Exemption clauses and agency

1. The 4 basic steps with regard to exemption clauses

1) Was the clause incorporated into the contract?

2) What was the scope of the exemption clause?
3) Was the exemption clause clear and unambiguous? If not, the clause would be construed contra
proferentem
4) CECO: when one of the party was dealing as a consumer, the clause would be subjected to the
reasonableness test

2. Types of exemption clauses

1) Limit the defendant’s duty, e.g. limited liability for negligence

2) Limit the liability attached to a breach, e.g. being sued for breach or liable to damages
3) Limit the duty to indemnify, e.g. by the amount of damages recoverable or imposing a time limit

3. Principles of construction

(1) Exemption clauses muse be expressed clearly and without ambiguity or they will be ineffective

J Gordon Alison & Co Ltd v Wallsend Shipway and Engineering Co Ltd (1927) 43 TLR 323

D sold a cylinder to P “subjected to usual guarantee clauses”. Guaranteed P against defects of material
or workmanship but excluded liability for consequential damage. Could D rely on it?

“If a person was under a legal liability and wished to get rid of it he could only do so by using clear
words.”

-- The exemption clauses are therefore construed strictly, while the level of strictness will depend on (i)
whether they involve departure from the implied obligations ordinarily accepted by the parties, and (ii)
whether they are entirely excluding or limiting the compensation recoverable

(2) Clause must cover the event

Each clause will be considered according to its actual wording, and it must clearly extend to the exact
contingency or loss which has occurred in order to protect the proferens.

But what if the clause is so broad that it will literally create an absurdity or defeat the main purpose of
the contract?

The construction of the clause will be to ascertain the meaning of and to give effect to the agreement of
the parties, by looking at the entire contract.

The court is reluctant to give effect to an exemption clause which excludes all the liabilities of one party.
Suisse Atlantique Societe d’Armement Maritime SA v NV Rottendamsche Kolen Centrale [1967] 1 AC 36 1

“One may safely say that the parties cannot, in a contract, have contemplated that the clause should
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.”

(3) Contra proferentem

The party seeking to rely on an exemption clause bears the burden of proving that the case falls within
the provisions. Any doubt or ambiguity will be resolved against him and in favour of the other party.

Ambiguity of the words of the document will be construed more strongly against the party who made
the document and who now seeks to rely on them.

John Lee (Grantham) Ltd v Railway Executive [1949] 2 All ER 581

Railway warehouse leased by D to P. “Loss or damage (whether by act or neglect of the company or
their servant or agents or not) which but for the tenancy hereby created would not have arisen”.
Negligence of D eventually led to damaged goods.  Confined to the exemption of liabilities created by
the relationship of landlord and tenant

R v Canada SS Lines Ltd [1952] AC 192 (PC), quoted by Donaldson LJ in The RAPHAEL [1982] 2 Lloyds Rep
42

Lord Morton:

"Their Lordships think that the duty of a court in approaching the consideration of such clauses may be
summarised as follows:-

(1) If the clause contains language which expressly exempts the person in whose favour it is made
(hereafter called 'the proferens') from the consequence of the negligence of his own servants, effect
must be given to that provision. (Any doubts which existed whether this was the law in the Province of
Quebec were removed by the decision of the Supreme Court of Canada in The Glengoil Steamship
Company v Pilkington.)

(2) If there is no express reference to negligence, the court must consider whether the words used are
wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the
proferens. If a doubt arises at this point, it must be resolved against the proferens (in accordance with
article 1019 of the Civil Code of Lower Canada: 'In cases of doubt, the contract is interpreted against him
who has stipulated and in favour of him who has contracted the obligation').

(3) If the words used are wide enough for the above purpose, the court must then consider whether 'the
head of damage may be based on some ground other than that of negligence', to quote again Lord
Greene in the Alderslade case. The 'other ground' must not be so fanciful or remote that the proferens
cannot be supposed to have desired protection against it; but subject to this qualification, which is no
doubt to be implied from Lord Greene's words, the existence of a possible head of damage other than
that of negligence is fatal to the proferens even if the words used are prima facie wide enough to
cover negligence on the part of this servants."'

