Standard form contracts

STANDARD FORM CONTRACTS 

AND EXEMPTION CLAUSES

INTRODUCTION

This lecture is a continuation of the preceeding lecture on contents of a contract.  In this lecture we shall look at a special set of contents in a contract, namely, exemption clauses.  Because of their uniqueness and the attaching legal effects, these clauses have evolved into a special kind of contracts referred to as standard form contracts or contracts of Adhesion.

1. STANDARD FORM CONTRACTS

Standard form contracts are standardised written contracts.  The terms of such contracts are set out in printed standard forms which are used for all contracts of the same kind.

For example, when you board a bus, you enter into a contract of carriage.  The terms of such a contract will be printed, usually on the back of your travel ticket.  These will be uniform in all tickets issued by the carrier to all passengers.  They are standardised.

Perhaps you own a private vehicle.  If you have purchased a Third Party Insurance Cover for your vehicle you probably were issued with a standardised contract to sign.  Such a contract is issued to all insured who purchase such a cover.  Or, as a student of the Open University of Tanzania, you must have signed a contract with the University.  The contract was in a standardised form and was issued to, and executed by all your colleagues in the same form.  They are standard form contracts.

Such contracts have been variously described.  Sometimes they are referred to as "Contracts of Adhesion" which means that the individual has no choice but to accept.  He or she does not negotiate, but merely adheres.  At times they have been called "compulsory contracts" because they are somewhat imposed on the individual.

i. Nature and Purpose of Standard Form Contracts

Standard form contracts are an exception to the rule on freedom to contract which envisages that in concluding a contract parties are in equal bargaining positions.  The idea of an agreement freely negotiated between the parties has given way to the necessity for a uniform set of printed conditions which can be used time and time again, and for a large number of persons.

The necessity to use standard form contracts has arisen because of the complexity brought about by the existence of large-scale organisations.  For example, it would be difficult for the Postal Corporation, the National Insurance Corporation, the Tanzania Telecommunications Company, the Tanzania Railway Authority, and such like, to draw out a separate contract with every individual who enjoys the services offered.  Thus, each time an individual travels upon a bus or train, takes his or her clothes to the dry-cleaner, receives gas, electricity or water from the City, Municipal or Town Council, or when taking up the lease of a house or flat, he or she will receive a standard form contract, devised by the supplier, which he must either accept in toto or, go without.  Practically, the individual has neither alternative but to accept nor power to negotiate but merely to adhere.

ii. Characteristics of A Standard Form Contract

The first and obvious characteristic is that already observed above.  That is, the contract is in all cases devised by the supplier.  The consumer is not consulted on what terms are appropriate to include in the contract.  Every term is prescribed to him or her.  The only freedom the consumer has is the leave or take choice.

The second characteristic is that, such standardised contracts contain a large number of terms and conditions which are often in "fine print" and very cumbersome for the consumer or customer to read and exercise a rational choice whether or not to accept.  Lord Denning, M.R. pointed out in Thornton vs Shoe Lane Parking Ltd [1971] All ER 686 CA that:

"No customer in a thousand ever read the conditions.  If he had stopped to do so, he would have missed the train or the boat".

The third characteristic and which moved the courts to develop special rules to protect the disadvantaged individual, is that, most clauses in such standard contracts aim at restricting and often excluding the liability of the supplier.  Such clauses are called "Exemption Clauses".  In most cases very broad phrases are used to exclude or limit liability.  For example:

"the company shall not be liable for any loss, injury or delay to the passenger or his luggage"

"Cars parked at owner's risk"

or

"the proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the managers for safe custody"

You can at your own time compile a lot of versions of phrases used to exclude or limit liability.  Take the trouble to identify them whenever you are issued with a bus ticket, dry-cleaner receipt, postal receipt etc.

2. EXEMPTION CLAUSES

2.1. Status of Exemption Clauses in a Contract

As a general rule an exemption clause which has been duly incorporated in a contract is part of the terms of such contract.  As such it is binding upon the parties.  In the absence of any ground(s) for suspicion, ordinary principles of the Law of contract would operate to enforce such clauses.

