ABSTRACT
Commercial agreements have a bearing on our daily activities; we get into these agreements sometimes in haste and other times without deeply looking at the outcome because we are striving to close a deal.
This article provides an in-depth exposition of the developing case laws and written literature available as to whether having an exemption/exclusion clause can indeed limit liability to the party seeking to rely on it and if so, wouldn’t it make that clause a double-aged sword?
The rule as held by courts of law is that the term of exclusion will not usually be construed so as to cover serious or “fundamental” breaches going to the root of the contract. However, the term fundamental breaches going to the root of the contract cannot be construed to mean loss occasioned by an act beyond the control of the defendant.[1]
INTRODUCTION
An exclusion clause is a term in a contract which seeks to exclude or limit the liability of one of its parties. For example, it may state that a party has no liability if the contract is breached or seek to limit the range of remedies available or the time in which they can be claimed, they are terms whereby one party seeks to disclaim or reduce his or her responsibility under the contract
This doesn’t mean that the presence of an exclusion clause in a contract will exempt the party seeking to rely on it from liability, this is because an exclusion clause is an integral part of the contract and such a term must thus be brought to the attention of the other party as per Spurling Ltd V Bradshaw [1956] 2 ALL ER 121. According to Lord Denning MR
“if the clause is of such a nature that the party adversely affected would not expect it then the other party cannot incorporate it just by handing over or displaying the document but must make it conspicuous”
The above definition is fortified in the case of Express Transport Co. Ltd vs. BAT Tanzania Limited where the court held that
"Any clause excluding liability would be construed as relating to only that liability which would arise without negligence, unless it was quite clear that liability for negligence was also excluded.
Further, in Schmitthoff Export Trade: The Law And Practice of International Trade, on page 67 in instances where there is an agreement and the seller wants to incorporate standard terms into the contract, the seller must obtain the buyer’s Unqualified Confirmation before carrying out the contract especially when such negotiations are carried out by correspondence.
THE PURPOSE OF EXCLUSION CLAUSES IN CONTRACTS.
In Cheshire, Fifoot and Furmston’s Law of Contract the author suggests, that the approach taken to the purpose of an exclusion clause usually depends upon the wording of the exclusion clause being considered. However, exclusion clauses are more commonly viewed as a defence. There are two different approaches to the purpose of exclusion clauses[2]:
One approach would use the whole of the contract, including any exclusion clauses, to define the obligations set out in it.
The other approach would be to define the obligations set out in the contract. without reference to the exclusion clauses. The exclusion clauses would then be used as defences when necessary.
For an exclusion clause to be valid it must form a part of the contract. The courts have devised several rules to ascertain whether or not it has been incorporated into (made part of) the contract.
The document containing the exclusion clause must be part of the contractual documentation and not a mere receipt or acknowledgement of payment. The above is demonstrated by the decision in Chapelton v Barry Urban District Council[3] facts of the case Mr Chapelton hired two deckchairs from the defendant. A sign next to the deckchair gave the price and time limit but did not refer to any exclusion clauses. After Mr Chapelton had paid for the deckchairs he was handed two tickets. The back of the tickets stated that the defendant would ‘not be liable for any accident or damage arising from the hire of the chair’. When the plaintiff sat on the deckchair it gave way, causing him injury. The defendant relied on the exclusion clause contained on the ticket, but the High Court held that this was a voucher or receipt and did not form part of the contract.
One exception to this is a bill of lading. This is an official, detailed receipt which is given, by the master of a ship transporting goods, to the person consigning (sending) the goods. Despite acting as a receipt, it is commonly treated as part of the contract.
Therefore as a general rule, an exclusion clause in a signed contract is binding, regardless of whether or not it was read by the parties.
This was demonstrated by the decision of L’Estrange v F Graucob Ltd[4]. The facts briefly are Mrs. L’Estrange purchased a cigarette machine from the defendant for use in her café. At the time of purchase, she signed a form that included a clause excluding all implied conditions and warranties. The machine did not work properly and Mrs L’Estrange claimed there was an implied warranty that it was fit for purpose. The High Court held that by signing the form Mrs L’Estrange had agreed to be bound by its terms, regardless of whether or not she had read them. Therefore, the defendant could rely on the exclusion clause.
Except for those the law interferes with, the common law provides no rule whereby an exclusion clause would be declared unenforceable because it is unfair or unreasonable as seen in the case of Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. This is so because Exclusion clauses can exclude anything in the contract clauses, liability of consequential loss regarding anything in contractual obligations, and limit the remedies available on those remedies.
THE COMMERCIAL CONSTRUCTION OF EXCLUSION CLAUSES.
