Exemption clauses

 Limitation VS Exclusion
 Incorporation
 Signature
 Reasonable notice
 Previous course of dealing
 Special steps for harsh/unusual EC
 Common law rules
 Contra Proferentem
 Negligence
 Misrepresentation
 Over-riding undertaking
 The effect of privity
 Fundamental breach
- Terms of a contract which seek to exclude or limit liability for breach of contract or, where
appropriate, liability in Tort
- Exclusion and limitation clauses are basically subject to the same rules EXCEPT that courts are
more favorable towards limitation clauses
Since the courts may have to decide whether the exemption clause is reasonable, if it is a
limitation clause, it is more likely to be considered as reasonable
- If the “exemptor” wishes to rely on an exemption clause,
- the clause must satisfy common law requirements and statutory ones
- the “exemptor” must show that the clause has been “incorporated” as a contract term or
notice, either via the “signature” of the “exemptee” or by showing that the “exemptee” has
“reasonable notice” of the exemption
*Even if an EC clause is incorporated, it may still be defeated by common law or statutory rules,
but WITHOUT INCORPORATION, the clause definitely cannot operate, i.e. a necessary
requirement but not a sufficient one

 Incorporation by signature
A person is bound by an EC in a document which s/he has signed EVEN IF s/he has not read it

L’Estrange v Graucob (1934)

P bought a machine that didn’t work from D’s and sued. D’s were able to rely on an
extensive EC in the contract of sale excluding liability for breach of any express or implied
terms. P had signed the contract without reading it.
A person is bound by a signed document UNLESS there has been fraud or misrepresentation.

 Incorporation by notice
If there is no signed document, everything depends on reasonable notice
The test is not whether the “exemptee” knows of the clause BUT whether it is reasonable to
expect him to be aware of its existence

Chapelton v Barry UDC (1940)

P hired a deckchair from D’s, paid money got “receipt”. On the back of the receipt was an EC
covering personal injury. P was injured when the deckchair collapsed & sued. P won because
 EC ineffective. No reasonable steps had been taken to bring the clause to P’s notice. A
customer would assume the ticket only proved payment and did not contain terms.

 By the same reasoning, there is no “notice” if EC brought to customer’s attention AFTER

contract has been concluded

Olley v Marlborough Court (1949)

P’s booked into D’s hotel and made contract at reception. LATER, in their room, they found
an EC covering loss/theft of goods not put in hotel safe. P’s goods lost and P sued. D’s tried
to rely on EC but could not because it was brought to P’s notice AFTER contract completed.

 However, “Notice” may be provided by “previous course of dealings” as long as this was
“regular and consistent”

Spurling v Bradshaw (1956)

D had his barrels of orange juice stored by P’s. Somehow they lost all the contents (!) so he
refused to pay storage charges. But P’s relied on EC covering loss howsoever caused. D said
he hadn’t read BUT admitted he’d been a regular customer and had received document
before. So D was bound and had to pay for storage (case would now be decided on a
statutory basis).

 Where an EC is harsh or unusual, “special steps” must be taken to bring it to the other
party’s attention

Interfoto v Stiletto (1988)*

Not an EC clause, but the same principle applies

Common law rules

1. “Contra proferentem”
If there is any certainty or ambiguity about the effect of an EC, it will be construed AGAINST
the exemptor
Andrews v Singer (1934)
D’s promised to deliver consignment of “new Singer cars”. Some were not new and P sued.
Held that D’s could NOT rely on EC excluding liability for breach of any “implied” term
because they were in breach of an “express” term.

2. “Negligence”
if there is any uncertainty, the courts assume that there is no exemption clause to exclude
liability for negligence
Bewifise Motors v Hoi Kong (1998)
P’s cars had been stolen from D’s shipping containers but D’s successfully relied on a very
extensive EC.
CFA said the clause was in poor English BUT its “obvious meaning” protected D’s.
*It is difficult but not impossible to exclude liability for negligence at common law, but now
much harder to restrict liability for negligence because of STATUTE (esp. Control of
Exemption Clauses Ordinance(CECO))

3. “Misrepresentation”
 “Exemptor” cannot rely on EC where its effect has been “misrepresented”
Curtis v Chemical Cleaning & Dyeing Co (1951)
P took dress to D’s to be cleaned. Was asked to sign document. She asked what it was and
told it included exemption of liability for damage to beads and sequins (IN FACT it covered
all loss). P’s dress damaged and she sued. D’s could NOT rely on EC because they had
misrepresented its effect.
Which part of the dress got damaged? The part stated in EC or other part?

