CITY UNIVERSITY OF HONG KONG
Exclusion Clauses
Refer to Richards Law of Contract Chapter 8 and
Stone The Modern Law of Contract Chapter 9
A. INTRODUCTION
There are situations where contractual parties attempt to reduce or limit their liabilities
for breach of contract by inserting exclusion or exemption clauses. They can be used in
many contracts to allow parties to allocate risk between them, in order that they can plan
and insure against those risks.
The area is regulated by Statutes but the common law rules are still important as they
apply to all contracts. The statutory provisions were developed in the latter half of the
twentieth century and tend to have a consumer focus. The common law rules were
developed earlier to deal with imbalanced bargaining power between the parties.
B. THE COMMON LAW
The common law surrounding exclusion clauses centres around two main areas:
‘incorporation’ and ‘construction’.
1 Incorporation
The same rules as for all other contracts but court usually apply a strict rule that notice
should be brought of exclusion clauses at the time of the conclusion of the contract.
Olley v Marlborough Court Hotel [1949] 1 KB 532, [1949] 1 All ER 127
An exclusion clause must be incorporated at the time of the conclusion of the contract.
Spurling v Bradshaw [1956] 1 WLR 461
Eight barrels of orange juice found lost in a cold storage. The defendant refused to pay
for the storage charges. The terms and conditions were held to be part and parcel of the
present agreement by virtue of the previous dealings that had taken place between the
parties. So clauses may be incorporated through a course of dealing.
Chapelton v Barry UDC [1940] 1 KB 532, [1940] 1 All ER 701
Exclusion clause on a ticket was not included in a contract as the ticket was merely a
receipt.
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L’Estrange v Graucob [1934] 2 KB 394
Although the clause was in small print, and very difficult to read, however, it is said to
have been incorporated through signature.
Parker v South Eastern Railway (1877) 2 CPD 416
For a clause to be incorporated reasonable notice must be given of the clauses existence.
An exclusion clause was printed on the back of a cloakroom ticket, given in exchange for
the deposit of a bag. Its front contained a number and date, also said ‘see back’. The
overleaf contains various clauses, including one excluding liability for goods over the
value of GBP10. The plaintiff’s bag worth GBP24.50 had been lost. The jury had judged
for the plaintiff.
Spurling v Bradshaw [1956] 1 WLR 461
‘Some clauses which I have seen would need to be printed in red ink on the face of the
document with a red hand pointing to it before the notice could be held to be sufficient’.
Lord Denning p 466:
Thornton v Shoe Lane Parking [1971] 2 QB 163, [1971] 1 All ER 686
Exclusion clauses displayed inside the car park were held not to be incorporated into a
contract which was made by the purchase of a ticket from the machine.
2 Construction
Once a clause has been incorporated into the contract it is important to decide if the
wording of the exclusion clause covers the breach which has occurred.
Construction has been used as a means of limiting the application of exclusion clauses.
(a) Contra Proferentem Rule
An exclusion clause will be interpreted against the person putting it forward. If there is
ambiguity in the language of the clause it will be interpreted in the claimant’s favour.
Hollier v Rambler Motors [1972] 2 QB 71
“The company is not responsible for damage caused by fire to customer’s cars on the
premises. Customer’s cars are driven by staff at owners’ risk.”
‘Fires can occur from a large variety of causes, only one of which is negligence on the
part of the occupier of the premises, and that is by no means the most frequent cause. …
To my mind, if the defendants were seeking to exclude their responsibility for a fire
caused by their own negligence, they ought to have done so in far plainer language than
the language here used’. Salmon LJ p 81
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The clause was not, in effect, an exclusion of liability, but simply a warning that the
defendant was not liable for non-negligent fire damage. If they wanted to avoid liability
due to negligence, this should have been done more explicitly and clearly.
Canada Steamship Lines Ltd v R [1952] AC 192
Three stage test for exclusion of negligence:
1) Express reference to negligence?
2) Are the words used wide enough to cover liability for negligence?
3) If the words used are wide enough, could the party desire protection from some
other form of liability. If he could, and that ground is not so fanciful or remote, it
is likely that the words will be taken to refer to the non-negligent liability only.
(b) Has the position changed since the introduction of UCTA?