Gillian Bristow in his article Exclusion Clauses - Drawing The Line states that exclusion clauses can be commercially constructed and gives a list of authorities that help shade more light on the above, which I quote as follows;
“The House of Lords decision in Photo Production Ltd v. Securicor Transport Limited [1980) 1 All ER 556. Marked a shift away from the so-called contortionist approach of analysis of the exclusion clause which was becoming "progressively more refined"[5] in favour of "leaving cases to be decided straightforwardly on what the parties have bargained for".[6] The court advocated that "in commercial matters generally, where the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated but there is everything to be said ... for leaving the parties free to apportion the risks as they think fit and for respecting their decisions"[7]
The High Court endorsed a similar approach some six years later in Darlington Futures Limited v. Delco Australia Pty Ltd[8]
Darlington's case concerned a contract between a futures broker and a company seeking to engage in futures trading for tax minimization.
The broker, in breach of contract, failed to close out certain contracts, resulting in heavy losses to the respondent. In an action to recover those losses, the broker relied upon the following exclusion clauses:
6 The Client ... acknowledges that the Agent will not be responsible for any loss .. arising from trading by the Agent on behalf of the Client. The Client ... acknowledges that the Agent will not be responsible for any loss arising in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this Agreement or not ...
7 c) Any liability on the Agent's part or on the part of its servants or agents for damages for or in respect of any claim for damages for or in respect of any claim arising out of or in connection with the relationship established by this agreement or any conduct under it or any orders or instructions given to the Agent by the Client, other than any liability which is totally excluded by paragraphs (a) and (b) hereof, shall not in any event (and whether or not such liability results from or involves negligence) exceed $100
The High Court reversed the decision of the Full Court of the Supreme Court of South Australia which held the broker responsible for the trading losses. In a unanimous decision, it stressed the importance of "construing the language of (an exclusion clause) in the context of the entire contract of which it forms part"[9] and "giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate construing the clause contra proferentum in cases of ambiguity".
The High Court held that clause 6 could, on its terms, only operate to protect the appellant where any trading activity was carried out with authority. Clause 7, by referring to any claims "in connection with" the relationship established by the agreement was, however, wide enough to allow the appellant to limit its damages notwithstanding the unauthorised nature of the trading.
He puts forth a question “How effective is an exclusion clause in cases of serious or willful breach of contract? Does the quasi deviation principle often termed the "four corners" rule operate to limit reliance on exclusion clauses, or can a properly drawn exclusion clause provide blanket cover for liability?”
A LOOK INTO UGANDA’s CASE DEVELOPMENT.
In Uganda, our courts were faced with a similar issue as to whether to rely on an exclusion clause or not In the case of Dian Gf International Ltd vs. Damco Logistics Uganda Limited & Anor Civil Suit No 161 of 2010[11]The facts are, that the plaintiff contracted the defendant to transport its consignment of Nile Perch Fish Maws from Kampala to Vietnam and on the 31 of March 2010 the defendant took delivery of the said consignment at the plaintiff’s warehouse on Sir Apollo Kaggwa road in Kampala. The goods were loaded in container number MSKU 433207 – 7 and the defendant acknowledged receipt of the consignment. The defendant informed the plaintiff that the goods were robbed en route to the port. On the 6th of April, 2010 the defendant's employee and/or agent wrote to the plaintiff’s principals advising that the container number MSK 243 3207 – 7 was found empty en route to Nairobi. The defendant did not deliver the container as contracted by the plaintiff the defendant and the third party executed a contract dated 29th of October 2004 and perusal of the contract inter alia shows that it has an indemnity clause indemnifying the defendant against certain third-party claims stated therein.
The defendant's main defence was that the goods were transported at the owner’s risk pursuant to an exemption clause found under its standard trading terms and conditions for the provision of the services of transportation of the goods in issue.
Consequently, one issue is whether the exemption clause relied on by the defendant exempted the defendant from any liability for the loss of the plaintiff’s goods. The sub-issue to this is whether the exemption clause in the defendant’s standard conditions was ever brought to the attention of or communicated to the plaintiff at the time the contract for the transportation of the goods in question was executed. Another sub-issue in the question of whether there was communication of the exemption clause relates to the admissibility of e-mail allegedly used in communicating to the plaintiff, the terms and conditions of the defendant for the transportation of the goods in question.
The other issue concerned the defendant had a separate agreement with the third party in which there is a clause making the third party liable to indemnify the defendant from third-party claims in certain circumstances.
IN RESOLVING THE ISSUE OF WHETHER THERE WAS ANY COMMUNICATION OF THE EXEMPTION CLAUSE ASSERTED IN DEFENCE OF THE CLAIM BY THE DEFENDANT.
