Business Law Report: Analyzing Exemption Clauses and Liabilities

This report provides a detailed analysis of exemption clauses within the context of business law, using a factual scenario to illustrate their application. It begins by defining exemption clauses and their role in limiting liabilities, particularly concerning vicarious liability of employers for employee actions. The report then delves into the validity of these clauses, discussing incorporation through notice and signing, and the significance of the Unfair Contract Terms Act 1977 and the Consumer Protection Act 2015. The application of legal frameworks, including the requirement for clear wording and reasonableness, is examined through case law such as Thornton v. Shoe Lane Parking Ltd., L'Estrange v. Graucob, and Ailsa Craig Fishing v. Malvern. The report concludes by emphasizing the importance of compliance with consumer protection laws and the limitations of exemption clauses in cases of negligence, providing a comprehensive overview of the legal considerations surrounding these clauses.

BUSINESS LAW

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Factual Scenario..........................................................................................................................1
Validity of Exemption Clause.....................................................................................................1
Application of Legal Framework................................................................................................4
Application of law on facts.........................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
It is critical for every business organization to stay aware of all the rights and obligations
which contract law imposes on each of them. It is imperative to understand that a signed contract
has the effect of binding all the parties to the specific terms of contract. In pursuance to the same
businesses and their owners can be made liable for breach of any of the clauses. One of the
greatest concerns which the businesses often face is that in relation to vicarious liability, in
furtherance to which employers are made liable for negligent actions of their respective
employees. Hence, in order to protect the interest of ones business, the term of exclusion is often
included by the entities in their contracts (Lawson, 2011). This plays as one of the vital factors
which purports to protect the organizations from certain uncalled liabilities. However,
application of these terms is subject to certain exceptions which have been discussed in the
present project with the assistance of a business scenario.
Factual Scenario
The dining room for senior staff members has been refurnished by introduction of various
modern catering facilities. Some of the significant additions are in the form a coffee vending
machine as well as a small freezer. These two appliances were bought from Electrical Hardware
Suppliers and in order to install them the entity had sent for their own plumbers, who are
working in the name of Satisfaction Plumbers. The vending machine was connected and was
being used by the staff members for about two months. However, it was observed that many
people had fallen sick after consumption of coffee and were also complaining about the peculiar
taste it had. Furthermore, the freezer so installed was also not working properly and had broken
down to ruin all the food articles. A compliant was made to the Suppliers, pursuant to which an
engineer came to check the installation. He was shocked to discover that the plumbers had
connected the machine to a lavatory pipe instead of drinking water. On getting appraised by this
fact Innocent Plc sued the suppliers. However, they are disclaiming the liability under the
exemption clause, which was mentioned on invoice of appliances, given to Innocent Plc.
Validity of Exemption Clause
Exclusion clauses are the terms which are included in commercial contracts to restrict or
limit the liabilities of one of the parties in the case of certain happenings. For instance if one of
the parties who has breached the contract shall not be required to pay damages to the other party,
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in the event such a situation is covered by the exemption clause. The scope of exclusion clauses
is wide enough to even include the liabilities which are imposed vicariously on the employers. It
is not possible for the owner of business to undertaken each and every activity and hence, the
employees are required to accomplish the tasks on behalf of the owner (McKendrick, 2014).
However, there are many instances wherein the employees do not act in a reasonable manner and
cause harm to others. In such cases the employers are made vicariously liable for all the actions
of their employees. In order to protect from such liabilities the management often includes an
exemption clause in the contract which also covers vicarious liabilities.
The terms can be considered operative only if it is properly incorporated in the contract
with the assistance of an effective notice, it is completely legal and is in relation to only
negligence. Proper incorporation of the exclusion clause refers to the requirement of informing
the other party in respect of inclusion of such a term (Validity of Exclusion Clauses in Contract
Law, 2014). Thus, an actual or constructive notice shall be appropriately communicated to the
other party, before the entire contract comes into effect. In the case of Thornton v. Shoe Lane
Parking Ltd. (1971) it was held by the court that notice of inclusion of an exemption clause shall
be made before the parties enter into the contract. For instance such clauses mentioned at the
back of acknowledgement receipt or tickets cannot be considered as valid, as the purchaser is
only informed after the contract has been entered into by the parties. Thus, it is necessary the
term forms a part of the contract from the beginning. The incorporation of these clauses can be
through signing the contract, by notice or in the course of dealing.
