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Exclusion clauses in contracts

Parties often insert exclusions clauses into contracts because they are not willing to accept full responsibility for contractual breaches or negligence on their part.

There are three main types of exclusion clauses: those which limit liability altogether, those which limit a party’s liability to a specific sum of money, and those which make liability limited to certain circumstances. These clauses are legitimate given the principle of freedom of contract. However, two important principles must be met. The clause must be properly incorporated into the contract and must sufficiently cover the liability in question.

Incorporation 

Unless the exclusion or limitation clause is incorporated into the relevant contract, it will be unenforceable. There are five main methods of incorporation:

  • Signature
  • Reasonable notice
  • Course of dealing
  • The acceptance of an offer made in a ticket
  • By Reference

Signature 

The simplest way of incorporating an exclusion clause is to have the other party sign that contract containing the clause. A person who signs a contract containing an exclusion clause will be bound by it as an express term of the contract, even if they have not read it.

When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.

L’Estrange v Graucob Ltd has been approved in Australia in Wilton v Farnworth and considered by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.

Rights and liabilities regarding contracts are to be determined objectively rather than by the parties’ subjective intentions.

The test is what a reasonable person would understand the terms to mean given the surrounding circumstances. A reasonable person signing a contract recognises it is a legal document and agrees to be bound by those terms by signing the document. The principle applies if a person signs a contract that incorporates standard form general conditions.

However, the principle is subject to any vitiating factors such as any equitable or statutory relief available, whether the clauses have been misrepresented to the party or in circumstances of non-est factum.

Reasonable Notice 

Issues regarding incorporation generally arise where the parties have not signed a memorandum. In such circumstances, the terms can be incorporated by way of reasonable notice. In such circumstances, if the party did all that was reasonable to bring the clause to the attention of the other party, then that party will be bound by such a clause even if they did not read the term.

That person must additionally prove, given the circumstances, that the document containing the clause was not merely delivered to the recipient as merely a voucher or receipt.  In Causer v Browne a dry cleaning docket contained printed words on the front claiming no responsibility would be accepted for any loss or damage to garments however caused. However, the dry cleaners could not rely on this clause because, in the circumstances, the docket might reasonably be understood to be a voucher for the customer to pick up goods rather than form part of the contract.

Unless a course of dealing can be established between the parties, then notice must be given prior or contemporaneously with entry into the contract.

In Olley v Malborough Court Ltd [1949] 1 KB 532, the defendant could not rely on a sign in the hotel room excluding liability for negligence. The contract was entered into in the lobby when the client booked and paid for the hotel room, and notice given after the contract has been made is ineffectual.

Course of Dealing 

Contracts are often entered into over the phone, and dockets or ‘sold notice’ containing terms are often provided when goods are delivered, or services are provided. Suppose the person relying on the exclusion clause can prove that the dealings between the parties have been consistent and sufficiently long. In that case, they can claim that knowledge of the exclusion clause can be inferred. The customer will be considered to have received reasonable notice at some stage in those dealings even though the customer has not taken the trouble to read the clause.

This was the case in Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association.

The plaintiff provided ground nuts to SAPPA under oral contracts. They provided deliveries three or four times per month. When the stock was delivered, they handed over a ‘sold note’ which said that conditions of sale were on the back of the notice. Such clauses were taken to form part of the contract. The dealings were sufficiently long, and it was inferred that by the defendant’s actions, accepting the goods and never objecting to the terms, he accepted the goods under the terms set out on the notice even though he had never actually bothered to read the terms.

Ticket Cases

Where a party makes an offer on a document, usually a ticket of some description, the other party’s decision to keep the ticket indicates he has accepted the terms and entered the agreement.

The party relying on the ticket must give reasonable notice that the ticket is a contractual document.

However, the principle will not apply if there is no ability to reject the ticket and negotiate the terms.

Three questions are to be applied in ticket cases. Did the person receiving the ticket know there was writing on it? Did that person know that writing represented contractual terms? And finally, did the person relying on the terms adequately provide notice of the terms to bring it to the other party’s attention? Provided the party provided reasonable notice, it will not matter that the other party has not, in fact, read the terms on the ticket.

Reference 

Parties may record the bare essentials terms of the contract in a document, and the document may refer to and incorporate a set of terms such as standard terms of one of the parties.

The incorporated terms must be consistent with the other terms of the contract into which they are alleged to be incorporated. The written terms of the contract will prevail over any inconsistency in the incorporated provisions.

Does the clause cover the liability in question?

Additionally, the clause must cover the liability in question.

Primary Rule 

In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, the High Court observed that it had in the past authoritatively stated the approach to be adopted in Australia to the construction of exclusion clauses. Its view was that the decisions in Sydney City Council v West (see [123,020]); Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353:

‘Clearly established that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appeared including the nature and object of the contract, and, where appropriate, construing any contra proferentem case of ambiguity.’

However, in cases involving negligence, it has been repeatedly said that the exemption clause must be construed strictly and that clear words are necessary to exclude liability.

To exclude liability for negligence, it will be necessary to use the word ‘negligence’ specifically. The law in Darlington Futures Ltd v Delco Australia Pty Ltd and Davis v Pearce Parking Station Pty Ltd has been referred to as the authorities dealing with the proper construction of exemption clauses in many subsequent cases.

ANGAS SECURITIES LTD (ACN 091 942 728) and others v VALCORP

AUSTRALIA PTY LTD (ACN 008 147 671) [2011] FCA 190.  and BestCare Foods Ltd & Anor v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) & Anor [2011] NSWSC 908.

Secondary rules designed to assist in the application of the primary rule

The contra proferentem rule 

Where there is some ambiguity in the clause and the clause cannot be interpreted according to its natural and ordinary meaning, the clause will be interpreted against the party relying on the clause. The words must clearly specify the type of liability excluded, or else the courts will read it down.

The Four Corners Rule 

The four corners rule is stated in Gibaud v Great Eastern Railway Co [1921] 2 KB 426 at 435:

. . . a condition absolving a party from liability, in particular exonerating a bailee from liability for the loss of the goods in his care, is construed as referring only to a loss which occurs when the party is dealing with the goods in a way that can be regarded as an intended performance of his contractual obligations. He is not relieved of liability if, having obtained possession of the goods; he deals with them in a way that is quite alien to his contract’.

This rule was accepted by the Australian High Court in Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 377. The rule applies when there is a grave breach of the contract. An exclusion clause will not cover an act that is neither authorised nor permitted by the main object of the contract. In The Council of the City of Sydney v West (1965) 114 CLR 481, the Council could not rely on the exclusion clause when the plaintiff’s car was stolen from the Domain car park. Read strictly, the exclusion clause did not cover the Council conduct, and they were held liable. However, recourse to this principle of construction may be defeated where the language of an exclusion clause is sufficiently explicit to establish, on the literal reading, that the clause was intended to excuse conduct that lay outside the four corners of the contract.

Stephen is the founder and principal of Stephen Wawn & Associates. Stephen has been providing advice and representation to clients in diverse areas of law for over 40 years.

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DISCLAIMER

No part of these notes can be regarded as legal advice. Although all care has been taken in preparing all notes, readers must not alter their position or refrain from doing so in reliance on any of these notes. Stephen Wawn & Associates do not accept or undertake any duty of care to readers relating to any of these notes. All inquiries should be directed to Stephen Wawn & Associates.

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