The court held as follows; according to Halsbury’s Laws of England fourth edition volume 9 page 242 paragraph 367 which states that "Despite the lack of any general power to strike out exclusion clauses, the courts have inter alia and where appropriate, applied general rules of the law of contract in order to control the possibilities of abuse inherent in complete freedom of contract:
1. The party seeking to rely on an exclusion clause must show that it was incorporated as a term of the contract, which usually involves the taking of reasonable steps to bring it to the notice of the other party.
2. An exclusion clause is to be construed strictly against the party who introduces it and seeks to rely on it and this is known as the contra proferentem rule.
3. Furthermore on page 243 paragraph 368 it is written that for exclusion clauses to be effective they must as a general rule be incorporated in the contract at the time when the contract is made and it is insufficient if the clause is put forward at a later stage.
This principle is stated in the case of Olley v Marlborough Court Ltd [1949] 1 All ER 127 where the plaintiff booked a room in the defendant’s hotel and later saw a notice in the hotel room exempting the defendants from liability for articles lost or stolen. The decision of the Court of Appeal, per Singleton LJ on page 133:
“If the defendants, who would prima facie be liable for their own negligence, seek to exempt themselves by words of some kind, they must show
(i) That those words form part of the contract between the parties and
(ii) That they are so clear that they must be understood by the parties in the circumstances as absolving the defendants from the results of their own negligence.
This statement of law was applied with approval by Lord Denning MR in Thornton v Shoe Lane Parking Ltd [1971] 1 All ER 686 on page 689 when he stated:
“None of those cases has any application to a ticket which is issued by an automatic machine. The customer pays his money and gets a ticket. ... The contract was concluded at that time. It can be translated into offer and acceptance in this way. The offer is made when the proprietor of the machine holds it out as being ready to receive the money. The acceptance takes place when the customer puts his money into the slot. The terms of the offer are contained in the notice placed on or near the machine stating what is offered for the money. The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late. ...
In the present case, the offer was contained in the notice at the entrance giving the charges for garaging and saying ‘at owner risk’, i.e. at the risk of the owner so far as damage to the car was concerned. The offer was accepted when the plaintiff drove up to the entrance and, by the movement of his car, turned the light from red to green, and the ticket was thrust at him. The contract was then concluded, and it could not be altered by any words printed on the ticket itself. In particular, it could not be altered so as to exempt the company from liability for personal injury due to their negligence.”
Justice Madrama thus held that
“The underlying principle is that an exemption clause must be communicated effectively at the time the contract is made and not after it was made. In theory, the offeree would have a chance before the consummation of the contract to reject the exclusion clause. The exemption clause is also deemed to be part of the contract.
RESOLVING THE ISSUE AT HAND
The court held that the evidence before it does not show that the plaintiff accepted the terms and conditions if at all communicated through counter correspondence. No evidence shows that the plaintiff knew of the terms and was therefore bound by exhibit D3 which is a unilateral document spelling out the terms and conditions of the defendant’s services.
The principles applied are found in Halsbury’s laws of England (Supra) paragraph 369 on page 244 that for an exclusion clause to be incorporated into a contract, the party against whom it is to operate must be given reasonable notice of its existence.
Whether such notice has been given is determined according to the following principles:
(1) If the party against whom the clause operates has actual knowledge of the clause at the time when the contract is concluded he is inevitably bound by it.
(2) When there is no actual knowledge, the party against, the clause operating will not be bound if he has no reason to believe that the document containing the clause contained contractual terms.
(3) If the party against whom the close operates has reason to believe that a document given to him contains contractual terms it may be borne by those terms, including any exclusion clause, even though he does not choose to read the document; if the document contains what is reasonably necessary to bring the terms to the attention of the reader, the recipient will be bound but he will not be bound if he does not do so.”
The court further referred to the case of Atlantic Shipping and Trading Company Limited v Louis Dreyfus and Company [1922] AC 250, the requirement that an exemption clause must clearly state what is exempted was followed. It was held that un-seaworthiness was nowhere mentioned, nor is the liability for consequences of it excepted under any term.
In this case, the question is whether liability for loss through robbery as alleged was expressly excluded premised on the email communication that the cargo was transported at the owner’s risk. Any ambiguity is to be construed in favour of the party against whom it is to operate and general words of limitation will not usually be construed so as to cover serious or fundamental breaches going to the root of the contract.
General words will have no application to liability for negligence, but will prima facie be construed as to protect the defendant from a strict form of liability (i.e. on warranty) In the case of White v John Warwick Ltd (1953) 2 ALL ER 1021 the exemption clause relied on provided that
“Nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machines hired nor for any third-party claims, nor loss of any goods, belonging to the hirer, in the machines.”
