Incorporation into the contract

 

The easiest way to achieve this is to have a signed contract in place, as a party is bound regardless of whether he has read the contract or understood it (L'Estrange v Graucob [1934] 2 KB 394).

 

Of course, many business contracts are not always in writing.  In this case, the other party must have received reasonable and sufficient notice of the clause by it being incorporated into a contractual document and its existence drawn to his attention prior to or at the time the contract is formed.

 

For example, in the case of Olley v Marlborough Court [1949] 1 All ER 127 CA, a notice excluding a hotel proprietor's liability to guests for lost or stolen possessions was displayed in a bedroom and therefore invalid.  It should have been displayed at reception, i.e. when the contract was formed.  Further, the greater the gravity of a clause, a higher degree of notice will be required.

 

Finally, an exclusion clause may be incorporated where there has been a previous course of dealings on the same terms.  The course must have been regular and consistent and, where contracting with a consumer, frequent. 

 

Construction (interpretation) of the contract

 

For an exclusion clause to be effective, the contract must cover the breach which has occurred and this will be interpreted by the court.

 

A clause must be unambiguous and clearly expressed in plain language.  Any ambiguity will be construed as narrowly as possible against the person relying on the clause. 

 

For example, in Houghton v Trafalgar Insurance Co [1953] 3 WLR 985 CA, an insurer's liability was excluded where a car carried an excessive "load"; the court interpreted "load" to mean goods, not passengers.  To exclude liability for negligence or misrepresentation, this must be specifically stated.

 

The effect of legislation

 

Legislation has sought to limit the effect of exclusion clauses and great care must be taken when drafting them.

 

The Unfair Contract Terms Act 1977 ("UCTA"), which applies only to business liability) firstly deals with negligence: a term excluding or limiting liability for death or personal injury resulting from negligence is simply unenforceable; for other loss or damage arising from negligence, an exclusion or limitation of liability must be satisfy a test of reasonableness to be enforceable (see below).

 

UCTA also limits the effect of clauses excluding or limiting liability for breach of contract for B2C contracts and contracts on standard terms.  In these cases, such clauses must also satisfy the test of reasonableness.  The test also applies to clauses permitting a party to render performance substantially different to that reasonably expected by the other party, or to render no performance at all.

 

In sale of goods and hire-purchase contracts with consumers, implied terms as to title, quality and fitness for purpose, and correspondence with description or sample cannot be excluded.  In such contracts with non-consumers, again exclusion of these terms must pass the reasonableness test.

 

The test of reasonableness is that the contractual term is fair and reasonable having regard to the circumstances which were (or ought reasonably to have been) in the parties' contemplation at the time the contract was made.  The court may consider the resources available to meet the liability and the extent to which insurance was available to that end.  In sale of goods and hire-purchase contracts, further guidelines may be considered, for example the parties' bargaining positions and whether the goods were made to order. 

 

Finally, the Unfair Terms in Consumer Contracts Regulations 1999 extend the protection of consumers in B2C contracts.  Any unfair term will not be binding against the consumer, but the rest of the contract will remain in force.  A term will be unfair if not negotiated and causes a significant imbalance between the parties' rights and obligations to the consumer's detriment. 

 

Practically, we would recommend that you take legal advice on any limitation or exclusion of liability in your terms and conditions.  Ensure that a consumer's attention is specifically drawn to such a clause.  Consider whether the terms would pass the reasonableness test. It would also be advisable to consider your level of insurance.  Whilst desirable to exclude your liability absolutely, do you actually need to do so?  It may be that that limiting it to your level of cover instead will not leave you exposed.

 

Finally, if this series of articles is of interest to you, next month we shall consider misrepresentation.

 

Whether you are putting together a set of terms and conditions for clients, suppliers, for website use or a contract for a specific transaction or relationship, Fortune Law has the necessary expertise to advise and assist you with all aspects of Contract Law.  Please get in touch by telephone on 020 7440 2540 or by e-mail at enquiries@fortunelaw.com.