Analyzing the Validity and Implications of an Exclusion Clause in a Customer Service Scenario

1. Raj and Nice and Shiny

• The scenario posits a situation where the customer, Raj, has come to get his car cleaned and when he goes to the office to pay the bill, while the attendant has already started working on the care, there is a notice in the office saying: “The management accept no responsibility for any loss or damage howsoever caused.” This notice is in the nature of an exclusion clause, which aims at excluding the liability of ‘New and Shiny’. This essay considers the validity of the exclusion clause and also whether this exclusion clause will lead to the inability of Raj to get the breach of contract liability enforced against ‘New and Shiny.’ For that purpose, the essay will first consider the nature of exclusion clause and then apply the principles to the present scenario.

  An exclusion or exemption clause is a clause in the contract, the purpose of which is to exclude or limits the liability of the party making the clause under the contract. Such exclusion clauses are valid under the contract law, provided that such a clause is contained in an express term of the contract. However, such clauses will not be valid if these contravene the provisions of the Unfair Contract Terms Act 1977. In any case, in order to be valid exclusion clauses must satisfy certain requirements, which are discussed next in this essay.

  

  First, exclusion clause must be an integral part of the contract, which means that it must be a term in the contract itself, binding both the parties to the contract. In other words, it must be intended to be contractual in nature and should not just be in the nature of a receipt. Second, exclusion clause must be displayed in some place where it is prominent and will not escape the attention of the other party..

  escape the attention of the other party.. The common law has evolved two tests that are usually applied by the courts for the purpose of testing the validity of exclusion clauses. These tests are: Proper Incorporation test and the Clear and Precise test, which are also in the nature of conditions to be satisfied for the exclusion clause to be valid, as discussed below. It is noteworthy that once the two conditions have been satisfied, the reasonableness of the clause does not become a matter of grave concern for the courts. The Proper Incorporation test puts a responsibility on party making such clause that it must give

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  1. Parker v South Eastern Railway Co., [1877] 2 CPD 416.
  2. White v Blackmore, [1972] 3 WLR 296
  3. R Lawson, Exclusion Clause and Unfair Contract Terms (London: Sweet & Maxwell 2011) 3.
  4. McCutcheon v MacBrayne, [1964] UKHL 4; Thornton v Shoe Lane Parking Co., [1970] EWCA Civ 2.

  proper information to the other party of the existence of such a clause. Such information may be through incorporation with signature, notice or customs. Exclusion clause has to be displayed and informed prominently. The court may even put the onus on such a party to show that the clause has been reasonably brought to the attention of the other party. The Clear and Precise test provides that the clause making the exclusion must be informed to the other party in a clear, precise and unambiguous manner. If there is any ambiguity, then the court applies the contra proferentem rule to interpret the clause against the person making it.

  Applying these principles to the present case, it is seen that the exclusion clause that is made on the notice is both properly incorporated, being put up in the office and clear and precise. However, that does not mean that this clause will lead to the exclusion of liability of ‘Nice and Shiny’ in the present scenario. It is relevant to mention three things here: one, the exclusion clause was brought to Raj’s notice only after he had already given the key and car to the attendant; two, the breach of the contract is of such a nature that it destroys the whole contract; and three, the applicability of the statutory tests contained in Unfair Contract Terms Act,1977 (UTCTA 1977) and Unfair Terms In Consumer Contract Regulation 1999 (UTCCR 1999). This is discussed next.

  Where the breach of term is of such nature that it destroys the whole contract, the courts apply the doctrine of fundamental breach in order to not give validity to such exemption clause. Here the doctrine of fundamental breach is applicable and its focus is not on the term that is breached, but on the effect of the breach on the contract. There can be no exemption from a fundamental condition of the contract. In this case, the breach of contract is not of such a nature, where the very contract is destroyed by it. Because the contract was to clean the car and not to service it, therefore, as far as the cleaning of the car is concerned, that part of the contract is performed. However, there is also a damage to the car as well as personal injury and monetary loss to Raj.

  The UTCTA 1977 prohibits some kinds of exemptions altogether and subjects others to the requirement of reasonableness. If negligence leads to damage to property or financial loss, such

1. McCutcheon v MacBrayne, [1964] UKHL 4
2. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1987] EWCA Civ 6.
3. Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2; Harbutt’s Plasticine Ltd v Watne Tank and Pump Co Ltd [1970] 1 Lloyd's Rep.15.
4. R Stone and J Devenney, The Modern Law of Contract (Oxon: Routledge 2015).

terms shall be subject to a reasonableness test, under section 3. Here, the damage to the car as well as to Fred is the result of the negligence of the employees of Nice and Shiny. They were playing around with the sponge and then negligent enough not to notice the damage that they had done.

Here, Raj can also opt to use concurrent liability of Nice and Shiny under contract as well as tort law. Concurrent liability is applied in cases where there is a contract as between the two parties, therefore, there is already an existence of a contractual liability. At the same time, cause of action may also arise in tort. Generally speaking, this kind of liability arises in cases of negligence, where the other party fails in his duty to take care, while performing contractual liability. Here, the attendants were negligent in how they performed the contractual liability, therefore, there is a case for contractual liability as well, should Raj choose to take this action.