When the plaintiff was injured while riding the bike as a result of failure to maintain the machine in good condition and a defect in the bike, Singleton LJ said at 1025:
In the circumstances of the present case the primary object of the clause, one would think, is to relieve the owners from liability for breach of contract or for breach of warranty. Unless, then, there are clear words that would also exempt from liability for negligence, the clause ought not to be construed as giving absolution to the owners if negligence is proved against them. The result is that clause 11 ought not, I think, to be read as absolving the owners from liability for negligence if it is proved that the injury that the plaintiff sustained was due to lack of care which one in the owners’ position ought to take when supplying a tricycle for the use of a hirer. If that is proved, then the owners do not escape liability by reason of clause 11.
The court questioned whether the robbery in this case fell within a strict form of exclusion from liability under the clause.
The expressions excluding liability have to be considered. The first is that goods are transported at “Owner’s Risk” and this was expressed in email exhibit D2 (ii). The second exclusion clauses are found under exhibit D3 which is the Defendant’s Standard Trading conditions and is quite comprehensive but not proved.
Court resolved that there was no evidence as held above, other than a reference to Exhibit D3 in email exhibit D2 (ii) that these terms were actually given to the plaintiff in soft or hard copy. The e-mail relied on by the defendant does not even indicate where the plaintiff could access the standard trading terms of the defendant.
In conclusion, in the above case, there was no proven exclusion clause that exempts the defendant specifically from liability for the loss of the goods through robbery. I will premise my findings on the words “Owner’s Risk”. As we have noted above the general rules of construction are that an exclusion clause requires clear words to exclude liability which would otherwise arise. (Halsbury’s Laws of England vol 9 page 246 paragraph 370.) Any ambiguity is to be construed against the party putting forth the clause for his protection. General words of exclusion will not usually be construed so as to cover serious or “fundamental” breaches going to the root of the contract. However, the term fundamental breaches going to the root of the contract cannot be construed to mean loss occasioned by an act beyond the control of the defendant.
SIMILAR DEVELOPMENTS IN EXCLUSION CLAUSES IN THE UK COURTS
The case, of Mott MacDonald Ltd v Trant Engineering Ltd 2021 looked at the issue of whether a party that has fundamentally breached a contract could rely on an exclusion clause. In the event, the court decided that the party could.[12]
The case revolved around an agreement between two engineering firms Mott Engineering and Trant Engineering) to refurbish an RAF property in the Falkland Islands. During the works, there was a dispute over payments under the agreement. Mott claimed it was owed £1.6million by Trant. When Trant refused to pay, Mott disabled Trant’s access to the project design work. Trant then sued Mott for the cost of having to recreate the designs from scratch – some £ 5 million.
Key to the dispute was the contract’s exclusion clause. It’s worth reproducing the relevant section of the clause in full. It stated:
“Notwithstanding any other term to the contrary in the Agreement or any related document and whether the cause of action for any claim arises under or in connection with the Agreement in contract or in tort, in negligence or for breach of statutory duty or otherwise. In relation to any and all causes of action as aforesaid:
a. the total liability of the Consultant in the aggregate for all claims shall be limited to £500,000 (Five hundred thousand Pounds)…”
In summary, each party argued as follows:
Mott denied it had breached the agreement in the first place, although it still sought judgment to the effect that if it was found to be in breach the exclusion clause it had signed limited their liability to £500.00
Trant claimed that Mott’s behaviour in restricting access to the design work represented such a fundamental and wilful breach of contract that the exclusion clause was inoperative. For the clause to be applicable, Mott argued, there should have been clear wording that it applied even in the case of a fundamental breach.
The court decided against Trant – even though it would probably have to revisit all of the work it had done under the agreement to date.
The judge noted that the exclusion clause and the clause limiting liability to £500,000 did not specifically mention fundamental breaches (i.e. the parties had not removed such breaches from the exclusion clause’s ambit). The contract was clearly drafted, and it had been reached between two commercial entities at arm’s length.
Similarly in CIS General Insurance Limited v IBM United Kingdom Limited [2021] EWHC 347, the High Court heard arguments on a dispute between the IT supplier and consumer for wrongful termination of the contract. IBM had contracted to provide CIS IT systems but after delays in the provision of the goods, CIS withheld payment of IBM’s invoice. IBM relied on this non-payment to terminate the contract. CIS alleged that IBM had wrongfully terminated the contract and sought £ 132 million in damages for wasted expenditure resulting from the termination. The High Court agreed that IBM had wrongfully terminated the contract but that CIS could not claim for wasted expenditure because it was excluded by the exclusion clause in the contract.
On appeal, the Court overturned this decision and found in favour of Soteria (formerly CISGIL). The key issue for the Appeal Court was the proper construction of the exclusion clause.
