TERMS OF CONTRACT

Exclusion (Exemption) Clauses CONTENTS

1.0       Introduction

2.0       Objectives

• Main Content
• Exclusion (Exemption) Clauses
• Common Law Approach
• The Reasonableness Test
• Exclusion Clauses and the Consumer
• Exclusion Clauses and Business Parties

4.0       Conclusion

5.0       Summary

6.0       Tutor-Marked Assignment

7.0       References/Further Readings

 INTRODUCTION

Freedom of contract is a judicial concept that  contracts  are  based  on  mutual agreements and a result of free choice unhampered by external control. It implies that parties  to  it  have the right  to bind themselves legally.   They equally enjoy  the right   to  insert  what  clause or clauses they please  exempting  themselves  from   liability from one  breach or another or even from a  total  breach.  Problems often arise where one party lay failed to avert his mind to such clauses, or where the clauses are sudden or in standard form contracts and this is what we are about to learn.

 OBJECTIVES

When you shall have read this unit, you should be able to:

• Understand the circumstances under which one party to a contract may seek to escape some obligations in certain
• Demonstrate an understanding of the governing

 MAIN CONTENT

• Exclusion (Exemption) Clauses

The principle of freedom of  contract  assumes  that  within  reason,  the parties are able to negotiate freely any terms they may deem fit. As we have stated before, this may not be possible if one party has far stronger bargaining power than the other; for example, one party in the sale of goods may have a monopoly over the supply of those goods, or financial institution may impose an excessive rate of interest on a loan where the borrower  is  in serious financial  trouble.  In  these examples,  it  can be argued that  there is no genuine bargaining and it is quite common for us to be obliged to sign ‘standard form’ contracts which we are obliged to accept as they stand. Within this background, contracting ‘exemption’ clauses) in which one party attempts to limit or totally exclude liability if something goes wrong in the contractual relationship.

This topic is another prime example of the blending of common law rule with subsequent legislation. In their simplest form, exemption clauses are everywhere: on laundry and parking lot receipts, on  transportation slips (ships and buses), and on chairlifts which take you to the top of a mountain peak. Hence, in common law, there is a long line of so- called ‘ticket’ cases. These are typified by situations in which the courts assess whether or not, among other things, a passenger on  a  ship  (perhaps injured by a crew-  member’s negligence) is entitled to recover damages from the ship owner who claims ‘protection’ by an exemption clause on all passengers’ tickets.

 The Common Law Approach

In Olley V. Marlbrough Court Ltd (1949) 1 KKB 532, a Mr. and Mrs. Olley checked into the defendant’s  hotel.  In  their  room was a notice excluding  the Defendant’s liability for loss of guests’ belongings.  Some of the Olleys’ personal  goods   were   stolen   by  an  employee  of  the  Defendant,  who pleaded   the   exemption   clause.   The   argument failed as one of the common law principles state that the clause must be incorporated into the contract. This was not the case here as the contract between the Plaintiffs and the Defendant had been made at the front desk when the Plaintiffs registered. From this often confusing array of cases, the broad common law principles upon which exemption clause are based can be outlined as follows:

1. A person is bound by the terms of the contract he/she sign, even though he/she has not bothered to read them, unless there is some vitiating element. See L’Estrange V f Graucob Ltd (1934) 2 KB 394; DC, where the clause was “regrettably small
2. The exemption clause must be incorporated into the contract  at the time the contract is         
3. Reasonable notice of the exemption clause must be given to the other party. The  party relying on the clause has the burden of establishing that he/she took  such reasonable steps to draw it to the other’s attention: Parker V South Eastern Raily C., (1877)
4. It is difficult for a plaintiff to set aside an exemption clause  if there has been a  history of past dealing between the parties; (that is, there ha been some form of continuing relationship and this relationship is a question of fact).
5. Broadly speaking, the common law approach is that the clause is effective if  the  party relying on it can show that it was incorporated into the contract, the other party relied on it and it was clearly worded. Let us now examine statutory intervention to the common law in Nigeria

 The ‘Reasonableness Test’

As you have already learned, the common law is still important even if an Act has been passed, sometimes to ‘tidy up’ uncertainty which may arise  in   judicial   precedent.   Two types of contracts have to distinguished.

• Contract between a business and a consumer, or private customer; and
• Contract between a business and a business. Note that transactions may occur between two individuals dealing with each other privately outside the business world, but  we  will not deal with this in this section of the

 Exclusion Clauses And The Consumer

In the event of a dispute between a business which  is  relying on an exclusion clause,  and the customer, reasonable test applies which is essentially a restatement of the principles found in common law cases. It takes into account, among other things, the following:

1. the strength of  the  bargaining power  of  the  parties,  including alternative means   by which the customer’s requirements could have been met;
2. whether the   customer  was   induced  into  accepting  the   term or whether he/she had an alternative choice to enter into a similar contract with another business;
3. whether the customer knew or reasonably ought to have known of the existence and extent of the term,  having  regard,  among others, to trade custom or a previous course of dealing;
4. whether the goods had special features which were there at the request of the customer.

In a contract, for example, involving a cargo, receipt of the cargo carrier of the seller who shipped frozen chickpeas by lorry. The issue may arise whether the clause extended beyond the goods themselves to the lorry carrying the goods. If the latter were the case, then the above guidelines would be applicable. If the seller had no control over the transportation, which  was  the  purchaser’s  own   lorry,   then   the   exclusion  would   be careful with the  word  ‘consumer’.  We  are  all  consumers  in  the generally  accepted meaning of the word.

A party to a contract ‘deals as consumer’ in relation to another party if:

1. He neither makes the contract in the course of a business nor holds himself out as doing so;
2. The other party does make the contract in the course of a business; and
3. In the case of a contract governed by the law of sale of goods the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.

