Plant H ire [1974] 1 All ER 1059 5 [2010] UKSC 14 -2- 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 6. 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 7. 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. 8. 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 9. In RTS Ltd v Molkerei Alois Muller GmbH & Co5 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 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 Programmes [1988] 1 All ER 348 13 Chapleton v Barry UDC [1940 1 KB 532 14 Olley v Marlborough Ct [1949] 1KB 532 -5- Sufficient Notice 13. 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 14. “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 15. 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). 16. 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 15 Lacey’s Footwear v Bowler Intn [1997] 2 Lloyds Rep 369 16 Jonathan Wren & Co v Microdec Plc [1999] 65 Con LR 157 17 Spreadex Ltd v Colin Cochrane [2012] EWHC 1290 (Comm) 18 AEG (UK) Ltd v Logic Resources Ltd [1996] CLC 265 -6- * Small print“legible only to one of tender years” which was printed on the back of correspondence evidencing an agreement made by telephone was not incorporated. There was nothing on the face of the correspondence which referred to the small print on the reverse and the judge stated: “Every time I receive an unsolicited communication from a double glazing company ... I cannot be expected to read the terms and conditions set out in the small print in the advertisement.” 15 * Where a delivery note accompanying some photographs set out conditions including that the photographs should be returned within 14 days or else a charge would be incurred the Court of Appeal held that the relevant condition was unreasonable and not brought to the attention of the customer as it was only one of the many provisions in the conditions and it was not highlighted. If there had been a signed contract then the outcome of the case on the question of incorporation would probably have been different.16 17. Particular problems can arise when parties attempt to create contracts via website forms as the spread betting company Spreadex recently discovered when it unsuccessfully applied for summary judgment and its customer argued that he was not liable for unauthorised trades on his account which he said were carried out by a young child. 17 Spreadex applied for summary judgment relying on their standard terms which could be found on their website and which included a provision which stated “You will be deemed to have authorised all trading under your account number”. The Court held that the website set out the terms on which a contract would be created if a customer made an offer for a particular spread bet and Spreadex accepted that offer and took the bet. However, the court held that the deemed authorisation provision was not supported by consideration from Spreadex (who had no obligation to accept bets or keep an account open) and had no contractual effect if an individual bet was not concluded or authorised by the customer. 18. Where terms are stated to be available on request but are not actually provided to the customer then they may not be incorporated.18 19. Where a term is onerous and there is a failure to highlight or even to print it in a particularly clear font size or colour then it still might be incorporated if it is a standard 19 Motours 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 -7- term within the relevant industry. 19 CONSTRUCTION General Principles 20. 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 21. 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 22. 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 23. 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 27 Lamport & Holt Lines v Coubro & Scrutton [1982] 2 Lloyds Rep 42, 50 28 Suisse Atlantique v NV R otterdamshe Kolen Centrale [1967] 1 AC 361 29 Photo Production Ltd v Securicor [1980] AC 827 -10- 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 27. 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. 28. 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. 29. 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 30. 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 Samsung Electronics (UK) Ltd [2004] EWHC 1502 (Comm) 31 Springw ell Navigation Corpn v JP Morgan C hase Bank & Others [2010] EWCA Civ 1221 -11- conditions were incorporated and enforceable.30 31. 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 32. 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? 33. 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”. 34. 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. 35. 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. 32 Titan Steel W heels Ltd v RBS Plc [2010] EWHC 211 -12- 36. Springwell is consistent with other recent decisions such as Titan Steel Wheels 32 which held that where a commercial customer of a bank enters into a contract on the express basis that the bank will not be assuming responsibility to provide advice and the contractual terms preclude the customer from relying on the bank, the customer will be prevented from pleading actual reliance on the bank or its employee for investment advice. 