Exemption Clauses

Exemption Clauses

1. What are they?

   • Lord Diplock in Photo Production Ltd v Securicor Transport Ltd defined an exclusion clause: "...an exclusion (i.e. exemption) clause is one which excludes or modifies an obligation, whether primary, general secondary or anticipatory secondary, that would otherwise arise under the contract by implication of law. Parties are free to agree to whatever exclusion of modification of all 3 types of obilgations they please within the limits that the agreement must retain the legal characteristics of a contract."
     • From this definition, there are a number of core concepts/questions:
       • 1. a modification or exclusion of an obligation must occur.
         • 2. This can relate to the primary, general secondary or anticipatory obligations under the contract.
           • 3. Freedom of contract PERMITS parties to exclude such obligations SUBJECT only to the LIMITATION of retaining the legal characteristics of the contract.
   • In effect, exemption clauses manipulate these rights which arise under a conract and /or operates to take 'outside of the contract' those rights which would ordinarily be rights in a contract.

2. 3 types of Exemption Clauses

   • 1. Exclusion clauses: These exclude liability for the primary substantive right. for example: if Suzy supplies the pen but it is defective, she incurs no liability.
   • 2. Limitation Clauses: These limit what you can quantitatively get if there is a breach of contract; often, there is a limited time frame in which one can file a claim. For example: Obligation to claim on car insurance within a number of days of the accident.
   • 3. Exception clauses: these are used to define the obligations of contracting parties. For example: I am liable to supply all apples except green apples.

3. The law's treatment of exemption clauses

   • The law is largely unsympathetic as it relates to the inclusion of exemption clauses in consumer contracts. This is tied to the law's underpinning by the 'classical contract theory'. Recall, the fundamental elements of this theory:
     • 1. It is based on an exchange of promises.
       • 2. It is executory: the contract is formed and obligations under it arise, before either side has performed any part of it.
         • 3. It involves an 'exchange': each side is giving up something in return for the other's promise. It is the existence of this mutuality (given effect through the doctrine of consideration which generally gives rise to enforeability.
           • The content of contractual liability is determined by deciding what the parties have agreed or what the court looking as the reasonable person objectively believes that this is the agreement that the parties have come to.
             • Disputes about a contract can generally be determined by asking what the parties expressly or impliedly agreed (or should be taken to have agreed) in the contract itself. This is regarded to be the 'will theory of contract'.
               • 6. The transaction is discrete, rather than being part of a continuing relationship.
                 • 7. The role of the court is to act as an 'umpire' giving effect to the parties' agreement. In particular, it has no role in deciding whether or not the parties' agreement. In particular, it has not role in deciding whether or not the parties' transactions are 'fair'.
                   • 1, 3, 5 and 7 are quite relevant given party will give up something to gain something else. 4 and 6 raise the notion of will theory, which states that the will of the parties, as objectively determined by the reasonable and honest businessman (Smith v Hughes) should prevail. It is clear that it was not the will of the party on whom the clause is imposed and that there should be any limitation of liability, which is not clearly stated, and more importantly, negotiated. Thus, the role of the court under characteristic 7 in determining whether in these circumstances the effect should be given to the parties' agreement.
                     • Ultimately, classical contract theory assumes freedom of contract and that each party was given the opportunity to bargain in his/her best interest.
                       • Issues with Freedom of Contract
                         • The absence of negotiation/bargaining and a suspicion of exploitation of the consumer have informed the judicial stance on exemption clauses, both at common law and under the legislation, against their use and misuse. This absence of negotiation and presumed exploitation arises usually where there are standard form clauses; thus, terms and conditions which are not individually bargained for. Before a ticket is purchased from Great Western Railway, you do not bargain on what terms would be best for you! Rather the exclusion of liability is applicable to every person buying a ticket whilst those terms are in effect. Since individual negotiations would bring the business to a standstill, the law seeks to provide redress for this presumed 'inherent' unfairness in exclusion clauses by drawing a distinction between SUBSTANTIVE AND PROCEDURAL FAIRNESS.
                           • When Jack agrees to buy the latest Iphone from Priscilla, a contract is formed. Whenever a contract is formed, 2 main rights arise: a substantive and a procedural right.
                             • a) Primary substantive right: Iphone
                               • b) Secondary substantive right: to be compensated for the phone in the form of damages
                                 • c) Procedural right: To go to court and enforce the right whether primary substantive (assuming the phone has not yet been sold and/or still exists) or the secondary substantive right (to be compensated for failure for breach of the primary substantive right.)

4. When can the court interevene in cases of exemption clauses? Can they seek to determine whether the contract is substantively fair (issues of substance) or whether it is procedurally fair (issues of procedure)?

   • On issues of SUBSTANTIVE fairness, with a few exceptions, there is NO common law rule by which a contract term may be declared void on the substantive ground that its unfair or unreasonable. As long as offer and acceptance etc were fulfilled, the courts cannot investigate substantive fairness for the parties have agreed/made a deal, whether good or bad. Freedom of contract theory demands that courts do not interfere with bargains the parties have made.
   • In contrast, on the issue of PROCEDURAL fairness, the courts can inquire into the deficiency in the procedure/bargaining process. What is the deficiency? The fact that the party on whom the clause is imposed was not permitted to negotiate this term. To enter the contract, they were compelled to accept the terms and conditions. (have to tick that box accepting ts and cs - no room for negotiation.