EXCLUSION CLAUSES, FUNDAMENTAL TERMS AND FUNDAMENTAL BREACH

CONTENTS

INTRODUCTION

Apart from the terms usually inserted into a contract by the parties thereto, parties are also, free to limit or exclude the obligations otherwise attached to such undertaking. It is the importance and the significance of inserting exclusion or exemption clauses and limiting terms that is our concern in this unit.

OBJECTIVE

The objective of this unit is to bring out the importance and conditions of insertion of exemption clauses and limitation terms in the body of a contract in commercial transaction and the effect of fundamental breach on exclusion clause.

MAIN CONTENT

Exemption Clauses

An exemption clause or exclusion clause is a term in a contract which seeks to exempt one of  the  parties  from  liabilities  in  certain events. Where the term merely limits (rather than wholly excludes) liability, it is called a limiting clause. However, the governing principles are the same in both cases.

The courts have, over the years, made appreciable success in controlling unreasonable exemption clauses, and have fully developed principles which govern their validity.  These  principles are summarized as follows:

• The document containing the exemption clause must be an integral part of the contract between the parties.

In this regard, the courts have always insisted that the contract in which the exemption clause is written must be a contractual document, for it is only when the contract is a  contractual document that the exemption clauses therein contained can be a term of the contract and as such, bind the party against whom it is inserted. The contract may become a contractual document and so form part of the document in two ways:

1. The document must be signed by both parties to the contract.
2. Notice of the exemption clause is given to the affected party within reasonable time, before or at the time  of contracting  and  the affected party already knows of the clause.

The general rule is that the burden is on the party wishing  to rely  on the exemption clause to establish that the other party was aware of the exemption clause or ought to have been aware of it having regard to all the circumstances.

It is therefore, obvious that an exemption clause cannot be unilaterally introduced into a contract after its completion. Thus, an attempt to introduce  an  exemption  clause  in   a   receipt,   which is generally not regarded as a contractual document, would not  make it a term of the contract, and would, therefore, not bind the person who received it.

• Any ambiguity, or other doubt, in an exemption clause must be resolved contra proferentem. The contra proferentem rule states that it is a basic principle of the common law that an exemption clause must be constricted strictly against the party relying on it.  Therefore, in considering the validity of an exemption clause, the courts resolve any ambiguity or other doubts in the clause against the person who is seeking to rely on it; that is, against the person who is proffering it.
• If the plaintiff signed the document containing an exemption clause by reason of fraud or misrepresentation perpetrated by the defendant or his agent, the plaintiff is not bound.

Generally, if a person signs a contractual  document,  he is bound  by its terms, including any exemption clause it may concern, whether he read the document or not. But this rule does not apply where the plaintiff is induced to sign the document by fraud or misrepresentation on the part of the defendant or his agent.

• Third parties are not protected by the exemption clause
• No exemption clause, however wide, can operate if it is contrary y to statute.
• No exemption clause can operate if it is inconsistent with  a  Term of the Contract
• If the party seeking to take advantage of either the exemption or the limitation clause acts outside the four walls of the contract.
• If the exemption clause is repugnant to the main object and purpose of the contract.
• A party who is guilty of a fundamental breach of contract, if the contract can be so construed, be disqualified from Relying on an Exemption Clause.

SELF ASSESSM ENT EXERCISE 1

• What are exemption clauses?
• Examine the rules that govern the validity of exemption clause.

The Concept of Fundamental Terms

The courts have in recent years developed the concept of “fundamental term” which insists that the operation of an  exemption or limiting clause will be subject to the doctrine of fundamental terms.

Under this doctrine, no person is allowed to take shelter under the provisions of an exemption clause, notwithstanding how wide the clause is expressed, if the breach of  the  contract  is  substantial and affects the very purpose of the contract. In  every  contract, there are some central obligations, the non-fulfillment of which renders the contract meaningless.

An exemption clause will not avoid a party who is in  breach  of  such obligation and like a condition, a breach of  a  fundamental term may entitle the innocent party to an action for damages and repudiation of the contract.

