Aspects of Contract and Negligence for Business

Table of contents

What is an exclusion clause?

An exclusion or exemption clause is a clause that seeks to exclude a party’s liability when there is a breach of the contract) Example: Grace hires a powerful laptop together with suitable software for her job from Office Supplies Ltd. Grace signed a written hire contract with Office Supplies Ltd but she did not read it. It contained a clause stating ‘Office supplies are not liable for any financial losses or other losses. However caused, occasioned by using hardware or software products supplied by the company’ The italiced statement is an example of an exclusion clause.

The Legal Controls of Exclusion Clause

The law relating to exclusion clauses is governed by the following

  1. Common law rules – also known as Judicial Process
  2. Statutory rules: Unfair Contract Terms (UCT) Act 1977; Unfair Terms in Consumer Contract Regulations (UTCCR) 1999, various Acts which imply certain terms into particular contracts.

Common law rules- judicial process

Two distinct issues arise at common law for the legality of an exclusion clause. That is in order to be valid, an exclusion clause, must satisfy two conditions. Note: This is a judicial process to reduce the effectiveness of exclusion

  1. It must be incorporated into the contract
  2. The wording of the exclusion must cover the loss that the exclude seeks to exclude otherwise it is subjected to Contra proferentem

Incorporation of Exclusion Clause

An exemption clause cannot be effective unless it is actually a term of a contract (i.e. incorporated or inserted into the contract). It is therefore essential to decide whether or not the exclusion clause has been incorporated or inserted into the contract. An exclusion clause can be incorporated or inserted into a contract by:

  1. Signature
  2. Notice
  3. Previous dealings or custom

Incorporation of an exclusion clause by Signature

  1. If a person signs a contractual document, then they are bound by the terms, even if they did not read it: L’Estrange v Graucob (1934)
    Facts: L’Estrange signed a contract to purchase a cigarette vending machine from Graucob. The contract stated “This agreement contains all the terms and conditions under which I agree to purchase the machine specified above, and any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded.‘ The machine turned out to be defective so L’Estrange rejected it claiming that it was not fit for the purpose for which it was sold. Graucob claimed that the agreement expressly provided for the exclusion of all implied warranties. L’Estrange said although she did not read the agreement she did sign it intentionally.

Question: Did the exclusion clause incorporated or form part of the contract?

  1. a) Yes.
  2. b) No.

Decision: the conditions were binding on the CLAIMANT since she had signed them. It was not material that DEFENDANT had given her no information of their effect nor called her attention to them. Note: In the Sales of Goods Act 1979 (the existing law) some rights under this Act cannot be excluded b) The rule in the case above may not apply if the party seeking to rely on the exclusion clause misled or misrepresented the other party into the contract.

Facts: Curtis took her wedding dress to be cleaned. She was asked to sign a receipt on which there were conditions by which the cleaners disclaimed liability for damage however it might arise. Before signing C enquired what was the effect of the document, and was told that it restricted the cleaner’s liability in certain ways and in particular placed on C the risk of damage to beads and sequins on the dress. The dress was badly stained in the course of cleaning. Decision: Liability for damage to the wedding dress was not excluded due to misrepresentation of the clause as to the effect of the document which she signed. She was entitled to assume that she was running he risk of damage to beads and sequins only.

A contract between Peter and Quinton includes a clause excluding Peter’s liability in certain circumstances. When Quinton enquires as to the meaning of this clause, Peter replies that she does not wish to provide oral interpretation, but that Quinton must read the clause herself. She reads the clause and signs the contract. Peter later seeks to rely on the exclusion clause, and Quinton claims that Peter should have interpreted the clause for her. The clause itself is not misleadingly phrased. Consider whether Quinton is likely to be able to prevent Peter from relying on the cause. Activity1 Feedback

Incorporation of an exclusion clause by Notice

  1. An exclusion clause will not be incorporated into a contract unless the party affected actually knew of it, or was given sufficient notice of it.
  2. In order for notice to be adequate, the document bearing the exclusion clause must be an integral part of the contract and given at the time the contract is made. Chapleton v Barry UDC -1940) and Thompson v LMS Railway (1930)

Thompson v LMS Railway (1930)

  • Facts: T bought a rail way ticket, which stated that she would travel subject to the company‘s standard conditions of the carriage. These
    conditions could be inspected at the station; one of them excluded liability for injury to passengers. T was unable to read, and so was unaware of the clause. She was injured and claimed damages.
  • Task: Analyse and assess whether the exclusion was incorporated and advise the parities Held: The ticket was the document which should be expected to contain the terms, being more than a mere receipt of payment. The railway company had taken reasonable steps to bring the exclusion clause to the passengers’ attention, by incorporating into the contract document (ticket). T was bound by the clause (even though she could not read. ‘Illiteracy is a misfortune not a privilege, said the Judge)