The exclusion clause in the parties’ contract provided that
“Neither party shall be liable to the other…for any Losses arising under and/or in connection with this Agreement…which are indirect or consequential Losses, or for loss of profit, revenue, savings, data, goodwill, reputation”.
Lord Justice Coulson of the Court of Appeal went on to state that the High Court should
have considered the natural and ordinary meaning of the words as to what losses were being excluded. In this case, the clause could not have excluded a claim for wasted expenditure as it did not refer to such costs and they did not fall within the natural and ordinary meaning of “loss of profit, revenue or savings”.
Lord Justice Coulson stated “The more valuable the right, the clearer the language of any exclusion clause will need to be”.
As a result of the Court of Appeal’s decision, IBM’s liability to Soteria increased from £13m to £80m. It is likely that IBM will now seek to appeal the decision to the Supreme Court.
The Court of Appeal’s decision is significant as it sets a precedent that a strict approach should be taken when interpreting exclusion clauses. Wasted expenditure is a distinct form of direct loss that can arise from the termination of a contract and parties wishing to exclude it from liability should do so expressly with precise drafting. The ambiguous wording of an exclusion clause could be the difference between £13m and £80m liability. [26]
WHAT ARE THE RULES THAT GOVERN EXCLUSION CLAUSES?
The rules were laid down in the case of Ok Zimbabwe Limited V Msundire (CIVIL APPEAL NO. SC 111/12) wherein the court stated the following;
In general, parties to a contract are at liberty to exempt each other from the consequences flowing from a breach of the contract. For this reason, corporate entities and public institutions providing a particular service or engaged in a contractual relationship with another exempt themselves from liabilities they would otherwise incur. In general, if both parties are aware of the exemption no real difficulties are encountered. However, such an exemption can be an expensive trap for an unwary client.
For the above reason, the courts have set limits to the exemption that they will permit by interpreting such a clause narrowly. In doing so, the court endeavours to ascertain what the parties intended the exemption to cover. However, an exemption that is contra bonos mores (against good morals) will not be permitted. For example, a party may not exempt himself from his fraud.
The approach of the courts is to adopt a narrow interpretation of exemption clauses and adopt the principle that, unless the scope of the exemption is clearly expressed, it must be interpreted as giving minimum protection to the party in whose favour it operates as seen in
The case of Tubb (Pvt) Ltd v Mwamuka 1996 (2) ZLR 27 (S), restates the principles applicable in exemption clauses. These may be summarized as follows:
i. The words of the exemption clause must be read as part of the contract and must be sufficiently clear and comprehensive for a court to give effect to them.
ii. Any ambiguity as to the meaning and scope of the exemption must be interpreted against the MAKER of the contract unless he proves that the words used embraced the contingency that has arisen.
iii. If there is not an express reference to negligence in the exemption, the court must consider whether the words are wide enough to cover negligence on the part of the defendant or his servants and if so whether the claim for damages may be based on some ground other than negligence.
iv. Where the existence of an exemption excluding liability for negligence is not in dispute, the burden of establishing any other possible ground for liability such as gross negligence, rests upon the claimant.
v. The exemption must be within the knowledge of the other party at the time the contract is entered into.
vi. A party cannot exempt himself from liability for willful misconduct, or criminal or dishonest activity of himself, his servants or agents or from damage resulting from gross negligence on his part or that of his servants
Other rules
As stated in the case of Securicor Courier (K) Ltd Vs Benson David Onyango & Margaret R. Onyango Civil Appeal No. 323 Of 2002 Court Of Appeal, Nairobi held that the exemption clause has to be brought to the attention of the person against whom it is to operate at the time of making the contract and it becomes part of the contract. Reference was made by the court to Thornton vs. Shoe Lane Parking Ltd. [1971] 2 Q.B. 163; Interfoto Picture Library Ltd vs. Stiletto Visual Programmes Ltd. [1989] 1 Q.B. 433) that an exemption clause can be incorporated in a contract by, inter alia, signature or notice."
POINT TO NOTE.
a) The rule that exclusion clauses in signed contracts are binding on the parties is not applied where there has been fraud or misrepresentation as to the scope or effect of the clause. This is illustrated by Curtis v Chemical Cleaning & Dyeing Co[13] Here the defendant’s shop assistant innocently misrepresented the scope of the exclusion clause in the document Mrs Curtis was signing. As a result, the clause was held not to be incorporated into the contract.
b) In addition, If the contract is unsigned, the question is whether or not reasonable notice of the term has been given When determining whether reasonable notice of a term has been given, the timing of the notice is very important.
