EXCLUSION ESSAY

Statute law regarding exemption clauses means that common law principles are now largely irrelevant.
Describe the common law rules regarding incorporation and construction of exemption clauses. Assess
the validity of the statement above. [25]

Answer

An exemption clause is a clause which seeks to exclude or limit the liability of a defendant. Litigants
often use exemption clauses as a defense mechanism and in doing so the stronger party may exploit the
weaker party. Judges, notably Lord Denning have repeatedly expressed their disapproval of exemption
clauses due to their potential to cause injustice. Thus, exemption clauses are regulated by the common
law controls of incorporation and interpretation. With the enactment of UCTA 1977 and more recently
the Consumer Rights Act 2015 which protects the interests of consumers, these common law controls
have become less significant. It is argued that the judicial creativity exercised in the application of the
common law controls is no longer needed since this creativity often borders onto judicial legislation and
it is a desperate remedy only to be used to remedy widespread injustice( per Lord Hoffman in BCCI v Ali).
In order to uphold the doctrine of Parliamentary sovereignty it is best that the task of regulating
exclusion clauses is left to Parliament.

An exclusion clause is deemed valid only if it is incorporated into the contract. According to the common
law, incorporation of a clause may take place through signature, reasonable notice and previous course
of dealing. In L Estrange, an exclusion clause was incorporated into the contract through the claimants
signature even though it was in ‘regrettably small print.’ However in Curtis v Chemical Drycleaning, an
employee misrepresented the effect of the clause to the claimant and the court concluded that the
clause was not incorporated into the contract. Moreover, a clause will not be incorporated into the
contract if the claimants signature is on an administrative document, not intended to have contractual
effect. Therefore the parties would not be entrapped by their signature if the nature of the document is
such that it was not intended to have contractual effect( Grogan v Robin). The Grogan case depicts that
the common law considers whether the signer has genuinely assented to the exclusion clause and controls
the use of those clauses that the litigants have not consented to. Yet in Peekay Intermark Ltd v Australia
and NZ Banking Group Ltd (2006), it was stated that the rule in L’Estrange is an ‘important principle of
English law which underpins the whole of commercial life; any erosion of it would have serious
repercussions.’ Thus, it may be deduced that the common law control of incorporation by signature does
not effectively protect weak consumers since the L’Estrange ruling binds consumers to clauses that they
may have not read and understood. Therefore, the matter of regulating such exclusion clauses is left to
Parliament. Paragraph 10 of Schedule 2 to the Consumer Rights Act 2015 states that a term which has the
object or effect of ‘irrevocably binding the consumer to terms with which the consumer has no real
opportunity of becoming acquainted before the conclusion of the contract’ is indicatively unfair. This
provision attacks the L’Estrange rule in the consumer context by regulating the term which seeks to
incorporate the onerous terms into the contract.

An exemption clause may be incorporated into the contract if reasonable steps have been taken to bring it
to the attention of the contracting party ( Parker v South Eastern Railway). The assessment of whether
reasonable steps have been taken depends on a number of factors such as the time of notice, form of
notice and effect of notice. The time of notice must be before or at the same time as the conclusion of the
contract. In Olley v Marlborough an exclusion clause was not incorporated into the contract because the
clause was mentioned in the hotel room, whilst the contract had already been concluded at the reception
desk. Similarly, as outlined above, the clause must be in a document intended to have contractual effect.
In Chapleton v Barry, it was held that a ticket only signified proof of payment and notice of the clause on
a ticket would not be sufficient for the incorporation of the clause into the contract.In addition, Lord
Denning has articulated his famous red hand rule in the case of Spurling vBradshaw where it was held
that the more unreasonable and onerous the clause, the greater the degree of notice is required for the
clause to be incorporated into the contract. In Interfoto Picture Library, the conditions imposed on the late
return of transparencies to a picture library were deemed to be onerous and hence the court concluded that
sufficient notice had not been given for the term to be incorporated into the contract. On the other hand, in
Thompson v London, a clause was incorporated into the contract even though it was mentioned on pg 552
of a railway timetable which cost 1/5 of the price of the railway ticket. The continued use of a special
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test for the incorporation of onerous and unusual terms has given rise to some practical difficulties in
determining which clauses are caught by this rule. The words ‘onerous or unusual’ are not ‘terms of art’
and as a consequence, the courts have not always been able to agree whether a particular term is or is not
‘onerous or unusual.’ This seems to add a level of uncertainty to contract law. The judges have been of
the opinion that the problem of unreasonable clauses should be addressed by Parliament under UCTA
1977. Hobhouse LJ in AEG(UK) Ltd v Logic Resource Ltd thought that the fact that the clause had extreme
effect should be relevant only to the reasonableness assessment under UCTA, rather than the issue of incorporation.