Prior information on exclusion clause

An exclusion clause can be incorporated by notice, provided it was given before making the contract. I.e. each party must be aware of an exclusion clause at the time of entering into the contract if it is to be binding (Olley V Marlborough Court Ltd -1949)

  • Facts: H and W arrived at a hotel and paid for a room in advanced. On reaching their bedroom they saw a notice on the wall by which the hotel disclaimed liability for loss of valuables unless handed to the management for safe keeping. W locked the room and handed the key in at the reception. A thief obtained the key and stole W’s furs from the bedroom
  • Decision: A notice in a hotel room did not exclude the hotel liability as the contract was made at the reception desk (when the room was booked and paid for). Thus the disclaimer was too late. Whether the degree of notice given was sufficient it is a matter of fact, but in the case of Thornton v Shoe Lane Parking Ltd-1971, it was stated that the greater the exemption, the greater the degree of the notice required

Incorporation of an exclusion clause by Previous Dealings

For an exclusion clause to be incorporate by previous dealings there must have been a consistent course of dealings in the past between the parties and the documents used then contained similar clauses

J. Spurling Ltd v Bradshaw (1996)

  • Facts: J Spurling Ltd had a warehouse in East London. Mr Andrew Bradshaw had eight barrels of Orange juice which he asked Spurling Ltd to store for him. As usual, he later received a document which acknowledged receipt. In the contract was the “London lighterage clause” which exempted warehousemen from liability due to their negligence. When he came to collect the barrels were collected, they were damaged. Bradshaw refused to pay Spurling Ltd, the company sued for the cost. Bradshaw counter-claimed for damages for breach of an implied term of a contract of bailment to take reasonable care.
  • Held: the exclusion clause had been incorporated into the contract through the previous course of dealings whereby he had been sent copies of documents containing the clause, even though he had never read them
  1. If the parties have had previous dealings (not on a consistent basis) then the party to be bound by the exclusion may be sufficiently made aware of it (as a proposed condition) at the time of making the latest contract. It is not sufficient that he might have become aware of it.

Hollier vs Rambler Motors 1972

  • Facts: On three or four occasions over a period of five years H had had repairs done at a garage. On each occasion he had signed a form by which the garage disclaimed liability for damage caused by fire to customers’ cars. On the latest occasion, however, he didn’t sign the form. The car was damaged by fire caused by negligence of garage employees. The garage contended that the disclaimer had by course of dealing become an established term of any contract made between them and H
  • Decision: Three or four dealings between the garage and H over a five –year period were held to be insufficient to constitute a course of dealings. The garage was therefore liable. There was no evidence to show that H knew of and agreed to the condition as a continuing term of his contracts with the garage.

Customers of self-service shop take goods from the shelves and then walk down a corridor to a till. A conspicuous notice is hung across this corridor incorporating exclusion into contracts for the purchase of goods from the shop. Could a customer claim that the exclusion clause was invalid because he had selected goods before seeing the notice?

Interpretation of the Exemption clause must Cover the Loss

In deciding what an exclusion clause means, its wording must cover the loss that the party relying on it is seeking to be protected. If the exclusion clause is ambiguous, the interpretation may be subject to Contra Proferentem (i.e interpreted against the person relying on it). This was developed by judges to limit the effectiveness of exclusion clauses.

Contra Proferentem Rule

The rule requires that in case of ambiguities or uncertainties, in the exclusion clause, the court interprets the words narrowly against the interests of the person seeking to rely on the clause. Liability can only be excluded or restricted by clear words. In particular, if the clause gives exclusion in unspecified terms it will be interpreted as not to cover negligence on the part of the party relying on it unless that it is the only reasonable interpretation. Application of Contra Proferentem on the Holliers v Rambler Motors 1972 The garage disputed liability for fire damage to the claimant’s car on the basis of a contractual term which stated that the company was not liable for damage caused by fire to customer’s cars on the premises. On the basis of that exclusion clause alone, the disclaimer of liability could be interpreted to two ways:

  1. Only to accidental fire.
  2. To fire damage caused by negligence.
  3. According to Contra proferentem Rule, the disclaimer of liability should be interpreted against the garage in the narrow sense of  (a) above only so that it didn’t give exemption from fire damage due to negligence.
  4. As a consequence the plaintiff was entitled to recover for damages caused to his car by the defendants negligent.
  5. When constructing exclusion the court will also consider the main purpose rule.
  6. By this, the court presumes that the clause was not intended to defeat the main purpose of the contract. Effect of Exclusion Clause on Fundamental
  • BreachFacts: A security guard burned down the factory he was guarding. The contract between his employers and the factory owners limited employers’ liability for injurious acts and defaults of guards
  • Held: The clause was clear and unambiguous and effectively limited their liability even for this fundamental breach Summary of Test of Exclusion Clause in the Judicial process.