c) The exclusion clause must be brought to the attention of the other party before the contract is made. This is demonstrated by Chapelton and also Olley v Marlborough Court Ltd[14] In this case Mrs Olley and her husband arrived for a week’s stay at the Marlborough Court Hotel. They paid for the room at reception and then went up to their room. A sign on the back of the bedroom door stated, ‘The proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody …’. During their time at the hotel, Mrs Olley had furs, jewellery, clothes and a hatbox stolen from her room. She claimed the value of these from the company which owned the hotel. The company argued (among other points) that the sign on the bedroom door excluded their liability for the theft. Lord Justice Denning stated (at p. 549): The first question is whether that notice formed part of the contract. Now people who rely on a contract to exempt themselves from their common law liability must prove that contract strictly …
a) The best way of proving it is by a written document signed by the party to be bound.
b) Another way is by handing him before or at the time of the contract a written notice specifying its terms and making it clear to him that the contract is on those terms.
c) A prominent public notice which is plain for him to see when he makes the contract or an express oral stipulation would, no doubt, have the same effect.
But nothing short of one of these three ways will suffice.
As Mrs. Olley would only have seen the notice after she had entered into a contract with the hotel, it was held not to form part of the contract. In any event, it was found not to be clear enough to exclude the company’s liability for negligence. Therefore, the company’s appeal was dismissed.
Also the matter of the Previous course of dealings will give a justification of the exclusion clause In some situations a consistent previous course of dealings between the parties is sufficient to constitute reasonable notice. For example, in J Spurling Ltd v Bradshaw[15], the plaintiff received a receipt for storage charges, containing an exclusion clause, from the defendant. Although this was sent after the contract for storage was made, the plaintiff had entered into several contracts with the defendant previously and had received similar receipts with the same clause on them. The court, therefore, held that he was bound by the exclusion clause.
HOW IS AN EXCLUSION CLAUSE THEN INTERPRETED?
Exclusion Clauses Rules about the interpretation of exclusion clauses were discussed in the case of Assist (U) Limited V Italian Asphalt & Haulage Limited & Anor HCCS No 1291 of 1999 wherein the court stated that;
The plaintiff and first defendant entered into a lease agreement on the second defendant’s land. The plaintiff was allowed to make repairs in return for abatement of rent or possible sale of land to him. Fights broke out about the value of reimbursement, the plaintiff withheld rent until he could be reimbursed. The defendant distressed for rent and advertised to sell but the plaintiff obtained an injunction restricting the same
However, the case of McCutcheon v David MacBrayne Ltd[16] held that this only applies if the course of dealing has been consistent.
Furthermore, is the element of unusual terms in the contract for sale, if an exclusion clause is unusually wide, it requires an unusually explicit warning? This is demonstrated by Thornton v Shoe Lane Parking Ltd, where a clause purported to exempt the owner of a car park from all liability for personal injury, however caused. Lord Denning stated (at p. 170):
“All I say is that it is 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 most explicitly… To give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling”.
This case also, once again, illustrates the importance of timing as the terms and conditions were displayed inside the car park itself and, therefore, the plaintiff would only have been able to read them after he had entered into the contract to use it.
The case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd[17] indicates that the Thornton approach to unusual terms applies to contract terms in general, not just exclusion clauses.
More still, is the aspect of Battle of the forms ‘The phrase ‘battle of the forms’ refers to the situation where both parties are trying to incorporate their standard terms into the contract. The usual approach of the courts is to analyze this in terms of offers and counter-offers, although various other solutions are possible.
What then shall the court had to consider when applying the concept of exclusion clauses, The courts have sought to restrict the use and scope of exclusion clauses that are incorporated into a contract; particularly where one party is seen as being in a weaker bargaining position.
Use of clear words; If a person is under a legal liability and wishes to get rid of it, he can only do so by using clear words. (Lord Justice Scrutton, cited in Alison (J Gordon) Ltd v Wallsend Slipway and Engineering Co Ltd[18] The courts require particularly clear words to be used to exclude a party’s liability for negligence. In Canada Steamship Lines Ltd v The King[19] (heard by the Judicial Committee of the Privy Council), Lord Morton (at p. 208) set out three rules for determining whether or not an exclusion clause did cover liability for negligence.
If the clause contains language that expressly exempts the party seeking to rely on the clause from the consequences of negligence, the effect will be given to that provision. This usually applies where a clause specifically refers to ‘negligence’. For example, ‘Darling Dairies will not be liable for any negligent acts or omissions’. However, it can also include the use of words, that are ‘synonymous with negligence, or words which in the case law have acquired a status equivalent to a reference to negligence’ (per Lord Justice Steyn at p. 651 of EE Caledonia Ltd (formerly Occidental Petroleum (Caledonia) Ltd) v Orbit Valve Co Europe plc[20]
If the first rule is not satisfied, then the clause must meet the requirements of both the second and third rules before it is allowed to exclude liability for negligence.