Look at the ratio of:
Photo Production v Securicor [1980] AC 827
‘in commercial matters generally, when the parties are not of unequal bargaining power,
and when risks are normally borne by insurance, not only is the case for judicial
intervention undemonstrated, but there is everything to be said, and this seems to have
been Parliament's intention, for leaving the parties free to apportion the risks as they think
fit and for respecting their decisions’. Lord Wilberforce p 843
Can an exclusion clause avoid all liabilities under the contract? This is possible. In this
case, the plaintiff company employed the security company to patrol their property for a
relatively small fee. One of the security company’s employees set a fire for warmth in
the night but brought down the whole property by fire. The plaintiff company sued
Securicor for damages, which then relied on an exemption clause which stated that under
no circumstances would the defendant company be liable for any injuries or default by
any employee of Securicor.
The House of Lords held that the parties were in an equal bargaining position, and
therefore the exemption clause was valid and reasonable in the circumstances. If the
security company had not inserted the exclusion clause and thus laid themselves open to
liabilities, the amount they would charge would have been much greater than this small
fee.
C. UNFAIR CONTRACT TERMS ACT 1977
Chapter 71 Control of Exemption Clauses Ordinance is a replica of the corresponding
UK Statute.
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Standard form of building contracts are subject to the statutory restrictions above. The
common law still must be dealt with before the Act but in the majority of cases the Act
will be determinative.
As UCTA does not apply to all contracts the common law must still be relied upon in
many cases.
In this section we will be dealing with situations when UCTA does apply.
1 Exclusion of Negligence
Negligence is defined in Section 1 of the Act as covering the breach:
(a) of any obligation, arising from express or implied terms of a contract, to take
reasonable care or exercise reasonable skill in the performance of the contract;
of any common law duty to take reasonable care or exercise reasonable skill (but not any
stricter duty);
Section 2 of UCTA (and Section 7 of Chapter 71) deals with exclusions of liability for
negligence:
A person cannot by reference to any contract term or to a notice given to persons
generally or to particular persons exclude or restrict his liability for death or personal
injury resulting from negligence.
In the case of other loss or damage, a person cannot so exclude or restrict his liability for
negligence except in so far as the term or notice satisfies the requirement of
reasonableness.
Where a contract term of notice purports to exclude or restrict liability for negligence a
person’s agreement to or awareness of it is not of itself to be taken as his voluntary
acceptance of such a risk.
2 Standard Term Contracts
Section 3 deals with a common type of contract, the standard form contract:
This section applies as between contracting parties where one of them deals as a
consumer, or on the other’s standard terms of business.
As against that party, the other party cannot by reference to any contract term:
when himself in breach of contract, exclude or restrict any liability of his in respect of the
breach;
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“except in so far as the contract term satisfies the requirement of reasonableness.”
A person will deal as a consumer, under s 12, if:
he neither makes the contract in the course of the business nor holds himself out as doing
so; and
the other party does make the contract in the course of the business.
3 The Requirement of Reasonableness
Section 11(1) sets out the test as being whether the clause was:
… a fair and reasonable one to be included having regard to the circumstances which
were, or ought reasonably to have been, known to or in the contemplation of the parties
when the contract was made.
Guidance can be found in Schedule 2 to the Act which lists five factors which should be
taken into account:
1) The relative strength of the bargaining position of the parties;
2) Whether the claimant received an inducement to agree to the term;
3) Whether the claimant knew or ought to have known of the existence and extent of
the term;
4) Whether it was reasonable to expect that compliance would be practicable; and
5) Whether goods were manufactured, processed or adapted to the special order of
the customer.
Other factors have also been taken into account by the Courts, including:
i)
ii)
The normal practice in the industry concerned (Schenkers v Overland Shoes
[1998] 1 Lloyd’s Rep 498, and Watford Electronics Ltd v Sanderson CFL Ltd
[2001] 1 All ER (Comm) 696);
The ability of the parties to insure against the risk (Overseas Medical Supplies
v Orient Transport Services [1999] 2 Lloyd’s Rep 273).
D. UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS (UTCCR)1999
UTCCR was introduced in 1995 and revised in 1999 and is based on a European
Directive.
They apply only to contracts with consumers, defined in 3(1) as being, ‘a natural
person … acting for purposes which are outside his trade, business or profession’.
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The Regulations apply to any type of standard term which is not ‘individually negotiated’
(Reg 5(1)).