However, courts frown upon exemption clauses because they are often abusively used.  The ordinary principles of the Law of contract are not entirely capable of providing a just solution for a transaction in which freedom of contract notoriously exists on one side only.  In particular, where the party devising and delivering the standard form contract is permitted to exempt himself, or herself, unfairly from his or her liabilities and thus deprive the customer/consumer of the compensation which he or she might reasonably expect to receive for any loss or injury or damage arising out of the transaction.

Courts have endeavoured to alleviate the position of the customer/consumer by applying certain rules to regulate the use of, and to determine the applicability or validity of exemption clause in any circumstance.

2.2.   Rules Regulating the Use of Exemption Clauses

(i) Incorporation in the Contract

A party who wishes to rely on an exemption clause must show that the clause has been incorporated in the contract.

Incorporation of an exemption clause in a contract can be either by signature or by notice or by course of dealing.

(a) Incorporation by signature: Incorporation by signature is complete once the parties have signed the contractual document.  In such a case they are bound by all the terms as therein contained.  This is irrespective of the fact that a person may not have read the clauses or the contractual document as a whole.  Thus, in L'Estrange vs F. Graucob Ltd [1934] 2 K.B. 394 the proprietness of a cafe bought an automatic cigarette vending machine. She signed, but did not read, a sale agreement which contained an exemption clause in regrettably small print.  It was held that she was bound by the clause.

(b) Incorporation by Notice:  Incorporation by notice is complete if reasonable notice of the existence of the exemption clause is given to the party adversely affected by it.

(c) Incorporation by Course of Dealing:  Lastly, incorporation by course of dealing occurs where, for example, the parties have for sometime dealt with each other on terms that exempted one of them from liability and that were usually incorporated by signature or notice.  If on the occasion in question the usual document is not executed at the time of contracting (by oversight), and the question arises whether the usual exemption clause is incorporated in that particular transaction.

(ii) Reasonable Notice

It is the duty of a person delivering a document to give adequate notice to the offered of the printed terms and conditions.  Where this is not done, the acceptor will not be bound by the terms.  This is the rule in Henderson vs  Stevenson (1875) 32 LT 709.  The facts of that case were as follows:

The plaintiff bought a steamer ticket on the face of which were these words only: "Dublin to Whitehaven"; on the back were printed certain conditions one of which excluded the liability of the company for loss, injury or delay to the passenger or his luggage.  The plaintiff had not seen the back of the ticket, nor was there any indication on the face about the conditions on the back.  The plaintiff's luggage was lost in the ship-wreck caused by the fault of the company's servants.

The plaintiff sued to recover his loss from the company.  One of the issues before the court was whether he is entitled to recover the loss there being a clause exempting the company from liability.

The House of Lords held that he was entitled to recover his loss from the company in spite of the exemption clause.  Their Lordships observed that the plaintiff could not be said to have accepted a term "which he has not seen, of which he knew nothing, and which is not in any way ostensibly connected with that, which is printed and written upon the face of the contract presented to him".

Communication of Notice

Three general rules have been laid down by the courts to determine whether a person will be bound by the terms contained in a ticket [as per Parker vs South Eastern Ry (1877) 2 C.P.D. 416 at pp. 421, 423; approved in Richardson, Spence & Co. vs Rowntree [1894] A.C. 217; and Burnett vs Westminster Bank [1966] 1 QB.742.]

 (i) If the person receiving the ticket did not see or know that there was any writing on the ticket, then he is not bound by the conditions.

(ii) If he knew there was writing, and knew or believed that the writing contained conditions, then he is bound by the conditions, even though he did not read them and did not know what they were.

(iii) If he knew that there was writing on the ticket, but did not know or believe that the writing contained conditions nevertheless he will be bound if the party delivering the ticket has done all that can reasonably be considered necessary to give notice of the term to the person of the class to which he belongs.

As you can observe from the above rules, the first rule is unlikely to pose any problem of application.  As in Henderson vs Stevenson (supra) it presupposes that there is total failure of communication of the notice.  As well, the second rule which presupposes that communication of the notice is complete.  It is the third rule which poses some difficult in its application.  This rule is sometimes known as the test of "reasonable sufficiency of notice".