If negligence is not expressly referred to, the court must consider whether the ordinary meaning of the words used is wide enough to cover negligence.
McKendrick[21] explains that if there is any doubt about this, it is resolved against the party seeking to rely on the exclusion clause.
If the second rule is satisfied, the court must then consider whether or not the exclusion clause could cover forms of liability other than negligence. If this is the case, then the clause is generally not interpreted as applying to negligence.
The difficulties in meeting the requirements of both the second and third rules are illustrated by the case of Dorset County Council v Southern Felt Roofing Co Ltd (1990) 6 Const LJ 37, where a clause excluding liability for ‘loss or damage in respect of the Works … by fire’ was held to be wide enough to fall under the second rule. However, the fact it was so wide meant it could then be applied to fires that were not caused by negligence. This meant that it did not satisfy the third rule and the exclusion clause could not be relied on.
McKendrick[22]suggests that the second and third rules are contradictory. He also argues that they mean parties are unable to agree on an exclusion clause that covers both negligent and other types of damage. The House of Lords, in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank[23] did emphasise the importance of giving effect to the parties’ intentions. Lord Bingham (p. 367) stated that there could be ‘no doubting’ the general authority of the Canada Steamship Lines Ltd rules. However, he stated that they should be seen as giving ‘helpful guidance on the approach to interpretation and not laying down a code’.
In many cases, clauses excluding negligence are now covered by legislation on exclusion clauses (see Section 5.1). Therefore, a party seeking to rely on such a clause may have to show that it is valid both at common law and under the relevant legislation.
The contra proferentem rule This rule states that if there is any doubt about the meaning or scope of an exclusion clause, the ambiguity should be resolved against the party seeking to rely on the exclusion clause. It is the other party who is given the benefit of the doubt. An extreme example of this is given in Hollier v Rambler Motors (AMC) The defendant agreed to repair Mr Hollier’s motor car. While at the defendant’s garage, the car was damaged in a fire caused by the defendant’s negligence. The defendant sought to rely on a clause stating, ‘The company is not responsible for damage caused by fire to customers’ cars on the premises’. The Court of Appeal held that the clause was not incorporated into the contract but, in any event, it was not clear enough to exclude the defendant’s liability. Lord Justice Salmon (at p. 81) stated: The ordinary man would I think say to himself: ‘Well, what they are telling me is that if there is a fire due to any cause other than their negligence they are not responsible for it.’ To my mind, if the defendants were seeking to exclude their responsibility for a fire caused by their negligence, they ought to have done so in far plainer language than the language here used.
More recently, the courts have emphasised the need to avoid what could be termed as ‘illegitimate hostile construction’ rather than a ‘legitimate strict construction’ in cases such as George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd[24]. Legislation in this area has arguably lessened the need for such judicial interventions (see Section 4 onwards).
Also in the Privity of a contract; In some cases issues have arisen over whether someone who is not a party to the contract can rely on an exclusion clause contained in it. At common law, the doctrine of privity usually prevents a third party from relying on the terms of a contract. The original position about exclusion clauses was confirmed by the House of Lords in Scruttons Ltd v Midland Silicones Ltd[25], where the defendant (which supplied workpeople to load and unload ships) was sued for damages resulting from its negligent handling of goods. Lord Reid (at p. 473) stated:
Although I may regret it, I find it impossible to deny the existence of the general rule that a stranger to a contract cannot in a question with either of the contracting parties take advantage of provisions of the contract, even where it is clear from the contract that some provision in it was intended to benefit him.
Therefore, the defendant could not take advantage of an exclusion clause in the contract between the owner of the goods and the owner of the ship.
HOW DO EXCLUSION CLAUSES AFFECT THIRD PARTIES TO A CONTRACT? – UGANDAN PERSPECTIVE.
According to Halsbury's Laws of England volume 9, 4th edition page 257 at paragraph 382 a general rule is that if a third party is to be affected by the exclusion clause must either be a party to the contract containing the exclusion clause or to some other contract containing the same term.
