Exclusion clauses and unfair contract terms (Part 1)

An example of an exclusion clauseWe have all seen something like the above before, or something like it. “We are not liable for any damage arising from the use of our product, howsover caused” or “The management accepts no liability..” or “The customer hereby agrees to indemnify the company…” etc, etc. These are known in usual parlance as disclaimers, but in lawyers talk, they are known as exclusion clauses.

Exclusion clauses are found in both contracts, particularly consumer contracts, and notices. When I talk about consumer contracts, I mean contracts where one of the parties thereto is a consumer, who makes a purchase for a good or service from a business. The purpose of the former is to satisfy his need or want while the purpose of the latter is to profit from such a contract. An elementary principle is that consideration for a contract when, given, should be good consideration. In the case of the consumer and the business, the consumer pays good money for a good or service (pun not intended!) and the business should, accordingly, ensure that the good or service is up to par with the money given for it. Unfortunately, businesses have not always wanted to bear this burden, and so have sought to exclude it in the form of incoperating exclusion clauses in contracts seeking to obtain consent from the consumer to disclaim them. Consumers on their part do not wish for such liability, as and when they arise, to be disclaimed, for otherwise, they would be left without a remedy. Unfortunately they never seem to have a choice, as the exclusion of liability makes good business sense and would be adopted by almost all businesses as a result. Exclusion clauses have thus been described as “weapons of consumer opression”.

The English courts have often manifested their hostility to the operation of such clauses and Malaysia by virtue of the Civil Law Act 1956 has recieved such hostility. Such hostility had been described by the late Lord Denning as “worshipping the idol of freedom of contract yet stabbing the idol in the back” in the case of George Mitchell (Chesterhall) Ltd  v Finney Lock Seeds Ltd [1983] QB 284. The “stabbing” as he put is was eventually developed into a set of three rules, the rules of incorperation, interpretation and fundamental breach.

In the rule of incorperation, the saying is that the clause in question must be part of the contract itself at first to be effective. The one seeking to rely on the clause must have brought it to the attention of the other party (ie the business must have brought it to the attention of the consumer). The bringing of attention to the clause must also have been concluded before, not after, the contract has been made. A classic example is the English case of Olley v Marlborough Court Ltd [1949] 1 KB 532 where a woman had left some furs in her hotel room and they were found to be stolen. The innkeeper pleaded on a clause stating to the effect that he would accept no liability for items stolen that were not handed to him for safekeeping. Such a clause was found in the hotel room. It was held that the notice came too late, for the contract had been concluded when the woman had paid consideration for her hotel room in the lobby. This rule does not apply when a consumer has already signed a contract however, as signature would have implied that he would have noted the contents therein, including that of the exclusion clause. This was held in the classic case of L’Estrange v Graucob [1934] 2 KB 394.

In the rule of intepretation, the courts have held that when a party purports to exclude liability, the party must state in terms the kind and nature of liability he wants to exclude. Such an approach was made in the case of Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 where a car was destroyed in a garage by a fire caused by the negligence of the employees of the business. The exclusion clause pleaded did specifically mention damage by fire, but failed to mention that the damage would be one of negligence, and did not exclude the liability pleaded.

The rule of fundamental breach has not always been readily accepted, but it generally encapsulates the principle that a breach that is so fundamental it “goes to the root of the contract” cannot be excluded: Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936. Thus if a contractor of a building were to exclude liability for such a building collapsing, for example, it could be argued that such a liability would be so great it “goes to the root of the contract” to construct a building, and is thus not able to be excluded.

Most disclaimers however, easily passed the above tests put by the English courts, but could they survive the almighty power of the British Parliament? In 1977 that Parliament said “enough” and came to the aid of the consumer by enacting an Act to subject such exclusion clauses to an even more rigourous test, even providing for liability exclusions for certain types of damage to be banned outright! What is the name of this particular Act? Stay tuned for more in the next part to find out!