Exclusion_Clause

Problem question on exclusion clauses and privity of contract. Introduction Sinbad and his wife wish to sue the company which provided the holiday for breach of contract. The legal issues which arise are: i) whether the company can rely upon the exclusion clause; ii) whether Sinbad’s wife is prevented from bringing an action by the rules on privity of contract. These two issues shall be considered here separately in turn. Exclusion clauses Sinbad must show that Bluebeard cannot rely on the exemption clause. An exemption clause is a clause in a contract which purports to exclude the liability of one of the parties in particular circumstances. Bluebeard can only rely on the clause if it has been incorporated into the contract, the clause covers the breach, and the clause does not fall foul of the statutory regulations. Incorporation A clause cannot be effective to exclude liability if it is not part of the contract. The general principle is that a party must have had reasonable notice of the exclusion clause. However, where the contract has been signed by the claimant, the exclusion clause will be held to have been validly incorporated into the contract, such as in the case of L’Estrange v Graucob[1] an exclusion clause was in very small print which was difficult to read. However, in Chapelton v Barry UDC[2] it was held that items such as cloakroom tickets are not contractual documents. Sinbad did not sign the contract in the usual manner, but rather indicated his willingness to be bound by the terms of the contract by clicking the mouse onto the Internet site. In the absence of any case law on the issue, it is likely that this will be equivalent to a signature, since much business is now done over the Internet. The clause must be incorporated before or at the time the contract is concluded – Hardwick Game Farm v Suffolk Agricultural etc Association[3]. Thus in Olley v Marlborough Court Hotel[4] a notice in a hotel room which could not be seen when the room was booked could not have been incorporated into the contract. In the instant case, the clause was on the website for perusal before Sinbad booked the holiday therefore this requirement is satisfied. Whether or not a term is incorporated into the contract depends upon whether the party has received reasonable notice – Parker v South Eastern Railway[5]. In that case, a cloakroom ticket read, “See back”, and on the back of the ticket were various clauses, including one excluding liability for goods over a certain value. It was held that reasonable notice of the term had been given. The standard to be applied is what is reasonable as regards the ordinary adult individual, capable of reading English – Thomson v London, Midland and Scottish Railway[6]. Bluebeard’s site contains an instruction to read the term before booking, and Sinbad has therefore been given reasonable notice of the terms. However, in the case of exclusion clauses which are unusual or onerous, greater notice will be expected. As Lord Dening stated in Spurling v Bradshaw[7], some exclusion clauses “would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient”. In Thornton v Shoe Lane Parking[8] a notice inside a car park with onerous exclusion clauses was held not to be incorporated into a contract made at the ticket machine. In Interfoto Picture Library v Stiletto Visual Programmes[9] the rule operated to prevent the operation of a clause (although not an exclusion clause) which charged an exorbitant rate for late returns. A clause which purports to allow a holiday company to change a holiday from Sardinia to Scunthorpe would clearly require more notice than has been given in the instant case, where the term is somewhere near the end of a very long contract. Therefore it is likely that the courts will not uphold the clause. Construction It is necessary to consider whether the breach is covered by the clause. The general rule is that exclusion clauses are construed contra proferentem, against the party who is seeking to rely on the clause – Andrews v Singer[10]. Thus in Hollier v Rambler Motors[11] a clause excluding liability for damage caused by fire did not extend to fires caused negligently, although the result would be different if the clause could only have referred to fires started negligently – Aldersdale v Hendon Laundry[12]. The view was once taken that the doctrine of fundamental breach[13] stipulated that liability breaches of contract which are so serious as to be fundamental cannot be excluded. An example would be where the contract stipulated for the supply of peas, and beans were supplied instead – Chanter v Hopkins[14]. Another example is where