The principle as stated earlier is that where a written document is presented to a party for acceptance, a reasonably sufficient notice must be given to him of the presence of terms and conditions.

A notice will be regarded as sufficient if it will "convey to the minds of people in general that the ticket contains conditions".

For example, in the case of Parker vs South Eastern Rail Co [1874-80] ALL ER 166, the plaintiff deposited his bag at the cloakroom at a railway station and received a ticket.  On the face of the ticket were printed, among other things, the words "SEE BACK" and on the back there was a notice that "the company will not be responsible for any package exceeding the value of £10".  A notice to the same effect was also hung up in the cloak-room.  The plaintiff's bag was lost and he claimed the full value of his bag which was more than £10.  The company relied upon the exemption clause.  The plaintiff contended that although he knew there was some writing on the ticket, he did not see what it was as he though that the ticket was a mere receipt for the money paid by him.

Note: It is clear that the plaintiff knew there was writing on the ticket.  It is only that he did not know or believe that the writing contained conditions.  The question then is "was reasonably sufficient notice given as to the existence of the exemption clause?

The court held that, even though he had not read the exemption clause, he was bound by it, as the defendants had done what was reasonably sufficient to give him notice of its existence.

Note that, in the above case, not only words were printed on the face of the ticket alerting the plaintiff to see the back of the ticket where the exemption clause was written, but also the clause was hung in the cloakroom.  You may perhaps ask yourself what would be the case if the plaintiff was an illiterate person who could not read or write.  Would there be a reasonably sufficient notice?

The test of reasonably sufficient notice is a highly objective one.  The fact that the plaintiff is under some non-legal disability, for example, that he cannot speak English, or is blind, or illiterate, is immaterial, provided that the notice is reasonably sufficient for the class of persons to which he belongs.

The case of Thompson vs L.M. & S. Railway Co. [1930].  I.K. B. 41 is illustrative of the objectivity of the test.  

The plaintiff was illiterate and could not read.  Her niece bought for her a railway excursion ticket on the face of which were the words "for conditions see back".  The back of the ticket referred the reader to the company's time-tables and excursion bills.  The excursion bills referred to the company's time-tables (price board.) which contained a clause exempting the company from liability in respect of injury, fatal or otherwise, however caused.  The plaintiff was injured by the negligence of the company.

The Court of Appeal held that her illiteracy had no effect.  That the notice given, although circuitous, was reasonably sufficient for ordinary travellers, the class to which the plaintiff belonged.

The case of Richardson, Spence & Co vs Rowntree [1894] A.C. 217 gives the contrast position, that is, where notice given was considered inadequate.

The plaintiff, Minnie Rowntree, contracted with the defendants to be carried as a passenger on their steamer from Philadelphia to Liverpool.  She paid the passage money and received a ticket which contained a number of printed terms including one limiting the liability of the defendants to $ 100.  The ticket was handed to her folded up, and the conditions were obliterated in part by a stamp in red ink.  She sustained injuries during the voyage, and sued the defendants.

The jury found that, although she knew there was writing on the ticket, she did not know the writing contained conditions.  Accordingly, the question was whether a reasonably sufficient notice had been given.  It was found that it had not.

Before we proceed to examine further the rule of reasonably sufficient notice, it is perhaps pertinent to alert you that, the question whether all that is reasonably necessary to give notice has been done is a question of fact.  In answering such a question, the court must look at all the circumstances and the situation of the parties.  Thus the finding may vary from case to case.  In the Rowntree case a ticket was issued, but the notice was not properly communicated because of its being obliterated by stamp ink.  This was enough and changed circumstance to hold that the notice was inadequate.

Notice where a Document is Non-Contractual

The foregoing discussion of the rule on reasonably sufficient notice is premised on the presumption that the document which carries the notice is a contractual document.  If the document is one which the person receiving it would scarcely expect to contain conditions, for example, if it consisted of the sort of ticket which a reasonable man would suppose to be merely a voucher or receipt, it cannot be said that the notice given was reasonably sufficient in the circumstances.  Therefore, in applying the rule, courts have to distinguish between contractual documents and mere receipts and vouchers.