A statute may define ‘consumer’ in its own terms and confer varying degree of protection. In addition, the ‘reasonableness’ test will apply in the situations many of us encounter in our daily lives: dropping a suit off at the laundry, parking a car having it serviced, and checking into a hotel, to name a few.

 SELF ASSESSMENT EXERCISE

1. What is generally the purpose of exemption clauses in contracts?
2. In what circumstances are since clauses enforced by the courts?

    Exclusion Clause And Business Parties

As  you  are  aware,  many  business  contracts  (that  is,   between   two business   parties) are executed on standard forms and sometimes on a ‘take it or leave it’ basis.  The law also acknowledges that parties who contract in this manner are to be differentiated from those who negotiate and draft their own ‘tailor-made’ requirements.  It is more likely, then, that in a standard form contract, there may well be unequal bargaining power between the parties; consequently, as you saw in the guidelines, the weaker party is afforded some protection.

Also  of  significance  is   that   a   person   cannot   completely   exclude   or restrict his or her liability for negligence insofar as the clause in question complies with the reasonableness test. It should also be pointed out that under no circumstances can a party, by an exemption clause, exclude potential liability for death or personal  injury.  However, clause which attempt to exclude liability for financial loss or property damage will be subject to the reasonableness test.

In Photo Production Ltd  V.  Securicor  Transport  Ltd.  (1980) A.C. 827,  the  Plaintiff’s factory was burned down as the result of the negligence of an employee of the Defendant security company. The House of Lords held that the Defendant was protected by the parties’ exemption clause even though the  employee  setting  fire  to  the  premises constituted a fundamental breach of their contract.

This approach was cited in a recent Ontario case of Fraser Jewelers (1982) Ltd V. Dominion Electric Protection C. et al (1997) in which the defendant, also a security firm, had contracted with the Plaintiff jeweler to maintain a protective burglar alarm system on its premises. The exemption clause  limited  the  defendant’s  financial  liability for  loss, damage or injury sustained by a failure in the service or equipment.  The premises were robbed and the Defendant’s employee did not respond quickly enough. The Plaintiff claimed the  CDN$50,000  loss  it  had suffered.  The Ontario  Court of Appeal (‘OCA’) held that the exemption clause was binding between  the  parties  and  the  Defendant  was  not  liable. As another example of how cases are  argued in court, we will review the arguments presented by the Plaintiff’s lawyers and the Court’s ultimate response. You will spot several references to legal issues which you are studying.

1. The Plaintiff argued
   1. It had not read the
   2. The exclusion clause had not been pointed out to
   3. The failure of the Defendant’s alarm system was a fundamental breach of their contract.
2. The Court of Appeal’s response was
3. A fundamental  breach  must,  among   other   things,   serve   to  substantially  deprive the Plaintiff of the benefit of the contract. No such breach occurred  as the  parties had dealt with each other for two years and worked with each other right up to the trial.
4. As business executive signing an agreement is presumed to be aware of the terms therein and intended the company to be bound (L. Estrange V f Graucob Ltd)
5. The language  of  the  exemption   clause   was   clear   and unambiguous.  It should be, prima facie, enforced according to its true meaning and seen in the light of the entire agreement, not to be unacceptable commercial practice.
6. That the parties may have a different bargaining power does not in itself render an agreement unconscionable or unenforceable and entitle the party to repudiate the

 CONCLUSION

Parties are free to enter into whatever bargain they please and product themselves. The court may not interfere if parties are equal, and may where one party is in a stronger negotiating position.  It is important that the  document  containing  the  exclusion   clause must be a contractual document. It is not an excuse that the document was not read, provided it has been signed by the party. Where it is not signed, he has to be put on notice.   Ambiguity  in an exclusion clause interpresated against  the party relying on it.  A stranger cannot take advantage of an exclusion clause.

 SUMMARY

In this  unit  you  have  learnt  about  the  Common Law,  statutory  and Judicial  approach to exclusion (exemption) clauses. We have referred to the case of Olley V. Malborongh Court Ltd (1949) IKB 532, see the following cases Chapelton V. Barry (1940) I KB 532, and the Nigerian cases of Akinsanya V. UBA (1986) 4 NWLR (Pt. 35) p 273 and Narumal Ltd V. Niger Benne Transport Corp (1989) 2 NWLR (Pt. 106) 730 at 751-54. We hope you will be able to identify the reasoning of the court in each case.

 TUTOR MARKED ASSIGNMENT

Deolu pays N100 as entrance fee at the turnstiles of Eko Private Park, which is a mini- zoo.  He  is strolling along  ten minute  later when an aggressive monkey escapes from  its compound and bites him severely on the leg. A park keeper has negligently failed to lock the gate after feeding  the  inmates.  There  is   a   framed   notice   on   the compound exempting the  park  authorities  ‘from  any  and  all  injury  caused  to  visitors whether attributable to its negligence or not’.Can  Deolu  successfully  sue   Eko’s  Private  Park  for   the   injuries   he sustained as a result of the park’s   negligence?

 REFERENCES/FURTHER READINGS

BELL, MALCOLIN W: The Law of Contract: Elements and Terms in Corporate Law. The open University of Hong Kong 2001

BLACK’S LAW DICTIONARY 7th Ed.

CURZON. B Dictionary of Law 3rdEd.

FOGAN. P. Law of Contract malthouse Press Ltd. Lagos 1997.

OYAKHIROMEN & ANOR: Compendium of Business Law in Nigeria, 2004 MACMILLAN C. AND STORE R: Elements of the law of Contract Univ. of London Extenal Programme, 2003

TRIETEL, G. H: The Law of contract 8th Ed. 1991

WADDAM S: The Law of Contract 3rd Ed. 1993.77