the breach would have destroyed the whole contract and therefore the exclusion clause with it. The Court of Appeal in Photo Production v Securicor[15] took this view. The defendants provided security services, including a night patrol. One of the guards employed by the defendants started a fire on the claimant’s premises, which got out of control and destroyed the premises. The defendants were not allowed by the Court of Appeal to rely on an exclusion clause that they were not liable for the acts of their servants over whom they had no direct control. However, the House of Lords in Photo Productions stated that there was no rule that a fundamental breach of contract prevented an exclusion clause from becoming effective, following the earlier decision of Suisse Atlantique Societe d’Armemente SA v NV Rotterdamsche Kolen Centrale[16]. The doctrine is no more than a matter of construction – the more serious the breach of contract, the more difficult it would be to show that the breach fell within it. Applying this to the facts, whether or not the clause covers the breach is a borderline issue. On the one hand, the breach is so serious that the courts would require unequivocal wording to show that it is covered by the clause. On the other hand, the clause does state that the right to change the holiday destination is in Bluebeard’s absolute discretion. On balance, the breach probably is covered by the clause. Statutory regulation Classical contract law is based on the principle of party autonomy; that is, the parties to a contract are free to modify the nature and extent of their liability under the contract if they so wish. This is based on the assumption that the parties have equal bargaining power. English contract law therefore in principle recognises and enforces clauses purporting to exclude or exempt one party from liability. However, it is now generally accepted that not all contracts are freely negotiated. Adhesion contracts – that is, standard form contracts which present little choice to the party who has not drawn up the document – can be used to impose an exclusion clause. As Downes points out: The imposition of such exemption clauses may be particularly harmful in consumer contracts, where the disequilibrium between the bargaining positions of the parties may be substantial.[17] It is for this reason that there are now statutory controls on exclusion clauses, in the form of the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms of the Consumer Contract Regulations 1999 (UTCCR). UCTA applies to the contract for the holiday by virtue of section 1(3) which states that the Act applies to business liability which is defined as "liability for breach of obligations or duties arising from (a) things done or to be done in the course of a business”. Liability for breaches of contract other than those caused by negligence is more limited, and is covered under the Act where there is a inequality of bargaining power between the parties. Sinbad’s contract is included by virtue of section 3 which covers consumer contracts and section 12 which states that a person deals as a consumer of “(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and (b) the other party does make the contract in the course of a business”. The effect of section 3 is that any attempt to exclude or restrict liability to, inter alia, consumer contracts, must satisfy a test of reasonableness (section 3(2)(a)). The standard of reasonableness is given clarification by section 3(2)(b)(i) which states that this extends to any contractual term by virtue of which a party claims to be entitled to render a contractual performance substantially different from that which was reasonably to be expected of him. This clearly applies to Sinbad’s contract. Reasonableness is clarified further in section 11, which states that the test is whether the clause is fair and reasonable “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”. The court therefore retains a wide discretion under the Act to determine whether a particular clause satisfies the test of reasonableness. The party seeking to rely on the clause bears the burden of showing that it is reasonable – section 11(5). Bluebeard are highly unlikely to be able to show that the clause is reasonable, and it will therefore be invalid under section 3. UTCCR applies to consumer contracts; its scope is wider since it covers all terms in contracts and not merely exclusion clauses. The test is whether the clause is unfair, and in this case it is clearly an unfair clause. The exclusion clause is therefore invalid under both UTCA and the UTCCR and Sinbad can sue Bluebeard for breach of