4. “Over-riding” undertaking (OU)

Where there is an over-riding undertaking, this will defeat EC where they contradict
Couchman v Hill (1947) !!!!!!!!!!
(dealt with previously) …A separate “collateral” promise that heiffer “unserved” overrode
the auction basic terms that no assurances existed and all lots were “as seen”.

5. The effect of “Privity”

Traditionally, only parties to a contract can take benefits from it. So, an EC cannot benefit a
non-party
Though privity reform, the EC must still be intended to protect the 3 rd parties
Adler v Dickson (1954)
P made a contract for cruise with P & O line. She signed a document excluding the
“Company’s” liability for causing death or personal injury (by negligence) to passengers. She
was injured when gangplank slipped. P could not sue P & O because of clause, but
successfully sued the captain & boatswain PERSONALLY in the Tort of Negligence.
1. Because they were not parties to the contract AND….
2. Because clause did not purport to protect employees …only “the company”.*
QUESTION: would the case be decided differently now in light of privity reforms?
the reformed Privity rules in England & HK now make it easier for 3rd parties to be
protected. BUT clause must be intended to protect the 3rd party (NB wording in Adler v D).*
* And remember that intention will be judged “objectively?.
Scruttons v Midland Silicones (1962)
it was held (by UKHL) that a limitation clause limiting the liability of the “carrier” of P’s goods
to US$500 did NOT protect stevedores who damaged P’s goods while delivering to P.
However, even before the privity legislative reforms, a very fully & carefully drafted EC was
held to protect an “apparent” 3rd party in:
NZ Shipping v Satterthwaite (The Eurymedon) (1975)
where a contract exempted carrier’s liability for damage to P’s goods unless an action was
brought within one year
The exemption was expressed to cover not only the carriers BUT ALSO their servants , agents
or independent contractors. For the purpose of the contract the carrier was said to be
dealing as agent ON BEHALF of all its servants or agents etc who were thus “contracting
parties”….
Why they were protected? the carrier made the contract on behalf on them
because they are contracting parties, so no problem of privity
If the servants are also contracting parties, they should provide consideration
QUESTION (some revision!) where was the agents’ consideration?
The fact they unload cargo of the carriers
Though the servants are contractual bound to do by the carriers
Contractual relationship between the carrier and the servants
 Performance of existing duty owed to the 3rd party is good consideration

6. “Fundamental Breach”
As a matter of law an EC could not protect a party guilty of a fundamental breach
“not applicable now”
Karsales v Wallis (1956)
P’s made a contract to deliver a car to D on HP terms. After contract they delivered a car
very different from what D had seen (many parts missing, car couldn’t start and was towed
to D!). D refused to pay and was sued. P’s tried to rely on very wide EC covering any defects.
Held: could not rely on EC because in “fundamental breach”.

The House of Lords has confirmed that there is no such rule of law, everything depends on
the “presumed intention” of the parties
It is a matter of “construction”

Photo Productions v Securicor (1980)

D’s employed to protect P’s property BUT one of their employees deliberately caused a fire
causing extensive damage. P’s sued.
P’s won in CA (fundamental breach) BUT HL reversed decision. There is no “rule of law” that
FB defeats an EC. Depends on parties’ intention and here the EC was clear and covered the
breach.
CA was WRONG, everything is a matter of CONSTRUCTION
Both parties were businesses in an equal bargaining position. P’s could/should have noted
the EC & insured accordingly.
The court felt that there were now sufficient “statutory” protections (then UCTA* in England
= CECO HK) so no need for FB doctrine any more.

