Construction of exemption clauses.

CONSTRUCTION OF EXEMPTION CLAUSES 

INTRODUCTION

We have discussed what a standard form contract is, its purpose and characteristics.  Also we have seen how an exemption clause can be included in a contract; the rules regulating the use of exemption clauses.  This lecture, however, will discuss the rules of construction of exemption clauses, exclusion of tortuous liability and third parties.

1. THE NEED TO CONSTRUE EXEMPTION CLAUSES

Assuming that a reasonably sufficient notice of a standard form contract (i.e. the exemption clauses) has been given to the person who receives the document, does it then follow that such person is bound by the terms and conditions therein?

If the doctrine of "sanctity of contracts" as applied in the case of L'Estrange vs F. Graucob Ltd (supra) which was earlier referred to when elucidating incorporation of an exemption clause by signature, is followed, then an exemption clause shall ipso facto be construed as effectively excluding liability.

Unfortunately, exemption clauses do not often lend themselves to simple literal interpretation.  Sometimes the words used in an exemption clause are capable of two constructions.  A wider construction and a limited construction.  At times the exemption clauses are ambiguous and so outrageous, unreasonable and unconscionable such that interpreting them literally would occasion injustice.

The courts are also conscious of the possible abuse and unfairness in the use of exemption clauses.  Literal construction of exemption clauses would always operate against the weaker party who the courts strive to protect.  Certain canons of construction have thus been evolved by the courts which normally work in favour of the weaker party and against the person seeking to claim the benefit of the exemption.

2.  RULES OF CONSTRUCTION OF EXEMPTION CLAUSES

2.1  The Strict Construction Rule

According to this rule, exemption clauses are construed strictly, particularly, where a clause is so widely expressed as to be highly unreasonable.  This rule requires that an exemption clause be precisely worded.  The words used must exactly cover the liability which is sought to be excluded.

For example, an exemption clause excluding liability for "latent defects" will not exclude the condition as to fitness; or, a clause excluding liability for breach of warranty will not exclude liability for breach of condition.

In applying the strict construction rule the courts will resolve any ambiguity in the mode of expressing an exemption clause in favour of the weaker party.

Let us look at how this rule has been applied.  In the case of  Lee (John) & Sons (Grantham) Ltd vs Railway Executive [1949] 2 ALL ER 581, the facts were as follows:

Goods stored in a railway warehouse let to a tenant were damaged by fire and the tenant brought an action against the railway executive alleging that the accident was due to their negligence because a spark ejected from their railway engine had caused the fire.  The defendants set up a clause in the tenancy agreement which exempted them for loss of or damage to property however caused (whether by act or neglect of the company or their servants or agents or not) which "but for the tenancy hereby created would not have arisen".

The court held that the company was liable.  That the words "but for the tenancy hereby created" were confined to liabilities which arose by reason of the relationship of landlord and tenant.

In this case the court used strict interpretation of the words "but for the tenancy hereby created".  Given a wider interpretation, any loss or damage to the property would be exempted even if caused by factors which are unrelated to the landlord and tenant relationship.  The court, by using strict interpretation confined the causation of loss or damage which would fall within the exemption clause to only such loss or damage to the property caused by factors which are within the landlord and tenant relationship.

In the case of Akerib vs Booth [1961] 1 ALL ER 380; [1961] 1 WLR 367 the facts were that:

By a written agreement the defendants let to the plaintiffs a few rooms on the second and third floor of their premises for office and store purposes.  They retained in their possession a water closet in the fourth floor.  The agreement provided that the plaintiffs shall exclusively employ the defendants in making up and packing all the goods brought by them for business on the premises and that the defendants shall not in any circumstances be responsible for damage caused by water, insects, vermin or fungi to any goods.  Owing to the negligence of the defendants or their servants water escaped from the cost and caused damage to the plaintiffs' goods.

It was held that the exemption clause must be limited to the purpose of the contract.  The purpose was to exempt the defendants from liability to goods that came to their possession for packing or making up.  The exemption clause must be confined to this and was not to apply to any other goods.  The goods in the above case were not, at the time of their being damaged, in the hands of the defendants  for packing or making up.  Accordingly they were not covered by the exemption clause.  The defendants were held liable.