Inclusion of these clauses through contractual documents which are signed by the parties
are considered valid and automatically make the parties bound by all the terms . In the case of
L'Estrange v. Graucob (1934) it was opined by the court that even if the parties sign the contract
without reading the clauses, it shall be considered operative. However, in the event of any
misrepresentation of inclusion of the term, the entire contract or a part of it shall be considered
ineffective. A similar opinion was held in the case of Curtis v. Chemical Cleaning Co. (1951)
wherein it was held that inclusion of exemption clause through a signed document shall always
be considered valid. However, law for unsigned documents it not similar and requires the
concerned party to communicate an actual or constructive notice to the other party. In pursuance
to this law it is also required that the notice shall be reasonable and sufficient enough to inform
the party about inclusion of such a term (Ayres and Schwartz, 2014). In the case of Parker v. SE
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Railway Co. (1877) it was opined by the court that such clauses can only be mentioned or
included through contractual documents. In other words, such documents which a reasonable
person would assume to be comprised of terms of contract. Inclusion of these terms in normal
documents which are generally given in the form of acknowledgement receipt or a ticket.
Further, in the case of Chappleton v. Barry (1940) it was recognized by the court that the
rationale behind this law is that no reasonable person would expect receipts or tickets to contain
contractual terms, and hence would never be informed about the same (Anson and et. al., 2010.).
Therefore, it is imperative to apply the test of incorporation which validates or invalidates the
exemption terms of a contract.
Further, it is vital for the term to be in compliance with all the applicable legal
framework. The consumer Protection Act requires the businesses to provide services or products
which are fit for the purpose and match the quality standards. Hence, the provisions of these
statute operate to protect the buyers from misleading or deceptive actions of sellers. Any
exemption clause does not have the power to restrict the liabilities arising from breach of any of
the provisions of applicable laws. Therefore, it is vital to to check the legality of these terms.
Further, it is also important that an exclusion clause shall be worded clearly to protect the
concerned party from a negligence. This was highlighted in the case of Craig Fishing v. Malvern
(1983) wherein it was opined by the court that the approach of courts while interpreting such
unclear clauses is to opine against the parties relying on it (Scope and validity of exemption
clauses in contracts, 2011).
Further, in the case of McCutcheon v. Mac Brayne (1964) it was opined by the court that
even if there was an ineffective notice of inclusion of these terms, court shall still consider it as
valid in presence of previous consistent transactions containing such a clause. In furtherance to
the same, in Hollier v. Rambler Motors (1972) it was reiterated by the court that in the case of
private customers, significant number of such transactions shall have been entered into by the
parties (Cartwright, 2016). Another exception which has been recognized by the court in British
Crane Hire v. Ipswich Plant Hire (1974) that inclusion of these term shall be considered valid if
included through general trade usage or custom. Another doctrine which is applicable in this
scenario is that of Privity of contract, in pursuance to which any party who is not a part of the
contract shall be considered as a third party. Moreover, they shall not be protected by application
of such exclusion terms. In the case of Scruttons v. Midland Silicones (1962) it was upheld by
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the court that employees of business organizations who have entered into a contract with another
firm, shall not be protected by operation of exclusion clause mentioned in such a contract, on
undertaking a negligent action (Andrews, 2015). Therefore, it is an established law that
employees shall be considered as a third party in the context of contract entered into between two
parties.
Application of Legal Framework
It is imperative for the exclusion clause to be in compliance with the provisions of Unfair
Contract terms Act 1977 and Consumer Protection Act 2015. The former requires the parties to
draft the clause in a clear and unambiguous manner. The legislation checks the reasonability of
inclusion of such a term in the contract. The application of this statute is limited to all the
liabilities which arise within the course of businesses and such other related liabilities. The Act
provides for some of the specific instances which are unfair in nature and cannot be accepted by
law (Turner, 2013). It is extended to tortious liabilities which arise from undertaking of negligent
actions or under the Occupiers Liability Act, 1957. Section 2 (1) of the Unfair Terms Act provide
a business cannot exclude its liability, through an exclusion clause, for death or personal injury
which has been resulted from a negligent action. In furtherance to the same it has also been
stated that this is an absolute provision and is not subject to need of reasonability. In the case of
Ailsa Craig Fishing v. Malvern (1983) it was held by the court that apart from the above
exception in S 2(1) the parties shall be subject to the test of reasonability (Schwenzer, Hachem
and Kee, 2012.).