Fundamental terms imply that there is a fundamental obligation  of a contract of sale to deliver the goods contracted for In Karoles (Harrow) Ltd V Wllis (1956)2 ALL E.R.  866.  The  defendant agreed to buy a Buick Car from the plaintiff under a hire-purchase agreement which provided, inter alia, “no condition or warranty that the vehicle is road worthy or as to its usage, condition or fitness for any purpose is  given by the owner or implied herein”. The car was  left in the defendant’s premises one night and on inspection the defendant found that it was badly damaged. The cylinder head was off, all the valves were burnt out, two pistons were broken and it  was incapable of propulsion. The defendant refused to accept delivery of it. The court of Appeal held that the exemption clause could not avail the plaintiffs, for they supplied something entirely different from that contracted for by the defendant. In other words there was a breach of fundamental term  of the contract and not a fundamental breach of the contract.

SELF ASSESSMENT EXERCISE 2

Examine the concept of fundamental terms.

Fundamental Breach

Generally, a fundamental breach should not be confused with fundamental terms because of their similarity. They  are  two different concepts. Where there is a breach of a fundamental term, the innocent party may sue for damages as well as repudiate the contract, and any exemption clause in the contract cannot avail the part y in breach against the innocent party.

A fundamental breach has been described by UpJohn, L.J. in Charter House Credit Co. Ltd. V Toll (Supra) as:

“No more than a covenant shorthand expression of saying that a particular breach or breach  of  contract  by  one party is or are such as to go to the root of the contract which entitles the other party to  treat such breach or breaches as a repudiation of the whole contract”.

A fundamental breach does not mean that he  fundamental obligation has been broken, but that  the  breach  or  breaches which have occurred together strike at the root of the contract.  Thus, Charter House Credit Co. Ltd. V Tolly (Supra)  although  the vehicle delivered was defective, it was still a car  within  the terms of the agreement.  Therefore,  there  had not been a breach of a fundamental term. However, the principal defect was so serious that it constituted a fundamental breach of the contract.

The new governing principle, of exemption clauses in relation to fundamental term, as laid down by the House  of  Lords  in  the cases of Suisse Atlantique Case (1967)1 A.C 361 and Photo Productions Ltd v. Securicor Transport Ltd (1980)1 ALL E.R. 596 are as follows;

a)   A distinction must be drawn between breach of a “fundamental terms” and “a fundamental breach”. A fundamental term is  the  same as a condition, and therefore, breach of a fundamental term is the same as breach of a condition. A fundamental  breach  amount to the same thing as total non  performance  of  the  contract.

1. There is no rule that an exemption clause can never apply where there has been a breach of a fundamental term or a fundamental breach. This is because the parties are  free  to agree to whatever exclusion or modifications of their obligations they choose.
2. It is a question of construction whether an exemption clause applies or not in the event that have happened.
3. If, after a breach of a fundamental term or a fundamental breach, the innocent party elects to affirm the contract and continue with  it, he is bound by all its clauses, including an exemption clauses unless the contract can be otherwise construed. If, on the other hand, the innocent party elects to repudiate the  contract,  the  whole contract, including the exemption clause, comes to an end.

SELF ASSESSMENT EXERCISE 3

Discuss the concept of fundamental breach

CONCLUSION

Exemption clauses, the concept of fundamental term and fundamental breach are principally interwoven to the extent that there is no way a discussion on one will not necessarily affect the other. This, therefore, is what the learner should look out for.

SUMMARY

Exclusion clause, limitation terms fundamental terms and fundamental breach are all technical terms used in the creation of a contract in commercial transactions. A proper understanding of this term will be of immense advantage to the learners.

TUTOR-MARKED ASSIGNMENT

• What are exemption clauses?
• Examine the   rules  that   govern  the  validity  of   exemption clauses in a contract.
• Define fundamental terms
• Fundamental breach    is    actionable    in    law    subject    to Discuss these rules.

        REFERENCES/FURTHER READINGS

Kingsley Igweike (1993). “Nigeria Commercial Law: Agency.” Jos, Nigeria: FAB Educational Books.

Sagay; (1991). “Nigeria Law of Contract.” Ibadan.

J. A. M. Agbonika and J. A. A. Agbonika, Sale of Goods (Commercial Law), 2009, Ababa Press Ltd

C.J. Okoro (2013), Business Law for Professional Exams, MaltHouse Press Ltd