2.2 The "Contra proferentem" Rule

These words come from the Latin maxim: Verba Chartarum fortius accipiuntur contra proferentem which means, the words of written documents are construed more forcibly against the party using them.

As a rule of construction of exemption clauses, it means, every exemption clause is to be interpreted, in case of ambiguity, contra proferentem.  That is, if there is any doubt as to the meaning and scope of the excluding or limiting term, the ambiguity will be resolved against the party who has inserted the clause.

For example, in the case of Hollier vs Rambler Motors AMC Ltd [1972] 1 ALL ER 399, the facts of which were that:

H inquired of R over telephone whether R could repair his car.  R told H to bring the car and that it would be repaired in due course.  On three or four occasions during the last five years R had carried out servicing for H.  On each occasion R was required to sign an invoice which described the work and mentioned the charge and gave warning below the customer's signature that "the company is not responsible for damage caused by fire to the customer's car on the premises".  On this occasion the customer did not sign any such invoice and this time his car was destroyed by a fire which occurred due to R's negligence.

The Court of Appeal faced two formidable questions.  First, whether the signature on the previous occasions amounted to a notice of the term for this occasion also, and, second, if it did, whether negligent fire was within the scope of the exclusion clause.

On the first question the court of Appeal held in the negative, that is, the signature on the previous occasions did not amount to sufficient notice of the term.  The Court referred to the decision of Salmon, L.J. in Henry Kendall & Sons vs William Lillico & Sons Ltd [1968] 3 WLR 110, HL where the parties had dealt with each other over the past three years.  During those years, three or four times every month goods were supplied on oral order followed by signature on sold notes which exclude liability for latent defects.  The House of Lords held that this practice was a sufficient notice of the terms. That was a typical case where a consistent course of dealing between the parties made it imperative for the court to read into the contract the terms  printed on the sold notes.

The court in this case could not follow the decision in the Kendall's Case because in this case there had been only three or four dealings during the past five years.  The court held that this was not sufficient to establish a course of dealing, and that the dealing was nevertheless not consistent as on this occasion the customer was not required to sign any invoice.

In reference to the second question, the court held that, a clause excluding liability for negligence should make its meaning plain on the face of it to an ordinary literate and sensible person.  Such clause should not be couched in a language which can bull a customer into a false sense of security by letting him think that he would have redress for any damage which he might suffer by the negligence of that person. Accordingly the defendants were held liable in spite of the exclusion clause.

By using the contra preferentem rule the exclusion clause was interpreted in a manner which gave the benefit of doubt to the weaker party.

2.3  Exclusion of Tortuous Liability

The rule on exclusion of tortuous liability is sometimes referred to as the rule in Alderslade vs Hendon Laundry Ltd [1945] KB 189.

The general rule is that, where the defendant has protection under a contract, it is not permissible to disregard the contract and to allege a wider liability in tort.  However, in determining whether this rule applied in any particular case, it is necessary to establish first, whether the clause excluding tortuous liability, (usually negligence) is a contractual term.  That is, it clearly exempts the person relying on it from the torts of himself and his servants or agents.  If such is the case, then effect must be given to it.

  For example, in the case of Rutter vs Palimer [1922] 2 K.B. 87, the plaintiff left his car at the defendant's garage for sale on commission.  The terms of the contract were that "customers" cars are driven by the defendant's servants at customers' sole risk.  The car was sent out by the defendant in charge of one of his drivers for a trial run.  There was a collision and the car was damaged.  The court held that the clause clearly exempted the defendant from the risk of negligence and placed it on the plaintiff.  His claim therefore failed.

But, where the clause does not clearly exempt the party relying on it, even if it is general enough to exclude liability for negligence, the rule in Alderslade vs Hendon becomes applicable.

This rule falls into two parts as follows:

(i) Where the head of damage in respect of which limitation of liability is sought to be imposed by such a clause is one which rests on negligence and nothing else, then the clause must be construed as extending to that head of damage.

Let us consider the case of Alderslade itself to illustrate this first part.  The facts of the case were briefly as follows: 

The plaintiff sent certain of his handkerchiefs to the defendants' laundry.  They were not returned to him.  When sued the laundry relied on a clause which stated: "The maximum amount allowed for a lost or damaged article is twenty times the charge made for laundring".