37. Accordingly, commercial entities which sign “non reliance” clauses will generally find that they are bound by them even if there has been substantial reliance on misrepresentations. STATUTORY CONTROL The Statutory Framework 38. The main legislation is The Unfair Contract Terms Act 1977 (“UCTA”). For consumer contracts the Unfair Terms in Consumer Regulations 1999 are also relevant. The Unfair Contract Terms Act 1977 39. UCTA imposes controls over the following main areas (which sometimes overlap): * Terms which exclude or restrict liability for causing death or personal injury * Terms which exclude or restrict liability for negligence (other than for death or injury) * Terms which exclude or restrict liability for breach of terms implied by statute or common law in contracts for the sale or supply of goods and hire purchase. * Terms which purport to allow a party to render a contractual performance substantially different from that reasonably expected of him or no performance at all. * Exclusions or restrictions in manufacturers’ guarantees. * Standard terms and conditions Liability for causing death or personal injury 34 Titan Steel W heels Ltd v RBS Plc [2010] EWHC 211 35 Charlotte Thirty v Croker (1990) 24 Con LR 46 -15- of the customer. 53. How the courts decide reasonableness for the purposes of UCTA can be illustrated by the case law. 54. In Titan Steel Wheels 34 a manufacturer of steel wheels brought a mis-selling claim against RBS in respect of currency swap derivative products. Titan alleged that RBS had negligently advised it to purchase the swaps and that there had been unfair dealing under the FSA rules. One of the issues that arose was whether or not any of the exclusion clauses in Titan’s contract with RBS were subject to UCTA. The contract provided that RBS was not liable for any loss of opportunity, decline in the value of investments, error of fact or judgment or other loss from any act or omission made under or in relation to or in connection with the terms of business or the services provided under these, except to the extent that they resulted from its gross negligence, wilful default or fraud. Mr Justice Steel concluded that this clause satisfied the reasonableness test under UCTA for the following reasons: * There was complete equality of bargaining power as Titan could choose any other bank for its custom if it wished; * the terms of the clause were standard terms included in the terms and conditions of many banks; * Titan was easily able to seek its own independent advice if desired (as was anticipated elsewhere in the terms of business); and * the terms were clear and regularly brought to the notice of Titan. 55. In Charlotte Thirty v Croker35 the court considered a clause in a contract for the design, supply and installation of a concrete batching plant. The standard conditions included a six month warranty and at clause 3(d) a provision excluding consequential loss or damage together with implied conditions or warranties, statutory or otherwise. The Judge found that the clause was unreasonable and said: “If Cl 3(d) is effective, then the customer gives up all this protection [under the 1982 Act] for the tightly constrained 6 month warranty of such components as he is prepared to dismantle and send back to Croker. Such an arrangement is absolutely at variance with the needs of fairness in a construction contract and, no doubt for this reason, it is absolutely at variance with the practice of the construction industry.” 36 Edmund Murray v BSP International Foundations (1992) 33 Con LR 1 37 Watford Electronics v Sanderson CFL Ltd [2001] 1 All ER Comm 696 at [63], approving Salvage Association v CA P Financial Services Ltd [1995] FSR 654 at 676 38 First Balmoral Group v Borealis (UK) Ltd [2006] EWHC 1900 (Comm). -16- 56. In Edmund Murray v BSP International Foundations36 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.” 57. 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.” 58. In Balmoral v Borealis38 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 Borealis was more successful in Kingspan 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 did not apply and the terms were in any event reasonable 40 Regus (UK) Ltd v Epcot Solutions [2008] EWCA Civ 361 -17- * 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? 59. 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. 60. 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 61. In Regus v Epcot40 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 44 Spreadex v Colin Cochrane [2012] EWHC (Comm) -20- 67. Consumer for these purposes is limited to natural persons 68. 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. 69. 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. 70. 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. 71. 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 72. Do not exclude liability for: * Death or person injury. -21- * Fraudulent misrepresentation/ deceit * Breach of implied terms as to quality, fitness etc in consumer contracts Consider expressly stating that such liability is not excluded. 73. To maximise the chances of a clause being upheld as reasonable: * Highlight the clause so that it is not hidden in the small print. * Draft with precision and avoid ambiguities. * Where possible, use limitations on liability rather than exclusions. * Consider relating the limit on liability to the limit of the available insurance * Distinguish between different causes of loss (non delivery, late delivery, defective goods, deliberate wrongdoing, fraud etc) * Distinguish between different types of loss (physical damage, loss of profit etc). * Distinguish between direct and indirect losses. * Do not use blanket exclusions * Recommend that the buyer obtains insurance. * When setting a financial limit for liability, consider offering to be exposed to greater liability in exchange for an additional payment * Use separate clauses for each part of the exclusion so that, if necessary, offending terms can be severed but others can still apply. DOV OHRENSTEIN RADCLIFFE CHAMBERS 11 NEW SQUARE LINCOLN’S INN