Per Lord Bingham in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] 2 Lloyd’s
Rep 61: [Ultimately the job of the court is to ascertain the intention of the parties and interpret
accordingly]

“Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down
a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a
certain and predictable result. The Court’s task of ascertaining what the parties intended, in their
particular commercial context, remains.”

More cases

(1) Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964 (HL), at 966:-

“Whether a clause limiting liability is effective or not is a question of construction of that clause in the
context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and
unambiguously expressed, and in such a contract as this, must be construed contra proferentem. I do
not think that there is any doubt so far. But I venture to add one further qualification, or at least
clarification: one must not strive to create ambiguities by strained construction, as I think that the
appellants have striven to do. The relevant words must be given, if possible, their natural, plain
meaning.”

(2) Carewins Development (China) Ltd v Bright Fortune Shipping Ltd FACV Nos 13 and 14 of 2008 (12 May
2009)

Ribeiro PJ: "After having navigated through the now discredited doctrine of fundamental breach, the
English courts have settled on the principle that the effectiveness or otherwise of an exemption clause,
especially involving a commercial contract where there is no inequality of bargaining power, is purely
a matter of its construction.

The correct approach in this context was summarised by Lord Wilberforce in Ailsa Craig Fishing Co Ltd v
Malvern Fishing Co Ltd, in the following terms:-

'Whether a clause limiting liability is effective or not is a question of construction of that clause in the
context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and
unambiguously expressed, and in such a contract as this, must be construed contra proferentem. I do
not think that there is any doubt so far. But I venture to add one further qualification, or at least
clarification: one must not strive to create ambiguities by strained construction, as I think that the
appellants have striven to do. The relevant words must be given, if possible, their natural, plain
meaning.'

That position is very similar to that taken in Australia where the courts had spared themselves the
fundamental breach diversion. In Darlington Futures Ltd v Delco Australia Pty Ltd, in a joint judgment of
all its members, the High Court described the proper approach as follows:-

'These decisions clearly establish that the interpretation of an exclusion clause is to be determined by
construing the clause according to its natural and ordinary meaning, read in the light of the contract as a
whole, thereby 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 proferentem in case of
ambiguity.'

Two related aspects of the principle so expressed should be underlined. First is the emphasis it lays on
the requirement that the exempting words be devoid of any ambiguity, with the clause being construed
against the person relying on the exemption. Secondly, the principle stresses the need to construe the
clause in the context of the contract as a whole, taking into account its nature and object. As Lord
Wilberforce pointed out in the Suisse Atlantique case, the principle is 'that the contractual intention is to
be ascertained ... not just grammatically from words used, but by consideration of those words in
relation to commercial purpose ...'

It will often be the case that an exemption clause uses very broad words which, viewed simply as a
matter of language, may be thought apt to exclude all conceivable liability. But the process of
construction does not stop there. Wide words of exemption will often cover a whole range of
possibilities, some of which will be consistent with maintaining the contractual obligations which
reflect the main purpose of the parties’ agreement, and some of which would negate those
obligations and effectively deprive the contract of any compulsory content. In such cases, the clause is
construed contra proferentem to ascribe the narrower meaning to it in order to sustain the purpose
and legal effect of the parties’ contract.

As Lord Diplock pointed out in Photo Production Ltd v Securicor, the court’s premise in the construction
exercise is that the parties intended their agreement to have contractual force:-

'Parties are free to agree to whatever exclusion or modification of all types of obligations as they please
within the limits that the agreement must retain the legal characteristics of a contract...'

Such legal characteristics embrace well-established implied incidents of commercial (and other)
contracts:-

'Since the obligations implied by law in a commercial contract are those which, by judicial consensus
over the years or by Parliament in passing a statute, have been regarded as obligations which a
reasonable businessman would realise that he was accepting when he entered into a contract of a
particular kind, the court's view of the reasonableness of any departure from the implied obligations
which would be involved in construing the express words of an exclusion clause in one sense that they
are capable of bearing rather than another, is a relevant consideration in deciding what meaning the
words were intended by the parties to bear.'

However, emphasising that the matter is ultimately a question of construction, his Lordship added:-

'But this does not entitle the court to reject the exclusion clause, however unreasonable the court
itself may think it is, if the words are clear and fairly susceptible of one meaning only.'