The court of Appeal accepted the argument of counsel for the defendants that the words "loss or damage" must relate to loss or damage by negligence and nothing else.  They could not relate to the primary obligation to launder the plaintiff's linens, as this was a fundamental term of the contract into which a question of due care did not enter.  They could only relate to the other ancillary obligations, for example to re-deliver the goods, and to ensure their safe custody, for which the laundry was not an insurer, but only undertook not to be negligent.  So, where loss was concerned, the only possible ground of liability was in negligence, and the exemption clause must extend to this.

(ii) Where on the other hand, the head of damage may be based on some ground other than negligence, the general rule is that the clause must be confined to loss occurring through that other cause to the exclusion of negligence.

For example, in the case of White vs John Warwick & Co. Ltd. (1953) 1 WLR 1285 the plaintiff hired a bicycle from the defendants.  The contract contained a term that "nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired".  The plaintiff had only ridden for a quarter of a mile when he saddle tipped up and he was thrown onto the road, sustaining injuries.  He sued the defendants alternatively for breach of contract and in tort for negligence.

NB: You will notice that in this case there was a head of damage other than negligence i.e. a strict liability for breach of contract.

The court of Appeal held that the exemption clause was confined to that head of damage under liability for breach of contract alone.  It therefore, could not exclude a claim for damages in tort.  The defendants were held liable.

Take note that, if a plaintiff sues on a contract then the exemption clause may be enforced.  But where the action is based on tort then a contractual term cannot be invoked to exclude tortuous liability.  But, most important to remember is that the rule in Alderslade cannot be applied where the words used clearly exclude all liability whatsoever.  So such phrases as: "will not be liable for any damage however caused"; "will not in any circumstances be responsible"; "entirely at owner's risk" and such like, will preclude the operation of the rule.

2.4 The Rule on Reasonableness   

In construing exemption clauses, unreasonable terms are to be excluded.  A term is unreasonable if it would defeat the very purpose of the contract or if it is repugnant to public policy.  Lord Wilberforce in the case of Suisse Atlantique Societe d'Armement Maritime S.A. vs N.V. Rotterdasche Kolen Centrale [1967] 1 A.C. 361 at p. 432 pointed this out thus:

"One may safely say that the parties cannot, in a contract have contemplated that a clause shall have so wide an ambit as in effect to deprive one party's stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent".

A very clear example of an unreasonable term is found in the case of Lilly White vs Mannuswami AIR 1966 Mad.13

A Laundry receipt contained a condition that the customer would be entitled to claim only fifteen per cent of the market price or value of the article in case of loss.  The plaintiff's new Sari was lost.

You will note that the clause limiting liability to only fifteen per cent of the market price or value of the article in case of loss in clearly unreasonable.  The rationale to hold such a term unreasonable is based on public policy.  That is, while parties enjoy freedom of contract, such freedom should not be abused.  Explaining the justification for not enforcing unreasonable terms in Lee (John) & Sons (Grantham) Ltd vs Railway Executive [1949] 2 ALL ER 581 at p. 584 Lord Denning, L.J. remarked:

"There is the vigilance of the common law which while allowing freedom of contract, watches to see that it is not abused"

In UK the principle excluding unreasonable clauses has now found statutory recognition in the Unfair Contract Terms Act, 1977.  The Act provides that in respect of any loss caused by the breach of contract, any restricting or excluding clause shall be void unless it satisfies the requirement of reasonableness.  Under English law therefore, a term will be regarded as reasonable if it is " a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been known to or in the contemplation of the parties when the contract was made".

2.5  The Rule on Exemption Clauses and Third Parties

During your lectures on consideration you were taught the rules on privity of contract.  That a contract is a contract only between the parties to it and no third party can either enjoy any right or suffer any liability under it.  This applies to standard form contracts as well.  Thus, where goods are supplied or services rendered under a contract which exempts the supplier from liability, and a third party is injured by the use of them, the supplier is liable to him or her notwithstanding that he has purchased his exemption from the other party to the contract.

For example, a contractor agrees to maintain and repair a lift in certain premises.  If the contract with the owner exempts him from liability, that exemption would not avail the contractor protection as against a person who is injured owing to bad repairs.

A third party is not affected by the terms of a contract.  Similarly, he cannot claim the advantage of them.