All previous CA cases based on FA have right decisions but in the wrong reasoning ways, the
courts should always ask what the parties intend to exempt, if a serious breach is included in
EC and intended to be exempted, it can still be exempted

It is now possible to
exclude liability for fundamental breach.
However,… it remains unlikely because the courts look at the parties’ “presumed
intention” & it will be difficult to convince a Court that an EC was really “intended” by
both parties to have the effect of evading liability for an extremely serious (fundamental)
breach

Control of Exemption Clause Ordinance (Cap 71)

Concerned almost entirely with restricting or prohibiting clauses exempting liability for “business
liability”
This is 1. Liability arising from the running of a business or 2. Liability arising from the operation of
business premises

Section 7 relates to exempting business liability for negligence

7(1) B cannot exempt liability for death or personal injury caused by negligence,
Can exempt liability for death or personal injury not by negligence

Absolute bar

7(2) B cannot exempt liability for “other loss” caused by negligence unless EC is “reasonable” (onus
of proof is on B)-involves the question of reasonableness

Is it an exemption clause?

The general approach is to look at the effect of the clause. If it seeks to remove liability that would
otherwise be there, it will be an exemption

Phillips Products v Hyland (1987)

P’s hired machinery & a driver from D’s. D’s driver negligently damaged P’s property and P’s sued
D’s. D’s tried to rely on clause that driver would temporarily be P’s (!) “servant” so P’s responsible.*
They argued responsibility had been “transferred”. The court held that it is an EC clause in disguise
and subject to reasonableness test. Court held D’s liable since this WAS an exemption clause &
unreasonable…

“It is not relevant to consider the form …is such that it can be considered an ‘exclusion’ or ‘restriction’
clause….To decide whether a person excludes liability by reference to a contract term, you look at the
effect of the term.”

Smith v Eric Bush (1989)

D’s (surveyors) had negligently prepared a valuation report for P’s building society (ie the financer of
P’s mortgage). D’s argued that they had no contract with P (true) AND that they could not be liable
in tort (negligence) as they had assumed no duty to P

P’s action in negligence succeeded on the “effect rather than form” approach. The “effect” of the
“disclaimer” which P had signed was to take away tort liability that would otherwise have existed so
it was an EC. Was it reasonable under s7(2)? No…D was in a superior bargaining position AND had
the opportunity to take out professional insurance cover.

Hedley Byrne v Heller

This is a leading (HL) Tort (Negligence) case which 1st indicated (obiter)that there could be liability for
careless statements causing economic loss. BUT HL said NO liability here because the advisers had
included a “without responsibility” clause which meant no duty of care. The case might now be
decided on the basis of the English equivalent of 7(2).*
*On the “effect rather than form” approach

“reasonable” is defined at length in Section 3. Essentially, it means in relation to a contractual term,

at the time when the contract was concluded, whether it was reasonable to include it (judged as at
the time the contract was made) or, in the case of a non-contractual “notice”, whether it is fair and
reasonable to rely upon it.

CECO Section 8

A business cannot exempt liability for breach unless the EC is reasonable (onus of proof is on B)

B cannot claim the right to “substitute” performance unless the substitution is reasonable
B cannot claim the right to do nothing in relation to some or all of its obligations unless this is
reasonable

Again onus of proof is on B

Only applies to 2 situations

- Where 1 party is a “consumer”

- Where in a business-to-business relationship, the contract is on the standard terms of one of the
businesses

St Albans CDC v International Computers (1995)

Under contract D’s agreed to supply to P’s a very technical database to list all eligible “poll tax” (local
tax) payers. This would affect how much the local authority (St Albans) would have to pay central
government. Because of deficiencies in the software D’s installed P’s had to pay far more to central
government than they should. P’s sued D’s who tried to rely on limitation clause (£100,000).
It was held that there was liability under (English equivalent of) s8 CECO. The contract had been
made on D’s “standard terms” so section applied. The limitation was unreasonable. Why? (factors):

1. D’s had lots of money and good insurance;

2. D’s were in superior bargaining position (P’s needed them & few competitors);

3. A finding for D’s would be unfair to ratepayers.