The last passage just cited contains a reference to the rule that ambiguities will be resolved against the
contract breaker. The exemption clause is given effect as excluding liability for the breach only where
the words are 'clear and fairly susceptible of one meaning only'. If it is also fairly susceptible of a
meaning which does not exclude liability for the breach in question, it is that narrower, contra
proferentem meaning which the court will ascribe to the term.

The application of this principle may be illustrated in the context of a charterparty exclusion clause by
the decision of the House of Lords in Tor Line AB v Alltrans Group of Canada Ltd ('The TFL Prosperity').
That case involved the charter of a vessel to operators of a roll-on roll-off liner service. One of the
clauses specified certain physical attributes of the vessel including free height on the main deck
consistent with her intended use. The vessel delivered did not meet those specifications but the owners
sought to rely on a clause exempting liability in very broad terms. Lord Roskill pointed out that if a
literal meaning were to be given to the clause relied on, it would mean 'that the owners would be
under no liability if they never delivered the vessel at all for service under the charter or delivered a
vessel of a totally different description from that stipulated in the preamble.' Such a construction was
rejected:-

'In truth if clause 13 were to be construed so as to allow a breach of the warranties as to description in
clause 26 to be committed or a failure to deliver the vessel at all to take place without financial redress
to the charterers, the charter virtually ceases to be a contract for the letting of the vessel and the
performance of services by the owners, their master, officers and crew in consideration of the
payment of time charter hire and becomes no more than a statement of intent by the owners in return
for which the charterers are obliged to pay large sums by way of hire, though if the owners fail to
carry out their promises as to description or delivery, are entitled to nothing in lieu. I find it difficult to
believe that this can accord with the true common intention of the parties and I do not think that this
conclusion can accord with the true construction of the charter in which the parties in the present case
are supposed to have expressed that true common intention in writing.'

The principle was applied to a bill of lading in Motis Exports Ltd v Dampskibsselskabet Af 1912
Aktieselskab, where Stuart-Smith LJ stated:-

'I also agree with the Judge that even if the language was apt to cover such a case, it is not a
construction which should be adopted, involving as it does excuse from performing an obligation of such
fundamental importance. As a matter of construction the Courts lean against such a result if adequate
content can be given to the clause.'

Like Lord Diplock, his Lordship accepted that the exemption might be effective if suitably drafted but
that it would be construed to be inapplicable if it was possible to ascribe to the term 'adequate
content' consistent with maintaining the basic purpose of the contract.

It is this approach which I apprehend the Australian authorities to have in mind when they speak of
'reading down' such clauses. Thus, in Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd, Marks J
stated:-

'The first question then is whether the words of exemption should be interpreted to mean what they
seem in clear language to say or whether they should be read down in accordance with the relevant
authorities, not to apply to loss due to conduct which would defeat the main object of the contract of
carriage, namely delivery to the consignee on his proof of payment, as evidenced by production of the
bill of lading.'
4. Onus of proof

In general,

(1) The party seeking to rely on the exemption clause bears the burden to prove that:

1) The clause covers the obligation or liability which it purports to restrict or exclude (scope)
2) The claimant’s case is within the clause

(2) In case there is any exception in the exemption clauses, the claimant will need to prove that his case
falls within the exception

(3) A burden of proving the contrary rests on the claimant if the defendant successfully argues that he
can rely on the exemption clause

5. Indemnity clauses

They are subjected to the same test for normal exemption clauses.

6. Deliberate breaches

Suisse Atlantique Societe d’Armement Maritime SA v NV Rottendamsche Kolen Centrale [1967] 1 AC 36 1

Lord Wilberforce: “Some deliberate breaches… may be, on construction, within an exceptions clause (for
example, a deliberate delay for one day in loading.) This is not to say that ‘deliberateness’ may not be a
relevant factor: depending on what the party in breach ‘deliberately’ intended to do, it may be possible
to say that the parties never contemplated that such a breach would be excused or limited.”

-- “To create a special rule for deliberate acts is unnecessary and may lead astray.”

-- Whether the exemption clauses include deliberate misconduct or breaches depends on the
construction of the contract

Theory of fundamental breach (Rejected by the House of Lords)

It was supposed that when a party committed a fundamental breach of contract or the breach of a
fundamental term, he would not be allowed to rely on an exemption clause.