The above position was fortified in the case of DIAN GF INTERNATIONAL LTD VS DAMCO LOGISTICS UGANDA LIMITED & ANOR CIVIL SUIT NO 161 OF 2010
The court reaffirmed the general rule that the contract is binding between the parties only. Lord Denning considered the availability of an exemption clause to a defendant in the case of Morris vs C.W. Martin and Sons [1965] 2 ALL ER 725 at 734
Now comes the question: Can the defendants rely, as against the plaintiff, on the exempting conditions although there was no contract directly between them and her? There is much to be said on each side. On the one hand, it is hard on the plaintiff if her just claim is defeated by exempting conditions of which she knew nothing and to which she was not a party. On the other hand, it is hard on the defendants if they are held liable for a greater responsibility than they agreed to undertake. As long ago as 1601 Lord Coke advised a bailee to stipulate specifically that he would not be responsible for theft; see Southcote’s Case, a case of theft by a servant. It would be strange if his stipulation was of no avail to him. The answer to the problem lies, I think, in this: the owner is bound by the conditions if he expressly or impliedly consented to the bailee making a sub-bailment containing those conditions, but not otherwise. (Emphasis added)
Whereas it is clear that the goods got lost while in the custody of the third party, what must first be appreciated is that the issue should be whether it was contractually proper to assign the contract to a third party. Notwithstanding this issue, there is no evidence that the plaintiff consented to a subcontract of the carriage of its cargo. The risk if any had passed on to a third party under terms to which it is not a party or privy. It is therefore sufficient for the plaintiff to prove that it had given custody of its goods to the defendant for safe conveyance to Vietnam.
The court held that
It is my finding that the defendant has not proved in evidence that it has exercised due diligence and care in the handling of the plaintiff’s cargo. Taking into account the fact that the cargo was assigned to a third party for conveyance as under the contract between the plaintiff and the defendant, the question of reliance on the original exemption clause if at all applicable should not arise on the basis of the evidence on record. The defendant has not discharged the burden that its agent the third-party exercised due care and diligence in the conveyance of the plaintiff’s goods. I agree with counsel for the plaintiff, that no evidence was adduced as to what measures the defendant took to convey the plaintiff’s cargo safely. As noted above, the burden had shifted to the defendant to prove that it had taken all necessary precautions to ensure that the goods would be secure after the plaintiff proved that it passed possession to the defendant. To make matters worse, TPW1 testified that precautions could have been taken if specifically requested for the goods to be escorted. It was upon the defendant who subcontracted the contract to the third party to request for such an escort if at all it was necessary depending on the nature of the cargo. No evidence was adduced to the effect that necessary precautions were taken and none can be inferred. The fact that the goods have been robbed has not been sufficiently established by the evidence on record.. In the premises, it is my finding that the defendant is liable for the loss of goods of the plaintiff.
CONCLUSION
In conclusion, exclusion clauses can be good to the extent that the party seeking to rely upon them is aware of the clauses and the rules that govern drafting which are not limited to the Use of clear words when incorporating these clauses into a contract.
Most recently the decision in Mott Engineering V Trant Engineering (2021) court ruled that the exclusion clause and the clause limiting liability to £500,000 did not specifically mention fundamental breaches (i.e. the parties had not removed such breaches from the exclusion clause’s ambit). The contract was clearly drafted, and it had been reached between two commercial entities at arm’s length. This basically calls for proper draftsmanship lack of which might create ambiguity which according to the contra preferentum rule any doubt about the meaning or scope of an exclusion clause, the ambiguity should be resolved against the party seeking to rely on the exclusion clause. It is the other party who is given the benefit of the doubt. Thus making it a double-edged sword.
The solution is for any contracting party to hire a good contract draftsman to limit any liabilities that might arise from those contracts.
By
Waboga David
Disclaimer This write-up is general knowledge and strictly for academic purposes.
For any inquiries. wabogadavid@gmail.com/0703724359
[1] See the case of Dian Gf International Ltd vs. Damco Logistics Uganda Limited & Anor Civil Suit No 161 of 2010 [2] Cheshire, Fifoot and Furmston’s Law of Contract (Furmston, 2017, Chapter 6) [3] [1940] 1 KB 532. [4] [1934] 2 KB 394. [5] nl3 at 562 per Lord Wilberforce. [6] ibid [7] n 13 at 561 per Lord Wilberforce. [8] (1986) 161 CLR 500 (hereinafter Darlington's case). [9] nl 7 at 509 [10] n17at510 [11] Accessed on https://ulii.org/akn/ug/judgment/ugcommc/2012/10 [12] See https://www.lexology.com/library/detail.aspx?g=30dc264b-8b6e-4cc6-a1cc-f554a68b3226 [13] [1951] 1 KB 805. [14] [1949] 1 KB 532 [15] [1956] 2 All ER 121 [16] [1964] 1 All ER 430 [17] [1989] QB 433 [18] (1927) 43 TLR 323, p. 324) [19] [1952] AC 192 [20] [1994] 1 WLR 1515). [21] (2013, p. 189) [22] Ibid 189 [23] [2003] UKHL 6, [2003] 1 All ER (Comm) 349, [24] [1983] 2 AC 803 (Furmston, 2017, Chapter 6) [25] [1962] AC 446
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