Rules applicable in determining validity of exemption clause. By Johnson Yesaya

 INTRODUCTION

Exemption clause is a contractual term that forms part of a contract which attempts to either limit or exclude a party's liability to the other.  This occurs when one party attempts to cut down the scope of their contractual duties or regulate the other party's right to remedies for a possible breach of contract. There are two types of exemption clause (Exclusion and Limitation clause) which have different degrees to exclusion. Exclusion clause is one of the types of exemption clause in a contract which exclude liability of a party completely. Limitation clause is another type of exemption clause which limits the liability of a party who is not completely excluded from liability in case of breach of terms of contract. 

The theory of freedom of contract assumes that parties are free to contract with one another and can protect their own interests. It assumes parity in contractual bargains which is not necessarily the case. The stronger party may insert terms favorable to it. This is the genesis of exemption clauses. An exemption clause is a clause inserted in a contract by the stronger party exempting, itself from liability or limiting the extent of any liability arising under the contract. These clauses are common in standard form contracts e.g. conveyance of goods, hire purchase agreements, contracts of insurance etc.

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.

Due to abusive use of exemption clauses in various contracts which eventually affects weaker parties, there are developed rules which are applicable in the determination of the validity of exemption clause.

RULES APPLICABLE IN DETERMINING VALIDITY OF EXEMPTION CLAUSE

Incorporation in a contract, for an exemption clause to be valid, a particular term exempting a party from liability must be included together with other terms in a contract paper. This is a standard set to determine the validity of exemption clause by checking existence of a term exempting a party in a contract paper. The existence of a term in a contract paper proves a particular term valid.

In L’estrange V. Graucob , a plaintiff bought an automatic cigarette vending machine from the defendant, in a contract of sale, among other terms, there was a very small print of a term in a contract which exempted a defendant (seller) from any defect of machine. Machine worked for few days, a aggrieved plaintiff sued defendant for the breach of terms of contract.

“It was held that the defendant was not liable as the document contained the terms of the contract and the plaintiff had signed the same and was therefore bound.”

Incorporation of exemption clause in a contract can be either by the following ways;

Incorporation by signature, it is enough for an exemption clause to be valid when parties agrees to sign a contract. It doesn’t matter if a party read or have not read terms of a contract as happened in a L’estrange V. Graucob  as explained above.

Incorporation by notice, Notice by parties on the existence of a particular exemption clause among terms of a contract is enough to prove the validity of exemption clause in case of disputes.

Incorporation by course of dealing, if parties have performed several transactions agreed by them under exemption clauses incorporated by signature or notice, when happens there is a breach of contract by one party to the future transactions, a party who is favored by a exemption clause may prove the validity of exemption clause by referring the past course of dealings.

Reasonable notice, before signing a contract, parties have to read all contents of a contract, signing a contract before reading it put a signatory to a risk of loss or damage because of being un-aware of the terms of a contract. It do not stand as a ground to claim damages due to loss arose from failure to read and understand terms of a contract.

It is a duty of a party offering goods or service to another, to issue adequate notice dis-closing all terms and conditions of a contract in a simple language without any intention to hide some terms. Failure to issue notice to another party, that party tend to be not bound by terms of the contract.

In Henderson vs  Stevenson , The plaintiff purchased 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 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".

Issuing adequate notice to another party is necessary for a party to escape liabilities exempted by exemption clause, failure by second party to read clauses exempting party issuing notice from liabilities will not stand as a ground to claim damages in a case of breach of terms of contract. In Parker vs South Eastern Railway Co , the plaintiff received a ticket which stated on the face “see back”. Later on dispute, a court held that, notice was given and it doesn’t matter if affected party read it or not.

Strict construction rule, The language of the terms must be clear and free from vagueness or ambiguity. In the event of any ambiguity the clause is interpreted contra proferentes. This is the Contra Proferentem Rule of interpretation under which clauses are interpreted restrictively against the party relying on them. As was the case in Omar Sale v. Besse and Co. Ltd. Where in a contract of sales of goods, the seller exempted itself from liability for breach of ‘warranties’. It breached an implied condition in the Sale of Goods Act. 

A question was whether the term warranties included conditions. It was held that since the term warranties were vague. It had to be interpreted restrictively against the seller and therefore did not include conditions. Hence the seller was liable.

Reasonableness of the terms of the contract, this is another test of the validity of the exemption clause in a contract. A term is unreasonable in case it defeat a main purpose of the contract or is against the public policy. In Lilly White vs Mannuswami , a laundry receipt stated a condition that, a person will claim only 15% of the market price of the lost article, plaintiff’s new SARI was lost. The clause was held unreasonable hence 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.

CONCLUSION

A court of law would generally not give an exemption clause effect if doing so enable the party evade what amounts to be the fundamental obligation of the contract or a fundamental breach. This rule is based on the premise that every contract has a fundamental obligation to be discharged and a party must not use an exemption clause to evade such obligation. Reasonableness of exemption clauses, incorporation, un-ambiguity meaning of terms and reasonable notice, are among rules used to determine the validity of exemption clause.

REFERENCE

BOOKS

M.D Mndeme. Law of  contracts in Tanzania, Dar es salaam, 2007

ONLINE SOURCES

https://www.saunders.co.uk/news/exemption-clause-incorporated-into-contract/

https://www.lawteacher.net/free-law-essays/contract-law/exemption-clause.php

CASE LAWS

Lilly White vs Mannuswami AIR 1966 Mad.13

Omar Sale v. Besse and Co. Ltd.

L’estrange V. Graucob 2 K.B. 394 1934

Henderson vs  Stevenson (1875) 32 LT 709

Parker vs South Eastern Railway Co 1877