2. Alicia Botti and Fred

This scenario relates to the contract between Alicia Botti, an opera singer and Fred, a theatre owner. The first offer by Fred was rejected by Fred, as Alicia wanted more money for the performance, but the second offer has been accepted by Alicia, although it is for less money that she originally wanted. However, just before the concert, Alicia has backed out of the performance and she says that as there is no written contract between them, therefore, she is not bound by the same. This essay will argue that Alicia is bound by the contract even though it is oral contract. Therefore, Alicia’s refusal to sing at the concert amounts to a breach of contract for which Fred may legally have action for appropriate remedies, including specific performance of the contract. The important points here are: Has Fred made an offer to Alicia? Has Alicia signified her acceptance to the offer? Is there a legally enforceable contract between Alicia and Fred? In order to answer these questions, reference must be had to the conditions of a valid contract, which are discussed below. Offer is the first condition of a valid contract. Offer means a signification or indication by one party of its willingness to enter into a contract with the other party on specified

The important points here are: Has Fred made an offer to Alicia? Has Alicia signified her acceptance to the offer? Is there a legally enforceable contract between Alicia and Fred? In order to answer these questions, reference must be had to the conditions of a valid contract, which are discussed below.

Offer is the first condition of a valid contract. Offer means a signification or indication by one party of its willingness to enter into a contract with the other party on specified

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Hedley Byrne & Co Ltd v Heller & Partners Ltd, [1964] AC 465.

terms. Such an offer should be accompanied with an intention to be legally bound by the contract should the other party signify its acceptance of the same. In this case, Fred has made a valid offer to Alicia when he offers to pay her £11,000 for singing in the concert.

When the offer is accepted by the other party, it signifies acceptance, which is the second condition for a valid contract. Alicia has signified her assent to the offer when she orally agrees to perform at the concert.

There must be consideration, where each party will do something of benefit to the other party. In this case the payment of £11,000 by Fred and singing by Alicia at the concert form a quid pro quo consideration for the contract. The parties must have the same idea of the contract (consensus ad idem) and an intention to create legal relations. This is also seen in the scenario because the offer and acceptance are made with respect to the same subject matter. There is also an intention to create legal relations between them.

With respect to Alicia’s contention that being an oral contract, it is not binding, that is not correct. An oral contract is an express contract just like a written contract. In express contracts, the terms of the contract are expressed by the parties at the time of entering into the contract. An oral contract may even be enforced where they are defective in form as long as it is equitable to enforce the contract. Consequently, the impact of oral and written contracts is the same as far the legal relations and rights and liabilities as between the parties are concerned. Therefore, Alicia is bound by the contract.

3. Inequality of bargaining power between parties

In contracts between parties, it is sometimes seen that the contract is made between two parties that are not of equal bargaining power and therefore, such contracts do create a situation where the courts may have to ascertain the conscionability or fairness of such contracts as they made between parties of unequal bargaining power. Usually, this is seen in consumer contracts or contracts involving standard form agreements. In consumer

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• H Collins, The Law of Contract (Cambridge: Cambridge University Press 2003) 68.
• Wakeham v Mackenzie, [1968] 1 WLR 1175; E McKendrick, Contract Law (London: Palgrave 2015) 65.
• Firstpost Homes Ltd v Johnson, [1995] 1 WLR 1567.

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contracts, exemption clauses are common, and are usually found in standard form contracts. There may then be a concern that the consumer may be in an unfair bargaining position allowing the exclusion clause to be used exploitatively.

Both the courts as well as legislation have responded to this. Therefore, equality of bargaining power may at times be an important consideration. Where there is inequality of bargaining power, or one party is forced to pay more due to lack of alternatives or any special difficulties are associated with the task undertaken, there the clause will be unreasonable.

First, it is important to note that courts have been initially vague in laying down the liability in cases involving unequal bargaining power. In Lloyds Bank v Bundy, Lord Denning did observe on the nature of unconscionable contracts with reference to unequal bargaining power, but in National Westminster Bank plc v Morgan, the House of Lords expressly denied the validity of unequal bargaining power as the basis of relief. The particular objections of the House of Lords to the upholding of such a principle as a basis for liability was that the undue influence principle already covered such cases, and that such a decision would lead to the restriction of a freedom to contract which was a legislative task and not a judicial task.