Statutory rules for control of exclusion clause

If an exclusion clause passes the common law test, it must also satisfy the statutory rules. These are contained in:

  1. Unfair Contract Terms Act (UCTA) 1977
  2. Unfair Terms in Consumer Contract Regulations, 1999.
  • UCTA, 1977 applies to exemption clauses in contracts made in the course of business or commercial concerns.

Note: In principle private persons may restrict liability as much as they wish.

  1. It does not apply to certain contracts relating to:
  2. the creation or transfer of interests in land;
  3. company formation or securities transactions
  4. insurance contracts

Summary of requirements of UCTA 1977
UCTA 1977 renders an exclusion clause either invalid /Void or made subject the requirements of reasonableness

Invalid or Void Exclusion clause

  • Those excluding liability for negligence causing death or personal injury
  • Those excluding liability for the implied terms in supply of goods contracts with consumers Sale and supply of Goods

A consumer contract is contract for the sale of goods, hire purchase, supply of work or materials or exchange of goods cannot exclude or restrict liability for breach of the conditions relating to description, quality,
fitness for the purpose for which sold and sample implied by the Sale of Goods Act 1979 and the Supply of Goods and Services act, 1982. In a non-consumer contract these implied conditions may be excluded if the exclusion clause is reasonable. The implied condition as to title cannot be excluded in any contract. Exclusion clause subject to test of reasonableness

  1. Those exclusion clauses excluding liability for negligence causing loss or damage to property
  2. Unreasonable indemnity clauses
  3. Exclusion clauses excluding or limiting liability for own breach or fundamental breach
  4. Excluding clause that entitles to render substantially different performance or no performance at all is subject test of reasonableness
  5. Exclusion Clause excluding for the implied terms in supply of goods contracts with business customers

A contract for the sale of a washing machine to a consumer contains the following clause: ‘the seller undertakes to repair any defects arising within the first 12 months free of charge, and the buyer shall accordingly not be permitted to return the machine if does not work at the time of sale’.

A consumer would normally have a statutory right to return the machine if it did not work at the time of sale.
Consider whether this right has been effectively excluded the clause Class Activity feedback

Test of Reasonableness

The burden of proving reasonableness is on the party seeking to rely on the clause. The following are Statutory guidelines which the court could take into account in assessing whether a term is unfair or unreasonable,

  1. The relative strength of the bargaining positions of the parties
  2. Whether the buyer received an inducements (such as reduced price) to persuade him to agree to the term
  3. Whether the buyer knew or ought to have known of the existence and extent of the exclusion (having regard, where appropriate, to trade custom or previous dealings between the parties)
  4. The ability of the party to insure against the liability e.g. failure of a
  5. Whether the goods were made, processed or adapted to the special order of the customer.

Class Activity

A contract under which a consumer buys a 20 volume encyclopaedia contains a clause excluding liability for defects not notified within a week of delivery. Two weeks after delivery, the buyer finds that several pages which should have been printed are blank. Will the seller be able to rely on the exclusion clause? What is the reason for your answer?

Unfair terms in consumer contract regulations

UTCCR, 1999 applies to contract where:

  1. The seller is acting in the course of the business
  2. The other party is a consumer and
  3. The terms have not been individually negotiated (e.g. Standard form contract)

Unfair Terms

A term is unfair if:
It is not expressed in plain, intelligible language
Contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations and this is to the detriment of the consumer It allows the seller to alter the terms of the contract unilaterally without a valid reason which is specified in the contract sec 3 UTCCR 1999.

If a term is unfair, it is not binding on the consumer although the contract shall continue in existence if is capable of continuing without the unfair term.

A schedule to the Regulations contains an indicative list of terms which may be regarded as unfair, for example;

  1. Terms which exclude or limit the liability of a seller in the event of death of a consumer resulting from an act or omission of that seller
  2. Terms requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation

Terms obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his.

Quick Quiz

By Virtue of the UCTA 1977, an attempt by any person to exclude or restrict liability for damage to property caused by negligence is:

  1. Void unless reasonable
  2. Effective only in a non-consumer transaction
  3. Void
  4. Valid if the other party to the contract knows of the exclusion clause or has been reasonable notice of it

Dave went to drop off his watch for repair. He was handed a not to sign that contained the words, among the many lines of the text, ‘the management are not liable for loss or damage to your watch however caused’. He did not read the note but signed it. His watch, worth £350, was lost in transit by the jeweler.

  1. The clause is not incorporated into the contract even though Dave has signed the note
  2. The clause is automatically void under the UCTA 1977

Which of the above is correct?

  • I) Only
  • II) Only
  • Both (I) nor (II)
  • Neither (I) nor (II)

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