Consumer Rights Act 2015 is another legislation which requires the party to provide
products or services which are of reasonable quality and fit to be used for the specific purpose.
The legislation in essence operates to protect the rights of consumers and save them from
inappropriate conduct of traders. Section 49 of the Act requires the service providers to act with
reasonable amount of care and skill while delivering the concerned services to the consumers.
Hence, in the event the trader fails to adhere to the requirement of providing reasonable skills
and care, it shall not be protected from the liability arising from such non-compliances. Further,
Section 65 of this legislation specifically states that no party shall be excluded from the liability
arising from negligent actions which have caused personal injury or loss to others (Poole, 2012).
Thus it can be concluded that every negligent action of business which does not clear the test of
reasonability, shall not be empowered to take recourse under exclusion clauses. In the case of
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Director General of Fair Trading v. First National Park (2001) it was opined by the court that in
the event it is found by the court that the concerned party has failed to exercise reasonable care
and skills while providing the services, then the exclusion clause shall not be considered capable
to restrict the liability.
Further in accordance to Supply of Goods and services Act 1982, every trader is under an
obligation to provide services or goods of proper standards and reasonable quality. Section 3 of
the said Act requires the traders to impose a condition in accordance to which goods delivered
shall be fit to be used (Haigh, 2015). Further in accordance to section 4 of the Act states that the
goods transferred in the course of business shall be of satisfactory quality and reasonably fit to be
used for all the know purposes. In the event the traders are acting in breach of these provisions,
there is no recourse available under Exclusion terms. In accordance to Section 14 of Sale of
Goods act goods or services delivered to the buyers shall adhere to the requirement of
satisfactory quality and shall be reasonable fit for the stipulated purpose (Chen-Wishart, 2012).
In the event of breach of these clauses from the end of seller, the buyer shall be entitled to claim
damages for losses incurred or require specific performance.
Application of law on facts
(i) In accordance to the laid down laws it can be inferred that the Electrical Hardware
Suppliers had provided a freezer which had an inherent defect. In addition the installation
services provided by them through Satisfaction Plumbers also failed to abide by the requirement
of providing reasonably fit services. This can be evidenced by the fact that the plumber
connected the vending machine to the lavoratory pipe, in place of drinking water supply, which
in turn caused personal injuries to many staff members. However, the suppliers are taking
recourse under the exclusion clause which is mentioned on the invoice.
In accordance to the mentioned laws in the previous section, the exclusion clause
mentioned in the facts shall be analyzed. The terms mentioned on unsigned documents shall not
be considered valid, until and unless the other party is specifically informed about the same. In
the instance case no such notice can be seen to be communicated to Innocent Plc. However, at
this point it is important to consider the fact that these are the usual suppliers of Innocent Plc,
which implies that there is a possibility that the two parties have been consistently dealing in the
same manner, and such exclusion clauses have been a part of all the previous dealings. In
accordance to the law followed in McCutcheon v. Mac Brayne (1964), such inclusion of
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exemption clause shall be considered valid, irrespective of being communicated through the
invoice (Qing-lin, 2011). Hence, the exclusion clause mentioned on the invoice given to Innocent
Plc by the suppliers is completely valid in nature as it has cleared the test of incorporation.
Further, it is important to assess the compliance of various legislations which are made
applicable on the suppliers. Firstly, in accordance to varied above mentioned provisions of
Consumer Rights Act 2015, Sale of Goods Act and Supply of Goods and services Act 1982 the
supplier is under an obligation to exercise reasonable care and skills in providing the services.
Moreover, it is also required by the supplier to provide services which are fit for the stipulated
purpose. However, the supplier has failed to abide by the requirements of these provisions as the
plumber connected the coffee vending machine with the lavatory pipe which in turn caused
personal injuries to various staff members. This action has attracted Section 2 (1) of the Unfair
Terms Act which clearly states that a business cannot exclude its liability, through an exclusion
clause, for death or personal injury which has been resulted from a negligent action (Pretorius,
2010). In furtherance to the same the suppliers cannot take recourse under the exclusion clause as
the staff members of the company have sustained personal injuries.