At the same time, commentators have been vocal about the need for courts to do more to prevent unfair contracts because one of the parties is in a more dominant position than the other. With relation to exemption clauses in standard form contracts, the unequal bargaining power as between parties does at times become relevant. Where, there is unreasonable allocation of risk for one party and unequal bargaining power, there also the exemption clause will be unreasonable. In Watford Electronics V Sanderson, the court refused to apply this consideration because parties were of roughly the same bargaining power and they both were aware the problems with the software as well as the consequences of any breach at the time the contract was made. It is true that one party was in a better position to insure against such consequences, but at the same time the other party was in a better position to assess the potential

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• Harris v Wyre BC/Smith v Bush, [1990] UKHL 1
• [1974] EWCA 8.
• [1985] UKHL 2.
• Janet O'Sullivan and Jonathan Hilliard, The Law of Contract (Oxford: Oxford University Press 2016) 301
• J Beatson and John Cartwright, Anson's Law of Contract (Oxford: Oxford University Press 2016) 405.
• St Albans Dc v International Computers Ltd, [1996] 4 All ER 481.

losses. Therefore, the court did not apply the consideration to the case. The Unfair Contract Terms Act (UCTA) 1977 is also an important response of law to the possibility of unfair contracts due to the unequal bargaining power as between the parties. The statute provides positive protection unequal bargaining position in contract law.

4. Terms of contract

A contract contains many terms, some of which may be so important that the breach of such terms by one party may constitute breach of contract and give the relevant remedies to the innocent party.

First, it is important to distinguish terms of the contract from representations. Terms of contract are promises made by the parties, whereas representations are statements that may be made by a party without the intention of being bound by such representations. Such representations are usually made in the negotiation stage and must not be confused with terms of contract. The distinguishing factor between terms and representations is in the importance of such statement to the contracting parties.

The terms that may be contained in the contract are: conditions, warranties and innominate terms. The most significant of these terms is a condition, which is so fundamental to the contract if one party fails to perform such condition, the innocent party will have the option to treat the contract as voidable. Warranties and innominate terms on the other hand, may not give such a remedy to the other party. These terms and their significance to the contract and the effect of their violation is discussed next in the essay.

Conditions are the agreed terms of contract that are essential to the performance of the contract. Such condition may relate to different aspects, such as for example, it may relate to stipulation as to time within which contract must be performed, and not doing so would lead to a breach of contract. Some conditions are also statutory in nature, such as the conditions given in the Sale of Goods Act 1979, which are implied conditions, such

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• Inntrepreneur Pub Ltd v East Crown Ltd, [2000] 2 Lloyds Rep 611.
• Bannerman v White, (1861) CB(NS) 844.
• Poussard v Spiers and Pond, (1876) 1 QBD 410.
• J Poole, Textbook on Contract Law (Oxford: Oxford University Press 2014) 302.
• Bunge Corporation v Tradax Export SA, [1981] UKHL 11.

as for instance, the condition that goods must be fit for the purpose for which sold is a condition of the contract of sale of goods

It is important to note that the significance of the condition comes from the fact that breach of condition is of such a nature that it may deprive a party to the contract from a benefit under the contract. Due to this, breach of condition is treated with gravity in the context of the rights of the innocent party and, therefore, such breach gives rise to certain remedies under the contract. The two important remedies are the right to terminate the contract by the injured and innocent party and the right to recover damages for breach under relevant circumstances. The breach of condition may even allow the innocent party to claim for both the termination of contract as well as for damages. Compared to condition, a warranty is not an essential term of the contract and failure to perform it does not render the contract voidable. Generally, condition and a warranty are distinguished on the basis that the former goes to the root of the contract, and the latter is a subsidiary term.

Innominate terms are of a recent origin, and the concept was first introduced in Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd. In this case, the court held that innominate terms are a category that is between conditions and warranties. For breach of an innominate term, the court will have to consider the consequence before deciding upon the remedy.

The use of the word ‘condition’ is by itself not enough to make the term a condition (Schuler V Wickman Tool Sales), (1974) AC 235 (HL). However, if the parties use the term in the contract, then such usage will serve as an indication of the parties’ intent to treat it as a condition. This was held in L’estrange v Gracoub, (1934) 2 KB 394. The purpose of this principle is to ensure that the parties are bound by the terms of the contract in the sense that they agreed upon those terms. If the term was agreed upon as a condition, then the parties must be bound by the same.

The courts need to understand the nature and effect of breach of a term in order to declare whether it is a condition, warranty or innominate term. For this, the court considers the

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• Poussard v Spiers, (1876) 1 QBD 410.
• Clegg v Olle Andersson T/A Nordic Marine, [2003] EWCA Civ 320.
• [1962] EWCA Civ 7.
• Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd, [1962] EWCA, 1962

objectives of the parties when they first entered into the contract.

Bibliography

Beatson J and Cartwright J, Anson's Law of Contract (Oxford: Oxford University Press 2016)

Collins H, The Law of Contract (Cambridge: Cambridge University Press 2003)

Lawson R, Exclusion Clause and Unfair Contract Terms (London: Sweet & Maxwell 2011)

O'Sullivan J and Hilliard J, The Law of Contract (Oxford: Oxford University Press 2016) 301

Oughton D and Davis M, Sourcebook on Contract Law (London: Cavendish Publishing 2000)

Poole J, Textbook on Contract Law (Oxford: Oxford University Press 2014)

Stone R and Devenney J, The Modern Law of Contract (Oxon: Routledge 2015).

²⁸D Oughton and M Davis, Sourcebook on Contract Law (London: Cavendish Publishing 2000) 470.

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