contract. Privity of contract Sinbad’s wife also wishes to sue for breach of contract. The advice given to her will depend upon whether the contract is covered by the common law or by the Contracts (Rights of Third Parties) Act 1999. As will be seen, this depends upon whether or not the contract contains a term that the 1999 Act is to apply. Since this is not clear from the facts given, the wife’s position shall be considered under both the common law and the statute. Common law The doctrine of privity of contract stipulates that only parties to a contract can bring an action under that contract – Tweedle v Atkinson[18]. This decision was confirmed by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd[19]. No person who has not given consideration can sue on the contract – Shadwell v Shadwell[20]. The doctrine has been criticised – for example, Cheshire et al state that the doctrine has been found to have “worked injustice and to be inadequate to modern needs”[21]. Thus in Beswick v Beswick[22] a nephew entered into a contract with his uncle which included a term that after the uncle’s death he would pay his aunt £5 per week. The House of Lords held that the aunt was unable to sue the nephew for breach of his promise in her personal capacity[23]. Sinbad’s wife will be unable to sue on the contract at common law. However, the effects of the common law doctrine are modified by the decision in Jackson v Horizon Holidays[24], where the claimant booked a holiday for himself and his family, and the holiday was a disaster. The damages awarded took into account the fact that his family had suffered loss as well. Although the reasoning taken in that case was rejected by the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd[25], their Lordships confirmed the decision. Sinbad will be able to claim damages for both his own loss and that of his wife. Contracts (Rights of Third Parties) Act 1999 This Act[26], which effectively abolishes the doctrine of privity of contract, applies to all contracts entered into six months after it came into force (which was in October 1999, and therefore does not apply to Sinbad’s contract) and also to all other contracts which state that they intend the Act to apply. It will therefore be necessary to examine the terms of the contract in order to determine whether the Act does apply. If the Act does apply, then Sinbad’s wife will be able to sue for breach of any term of a contract which either expressly states that she may do so, or which confers a benefit on her where on a proper construction of the contract, the parties did not intend that she should be able to enforce the term. The holiday has been booked for her benefit. Whether or not she can sue therefore depends upon a construction of the terms of the contract. Bibliography Atiyah, PS, ‘An Introduction to the Law of Contract’, 1995, Clarendon Beale, HG, Bishop, WD and Furmston, MP, ‘Contract – Cases and Materials’, 1995, Butterworths Collins, H, ‘The Law of Contract’, 1993, Butterworths Downes, TA, ‘Textbook on Contract’, 5th edition, 1997, Blackstone Huntley, JAK, ‘Casebook on Contract’, 1995, Green & Son Koffman, L, and Macdonald, E, ‘The Law of Contract’, 1995, Tolley Lawson, R, ‘Exclusion Clauses’, 4th edition, 1995, Longman McKendrick, E, ‘Contract Law’, 1994, Macmillan Poole, J, ‘Casebook on Contract’, 1995, Blackstone Smith, JC, ‘Smith & Thomas: A Casebook on Contract’, 10th edition, 1996, Sweet & Maxwell Treitel, GH, ‘The Law of Contract’, 1995, Sweet & Maxwell Wrzesien T, ‘The End Of The Line For Privity Of Contract’, 1999, Winward Fearon Solicitors, Internet Word count: 2484 ----------------------- [1] [1934] 2 KB 394 [2] [1940] 1 KB 532 [3] [1969] 2 AC 31 [4] [1949] 1 KB 532 [5] (1877) 2 CPD 416 [6] [1930] 1 KB 41 [7] [1956] 2 All ER 121 [8] [1971] 2 QB 163 [9] [1989] QB 433 [10] [1934] 1 KB 17 [11] [1972] 2 QB 71 [12] [1945] KB 189 [13] This doctrine has its origins in shipping law – Joseph Thorley Ltd v Orchis SS Co Ltd [1907] 1 KB 660 [14] (1838) 4 M&W 399 [15] [1980] AC 827 [16] [1967] 1 AC 361 [17] Downes, TA, ‘Textbook on Contract’, 5th edition, 1997, Blackstone, at p.273 [18] (1861) 1 B&S 393;confirmed in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 79 [19] [1915] AC 79 [20] (1860) 9 CBNS 159 [21] Cheshire, Fifoot and Furmston, ‘Law of Contract, 12th edition, at p.454 [22] [1968] AC 58 [23] Although on the facts as administrator of her husband’s will she could take his place as a party to the contract. [24] [1975] 3 All ER 92 [25] [1980] 1 All ER 571 [26] This Act was enacted in response to the Law Commission Consultation Paper, Privity of Contract – Contracts for the Benefit of Third Parties.