In addition, there is a question of legality involved as the supplier has failed to provide
services and goods of satisfactory quality, which are fit to be used, in accordance to Consumer
Rights Act 2015. There exists a clear non-compliance of the provision from the end of supplier.
This further restricts the application of this exclusion term and makes the supplier liable to pay
the requisite damages. Thus, Electrical Suppliers shall be imposed with a contractual liability
against Innocent Plc as they were bound by the terms of contract to act in a reasonably skilful
manner. Further, the sale of goods act require the parties to provide goods of satisfactory
quality , however, the suppliers have failed to adhere by the same as they provided a freezer
which broke within a period of two months. Thus, in this case also the suppliers cannot take
recourse under exclusion clause to restrict the imposition of contractual liability.
(ii) Further, in the case of liability which is imposed on the suppliers directly against the
staff members shall be tortious liability. The rationale behind the same is that the contract which
was entered into was between innocent Plc and Electrical Suppliers. In Scruttons v. Midland
Silicones (1962) it was opined by the court that employees of the companies shall be considered
a third party to the contract which is formed with the suppliers or other stakeholders. This infers
that there does not exist privity of contract between employees of Innocent Plc and the suppliers.
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In light of the same it can be concluded that there does not exist any contractual liability of
Electrical Suppliers against the staff members. However, in accordance to the law laid down in
Donoghue v. Stevenson (1934) there exists a tortious liability on the Suppliers against the the
employees who have fallen sick. The suppliers were under a specific duty to act in a reasonable
manner and install the appliance in the correct manner. However, there is breach of this specific
duty as the plumber failed to connect the water supply pipe to the vending machine. Further, the
breach of this duty has led to causation of damage to the employees who have fallen sick only
after consumption of coffee from the said machine. Lastly, the consequence of the same was not
remote in nature and could have been foreseen easily by the plumbers if they had acted in a
reasonable manner. Thus, all the elements of negligence have been established in the present
case, which clearly imposes the tortious liability on Electrical Suppliers against the staff
members.
CONCLUSION
It can be inferred from the above discussion that traders are under an obligation to act in a
reasonable manner while providing services or goods to their stakeholders. Contractual liability
in such cases can be imposed on either of the parties in case of direct breach of any of the terms
of contract. The exemption clauses act a shield to protect the organizations from different forms
of liabilities which can be imposed on them in the course of business. However, it is imperative
for the entities to assure that such a term is incorporated in a proper manner and is absolutely
legal in nature. Once these factors are complied with the concerned party shall be entitled to take
recourse under the exemption clauses.
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REFERENCES
Books and Journals
Andrews, N., 2015. Contract law. Cambridge University Press.
Anson, W. R. and et. al., 2010. Anson's law of contract. Oxford University Press.
Ayres, I. and Schwartz, A., 2014. The no-reading problem in consumer contract law. Stan. L.
Rev. 66. p. 545.
Cartwright, J., 2016. Contract law: An introduction to the English law of contract for the civil
lawyer. Bloomsbury Publishing.
Chen-Wishart, M., 2012. Contract law. Oxford University Press.
Haigh, R., 2015. Legal English. Routledge.
Lawson, R. G., 2011. Exclusion clauses and unfair contract terms. Sweet & Maxwell.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Poole, J., 2012. Casebook on contract law. Oxford University Press.
Pretorius, C. J., 2010. Exemption Clauses and Mistake: Mercurius Motors vs Lopez 2008 3 SA
572 (SCA). Browser Download This Paper.
Qing-lin, Z. H. O. U., 2011. On the Validity of Standard Form Exemption Clauses: Concurrently
on the Conflicts between Contract Law and Its Judicial Interpretation [J]. Modern Law
Science. 4. p. 022.
Schwenzer, I., Hachem, P. and Kee, C., 2012. Global sales and contract law. Oxford University
Press.
Turner, C., 2013. Unlocking contract law. Routledge.
Online
Scope and validity of exemption clauses in contracts, 2011. [PDF]. Available through:
<http://bclr.com/pdf/BCLR_ahead_newsletter_march_2011.pdf>. [Accessed on 28th
February 2017].
Validity of Exclusion Clauses in Contract Law, 2014. [Online]. Available through:
<http://www.dangelolegal.com.au/news/validity-exclusion-clauses-contract-law/>.
[Accessed on 28th February 2017].
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