Any ‘unfair term’ will not be binding on the consumer. The test of unfairness in
regulation 5(1) covers:
‘… any term which contrary to the requirement of good faith … causes a significant
imbalance in the parties’ rights and obligations under the contract to the detriment of the
consumer’.
The requirement of ‘good faith’ was previously unknown in English law but is well
known on the European continent.
Director General of Fair Trading v First National Bank [2002] 1 AC 481
‘The requirement of good faith in this context is one of open and fair dealing. Openness
requires that the terms should be expressed fully, clearly and legibly, containing no
concealed pitfalls or traps. Appropriate prominence should be given to terms which might
operate disadvantageously to the customer. Fair dealing requires that a supplier should
not, whether deliberately or unconsciously, take advantage of the consumer’s necessity,
indigence (poor), lack of expertise, unfamiliarity with the subject matter of the contract,
weak bargaining position or any other listed in analogous to those listed in Schedule 2 to
the Regulations.’
Regulation 7 requires that the terms of the contract be in ‘plain, intelligible language’, if
there is any doubt in the meaning of the term this will be interpreted in favor of the
consumer. This gives legislative authority to the common law contra proferentem rule.
Hong Kong’s First Cross-Sector Competition Ordinance CAP 619
The First and Second Conduct Rules and the Potential Implications for the Hong Kong
Construction Industry and SMEs.
The First Conduct Rule
The First Conduct Rule prohibits collusive agreements and understandings between
competitors. For example rival contractors must not agree on their respective bids in a
tender process; and must not share information about their proposed prices at a trade
association meeting. The rule does not apply to small-scale undertakings with a combined
turnover of less than HKD200m) unless the conduct is “serious anti-competitive conduct”.
“Serious anti-competitive conduct” means price fixing; allocation of sales, territories,
customers or markets; limiting or controlling the production of certain goods or supply of
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services; or bid rigging. Even a small undertaking could be liable to prosecution and
penalties if it participates in any of these four kinds of conduct.
Overseas, construction industry businesses have been heavily penalized for engaging in
bid rigging, bid rotation, and cover pricing.
Tips for suspicious bidding – failure to bid
1.
2.
3.
4.
5.
6.
7.
8.
Usually very low or very high bid;
Last minute changes;
Same company always fail to bid;
Attended industrial association;
Joint ventures (may be exempted);
Aware of joint information;
Emails against wording alert; and
Vertical construction agreement may be exempted.
Cannot share information with others!
The Second Conduct Rule
The Second Conduct Rule prohibits abuse of “a substantial degree of market power”,
with the object or effect of lessening competition in a market.
For example, a monopoly supplier of a material must not delay deliveries of its product to
a new entrant to the market, and must not supply it an inferior quality product priced at
the same level as others, intending to force it out of the industry.
The law does not focus on the merely having a substantial degree of market power: it is
the abuse of it to lessen competition that the law prohibits.
There are no statutory definitions on this type of market power but could be one of those
that are found where an undertaking is not constrained in its business decision-making by
the reactions of its rivals and customers. Market shares are relevant but are not decisive
as to whether market power exists. Other factors to be taken into considerations are (1)
ease of entry into the market; (2) the bargaining power of buyers and suppliers; and (3)
the degree of product differentiation are also significant.
There is also a threshold for Second Conduct Rule to be applied. The annual turnover of
the undertakings subjected to this Rule shall be no less than HK$40m (the de minimis
rule, avoid the trivial).
Remedies
The Commission is responsible for enforcing the Competition Ordinance, promoting
public understanding of the competition law, conducting market studies and promoting
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competition compliance measures for businesses. The Commission can, if it thinks
necessary to prove the infringement before the Competition Tribunal.
Warning notice and infringement notice procedures will give undertakings the
opportunity to correct their conduct and avoid prosecution.
The Commission can enter into leniency agreement which provides a person or company
with immunity form pecuniary penalties in return for that person’s cooperation in an
investigation or proceedings.
In other countries, leniency is commonly granted to the first undertaking who defects
from a cartel and who cooperates with the agency in its investigation and prosecution of
other cartel members.
But after imposing himself the whistle blower may suffer damages due to be recovered
under other tortious liabilities such as intellectual properties law.
Dr Eric Cheng
City University of Hong Kong
10 January 2014
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