Emphasizing this in Parker vs South Eastern Railway Co. (supra), Mellish, L.J. Said:

"I think there may be cases in which a paper containing writing is delivered by one party to another in the course of a business transaction, where it would be quite reasonable that the party receiving it should assume that the writing contained in it no condition, and should put it in his pocket unread.  For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll, he might reasonably assume that the object of the ticket was that by producing it he might be free from paying toll at some other turnpike gate, and might put it in his pocket unread".

Such may not be the case, say if a person who ships goods to be carried on a voyage by sea receives a bill of lading.  Such a document embodies the contract.  It is a contractual document that is supposed to contain conditions.

The case of Chapelton vs Barry Urban District Council [1940] 1 KB 532; [1940] ALL ER 356, CA elucidates the application of the distinction between contractual documents and mere receipts or vouchers.

The plaintiff went on to a beach and hired two chairs from a pile of deck-chairs belonging to the defendant council.  He received two tickets from the attendant, glanced at them, and slipped them into his pocket.  While he was sitting on one of the chairs, he had the misfortune to go through the canvas with the result that he suffered injury.  The tickets carried the words: "The Council will not be liable for any accident or damage arising from hire of chairs".  He said that he had no idea that there were any conditions on these tickets and that he did not know anything about what was on the back of them.

Slesser, L.J. held that the Council was liable for the plaintiff's injury.  He said:

"In my opinion, this ticket is no more than a receipt, and is quite different from a railway ticket which contains upon it the terms upon which the railway company agrees to carry the passenger".

The object of the ticket in Chapelton's case was that the person taking it might have evidence that he had paid for the hire.  The terms printed on it was not part of the contract.

It has been suggested that where the document containing conditions is non-contractual, extra care will have to be taken to communicate its terms.  As Lord Denning M.R. pictorially remarked in the case of Thornton vs Shoe Lane Parking Ltd [1971] ALL ER 686, CA.

"In order to give sufficient notice, it would need to be printed in red ink with a read hand pointing to it, or something equally startling".

The facts of the case were that, the plaintiff parked his car in an automatic car park.  A notice at the entrance stated: "Cars parked at the owner's risk".  The plaintiff slipped the money into a machine which brought forth a ticket.  The barrier at the gate was automatically raised and the plaintiff parked in his car.  He looked at the ticket to see the time of parking, and noticed some other words, but did not pay further attention to them.  These words drew the attention of the customer to a poster inside the garage which displayed the conditions, one of which excluded liability for any injury to the car or customer.  While taking back his car, the plaintiff was injured, for which he brought an action and the defendants sought the protection of the exemption clause.

The Court held that the exempting conditions so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his attention in the most explicit way.  If this is not done, the condition would not form part of the contract.

For example, exhibited notices can become part of the contract if they are displayed so prominently as to bring them home to the other party before or at the time of contracting.

Notice should be Contemporaneous with the Contract

Sufficiency of notice also presupposes that the notice is given to the intended person at such time as to make him/her bear it in mind when he/she finally decides to enter into a contract or otherwise.

Accordingly, in order that a term should become binding as part of the contract, it must be brought to the notice of the contracting party before or at the time the contract is made.

A notice which is communicated after the contract is made, has no effect unless there is evidence that the parties have entered into a new contract on a different basis.

A good illustration of the necessity for contemporaneity is provided by the case of Olley vs Marlborough Court Ltd [1949] 1 K.B. 532.

The plaintiff and her husband were accepted as guests for reward at the defendants' hotel.  They paid for a week's board and lodging in advance, and then went up to their room where a notice was exhibited which contained the clause: "the proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageness for safe custody".  Owing to the negligence of the hotel staff, a thief gained access to the room and stole some of their property.

One of the issues before the court was whether the notice exhibited in the room formed part of the contract between the plaintiff and the defendants.

The Court held that the notice was not communicated before or at the time the contract was made.  That the plaintiff only became aware of it after the contract was made.  The defendants were accordingly liable for the loss.

Of crucial emphasis here is that, one party cannot unilaterally, after the conclusion of the contract, impose upon the other party onerous conditions without his consent.  Any variation of a concluded contract can only take place by the mutual consent of both parties.