Finally, incorporation may also take place by previous course of dealing. If two parties have previously
made a series of contracts between them, and those contracts contained an exemption clause, that clause
may also apply to a subsequent transaction, provided that there is a regular and consistent course of
dealing between the parties(McCutcheon v David MacBrayne Ltd). What constitutes a ‘regular’ course of
dealing depends on the facts of a case. In Henry Kendall Ltd v William Lillico Ltd (1969), the HOL held
that 100 similar contracts over a period of 3 years constituted a course of dealing. But in Hollier v
Rambler Motors Ltd, three or four contracts over a period of 5 years was held not to be a course of
dealing between a consumer and a garage. The position is different between parties of equal bargaining
power. In British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd, a clause was incorporated on the basis of
two previous transactions and the custom of the trade. Thus, once again it is evident that the application
of the common law control of interpretation is uncertain and difficult. A more coherent test is given in the
reasonableness test of UCTA and the fairness test of the CRA.

Another common law control is the contra proferentem rule which requires courts to interpret exclusion
clauses against the party relying on them. In Houghton v Trafalgar, the words ‘excessive load’ in an
insurance policy were given a strained construction to mean luggage. It did not apply to an extra person
seated in a car and hence the insurers were unable to exclude their liability. This is an effective control,
particularly for the interpretation of ambiguous exclusion clauses. The contra proferentem rule governs
clauses which seek to exclude liability for negligence or for breach of a condition. Lord Mortons Canada
Steamship test requires an express mention of the word negligence( White v Warrick) or an express
mention of the word condition( KG Bominflot) for an exclusion clause to be valid and effective. The
special application of the contra proferentem rule in the above two cases led to the exclusion clause being
ineffective in both cases. In this regard, the contra proferentem rule serves as an effective primary control
to exclusion clauses. However, the rule is criticized in that in involves a game of ‘cat and mouse’ between
contract draftsmen and judges, with draftsmen trying to contract and negotiate out of an inconvenient
rule, ultimately imposing unnecessary costs on commerce. The judges have adopted a much more clement
approach to limitation clauses as opposed to exclusion clauses especially if the parties are experienced,
commercial businessmen with access to legal advice ( Ailsa Craig). The power of interpretation given to
judges allows them to exceed their constitutional role. It is, thus, argued by Lord Diplock in Photo
Production that since much of the cases involve consumer contracts, these can now be governed under
legislation. Judicial distortion of the English language is to be banished. The judges must follow the
ordinary rules of interpretation as articulated by Lord Hoffman in the West Bromwich case and interpret
all clauses having regard to the background knowledge and ‘matrix of fact.’ The contra proferentem rule
is to be restricted only to ambiguous clauses. Thus, the fact that the use of the contra proferentem rule is
being discouraged in recent cases paves the way for the statutory controls to be used more often.
It is imperative to note the means of regulation brought into the law through the two major pieces of
legislation. UCTA governs business to business contracts. UCTA renders some exemption clauses void
such as a clause seeking to exclude liability for death and personal injury arising from negligence-s2(1).
Other clauses are subject to the test of reasonableness. The test of reasonableness requires the courts to
assess a number of factors outlined in Sch 2 of UCTA such as the respective bargaining position of the
litigants and the availability of insurance. It is to be noted that there is significant judicial discretion
involved in the application of the statutory provisions. Under s 3(2)(b) of UCTA, the reasonableness test
is applied to a situation where the performance rendered is radically different than the one expected. A
very expansive interpretation was given to the clause in Timeload v British Telecommunications and the
HOL immediately backtracked in Penninsula giving the clause a very cautious interpretation for the
purposes of applying s 3(2)(b). Thus, it may be argued that the judicial creativity continues in the
application of the tests in UCTA as well. In this regard, doing away with incorporation and interpretation
would not really reduce the possibility of judicial distortion. In a similar vein, the CRA has been enacted
with the interests of consumers in mind and its ambit extends beyond exclusion clauses such that all terms
are subject to the fairness test in CRA. Under S 62(4), A term is unfair is contrary to the requirement
of good faith, it causes a significant imbalance in the parties rights and obligations under the
contract, to the detriment of the consumer. The test was applied in Parking eye v Beavis to the
disappointment of the consumer. The UKSC held that the term imposing a substantial parking
charge was not unfair and held that the claimant had a legitimate interest in imposing a charge of
this size in order to support its business model which enabled members of the public to park for
free for up to 2 hours. Thus, this case makes evident that the judges still have a role to play in the
application of the fairness test. It is, thus asserted that interpretation and incorporation continue to be
relevant as primary controls since often a time, a clause may be rendered ineffective without even having
to resort to UCTA and CRA.

In conclusion, it can be stated that whilst the common law controls allow room for judicial creativity and
manoveur, the Parliamentary controls in UCTA and CRA also require the judges to apply the tests in the
legislation. In the application of these tests, the concern about judicial creativity remains. Thus, the
current system of the common law controls co existing with the statutory controls is the best mechanism
to ensure that consumers and small businesses are adequately protected from exploitation through
exemption clauses.