The case law once suggested that there was a rule of substantive law preventing a party from relying on
an exemption clause in situations of fundamental breach, regardless of the wording of the clause. (E.g. J
Spurling Ltd v Bradshaw [1956] 1 WLR 461)

It was suggested that a “fundamental term” was the core of the contract, or that, if it was not complied
with, the performance would be entirely different from what the contract contemplated. ( Smeaton
Hanscomb & Co Ltd v Sassoon I. Setty, Son & Co [1953] 1 WLR 1468)
This view, however, was subsequently rejected by several important cases.

(1) UGS Finance Ltd v National Mortgage Bank of Greece [1964] 1 Lloyds’s Rep 446

Pearson LJ:

“As to the question of ‘fundamental breach,’ I think there is a rule of construction that normally an
exception or exclusion clause or similar provision in a contract should be construed as not applying to a
situation created by a fundamental breach of the contract. This is not an independent rule of law
imposed by the court on the parties willy-nilly in disregard of their contractual intention. On the
contrary it is a rule of construction based on the presumed intention of the contracting parties… This
rule of construction is not new in principle but it has become prominent in recent years in consequence
of the tendency to have standard forms of contract containing exceptions clauses drawn in
extravagantly wide terms, which would produce absurd results if applied literally.”

(2) Suisse Atlantique Societe d’Armement Maritime SA v NV Rottendamsche Kolen Centrale [1967] 1 AC
36 1

Shipowners sued the charterers of a ship for damages for delays in loading and unloading the chartered
vessel. Charterers relied on the demurrage clause; shipowners alleged the delays to be fundamental
breach of contract.

Held that:

1) Demurrage clause was not an exemption clause but an agreed damages provision
2) Since the shipowners had not treated the charter as repudiated, they were still bound by its
provisions
3) Even if the clause were an exemption clause, it plainly covered the breach alleged, whether or
not this was “fundamental” in the sense that it would have entitled the shipowners to be
discharged

“… [T]o look at the event [resulting from the breach], and to ascertain from the words and conduct of
the parties which created the contract between them what their presumed intention was as to what
should be their legal rights and liabilities either original or substituted upon the occurrence of an event
of this kind.”

Lord Wilberforce pointed out that the courts treated “fundamental breach” as a performance totally
different from that which the contract contemplated but:

“The conception, therefore, of ‘fundamental breach’ as one which, through ascertainment of the
parties’ contractual intentions, falls outside an exceptions clause is well recognised and
comprehensible.”

Lord Reid found that a “fundamental breach” was not different from a “breach:

“General use of the term ‘fundamental breach’ is of recent origin, and I can find nothing to indicate that
it means either more or less than the well known type of breach which entitles the innocent party to
treat it as repudiatory and to rescind the contract.”

And that:

“I do not think that there is generally much difficulty where the innocent party has elected to treat the
breach as a repudiation, bring the contract to an end and sue for damages. Then the whole contract has
ceased to exist, including the exclusion clause, and I do not see how that clause can then be used to
exclude an action for loss which will be suffered by the innocent party after it has ceased to exist.”

 Criticised by HL in Photo Production Ltd v Transport Ltd

(3) Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL)

D agreed to provide a visiting patrol service to P’s factory. Employee of D deliberately set fire in the
factory. Premises burnt down. Held that exemption clause clearly relieved D from liability. D effectively
modified their obligation to one of exercising due diligence in their capacity as employers. Clause
apportioned the risk between parties: risk of arson not being accepted by D due to cost and nature of it.

“Under no circumstances shall the company (D) be responsible for any injurious act or default by any
employee of the company unless such act or default could have been foreseen and avoided by the
exercise of due diligence on the part of the company as his employer; nor in any event, shall the
company be held respomsible for:

(a) Any loss suffered by the customer through burglary, theft, fire or any other cause, except insofar as
such loss is solely attributable to the negligence of the company’s employees within the course of their
employment…”

1) HL rejected the view that a breach, accepted by the other as discharging him from further
performance with it, brought an end to the contract and with any exemption clause
2) Essential to ask:
a. Whether an exemption clause protected one party in breach
b. Depended upon the construction of the contract

7. Common law qualifications

(1) Misrepresentations as to effect of exemption clause

No reliance even when the misrepresentation is negligence or innocent.

Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805

P took a dress to D’s shop to be cleaned. Asked to sign a receipt which contained a clause exempting D
from all liability for damage to the articles cleaned. D’s employee said it merely covered risks such as
damage to the beads and sequins on the dress. Dress turned out to be badly stained. Held that D were
not protected as the employee misrepresented the scope of the clause.

(2) Collateral warranties and guarantees

If an express oral warranty which runs counter to the tenor of the written exemption, the exemption
clause is not reliable by the party. (J Evans & Sons (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR
1078)

Collateral contract?

(3) Fraud

8. Control of Exemption Clauses Ordinance (Cap.71)

9. Miscellaneous

Are limitation clauses construed more generously than exemption clauses?

What about the following clause (taken from last year's LLB Contract Final Exam) between a Bank and its
customer?

"While we will assign a Personal Relationship Manager free of charge to you upon opening an account
with Success Bank, YOU AGREE THAT OUR BANK WILL NOT BE HELD LIABLE IN ANY CIRCUMSTANCES
WHATSOEVER FOR ADVICE GIVEN BY YOUR ASSIGNED PERSONAL RELATIONSHIP MANAGER. You
undertake that you will not act upon any advice whatsoever given by your assigned Personal
Relationship Manager without first independently satisfying yourself as to the accuracy and reliability of
such advice."

-- Is the PRM really free of charge? Consider the administration fee paid for opening an account

-- When more is paid  expecting a higher quality of service

-- Negligent advice: strange to include; Carewins: the clause must be read down to ascertain the intent
of both contractual parties  should have reasonable care

-- Last sentence though put in other ways, but in essence, it is an exemption clause

9. Agency

The basic principle: Principal, Agent, Third Party. Where the Agent is authorised to enter into a contract
on behalf of the Principal, the Principal will be bound by the contract. The Agent, however, drops out of
the picture and is not liable on the contract.

Actual authority. Implied or usual authority.

Apparent authority.

With actual authority, the question is whether the Principal has expressly or impliedly authorised the
Agent to act in such a way as to bind the Principal by some transaction. In this situation, what the Third
Party thinks is irrelevant.
With apparent authority, the question is whether the Principal has represented to the Third Party that
some person (the Agent) has authority to enter into some transaction with the Third Party which will
bind the Principal. In this situation, the Agent's motivations are irrelevant.

Rules of attribution in respect of companies.

Moulin Global Eyecare v CIR HCAL No. 29 of 2010 (15 February 2011) (Reyes J) (now overruled by CFA):-

“Not being a natural person, the state of a company’s knowledge at any specific time can only be
determined by attributing the knowledge of a relevant natural person to the company. For the purpose
of such attribution, who is a relevant natural person?

In Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 2 AC 500 (PC, New
Zealand) (at 506-11), LordHoffmann discussed how “rules of attribution” are ascertained.

Lord Hoffmann observed (at 506) that “a company’s primary rules of attribution will generally be
found in its constitution, typically the articles of association”. These primary rules will normally state
whose decision (for example, a decision of a director, of the board, or of a company in general
meeting) is to be treated as that of the company in a given scenario.

Such primary rules in the articles will often not be sufficient. One may need to supplement those rules
by (say) the principles of agency and vicarious liability. But even those principles may not cover all
situations.

In some cases, a statute may require that the knowledge of a particular person within a company is to
be treated as the knowledge of a company. Special rules of attribution will then have to be inferred from
the objectives and text of the statute. In other words, one needs to construe the statute (using
ordinary canons of statutory interpretation) to determine whose mental state was intended by the
Legislature to be treated as the knowledge of the company.

... In my view, Mr Burns rightly answers Mr Beresford by referring to what is sometimes known as the
Hampshire Land principle. See [1896] 2 Ch 743. It is an exception to the application of the normal rules
of attribution.

Under the principle, where a company’s agent defrauds that company or knowingly acts in breach of a
duty owed to that company as principal, the agent’s knowledge will not be attributed to the company.
The rationale behind the principle is that it would be fanciful to expect an agent to disclose to (rather
than conceal from) the company that agent’s deliberate act of fraud or breach of duty aimed at
harming the company.

The principle has been applied with approval by the Court of Final Appeal in China Everbright-IHD Pacific
Ltd. v. Ch’ng Poh (2002) 5 HKCFAR 630 (at para. 84)...."