HOW TO MINIMIZE BUSINESS EXPOSURE THROUGH USE OF ‘UNUSUAL’ CLAUSES
A.?? Introduction
A manufacturing company had contracted a security company to guard its warehouse. To this end, the security company charged the manufacturing company KES 25,000 per guard every month. In turn the security company was to pay the guards the agreed salary. The security company would avail 2 guards for the daytime and 2 for the night time.
One Sunday morning when the warehouse is usually closed, the guards colluded with some employees of the manufacturing company and stole goods worth millions of shillings. The guards and the employees were arrested, charged, convicted and imprisoned for the theft. The manufacturing company sought to have the security company compensate it for the loss. However, on perusal of the contract, it was noted that it contains a clause limiting the security company’s liability to KES100,000 and even then, only when the employee was acting within the scope of his employment. This meant that the manufacturing company had no recourse against the security company because the security guards were on a ‘frolic of their own’, so to speak. In any event, the amount the security company would have paid was insignificant compared to the value of the goods stolen. It would be therefore not worth pursuing the claim[1].
Such clauses are known as exemption clauses. These are clauses in a contract that either limit or exclude a party’s liability to the counter party, for instance in case of breach of contract. This is mainly by attempting to constrict the scope of a party’s duties and obligations under the contract or setting out a party’s right to remedy in the event of breach. ?They are to be found in many types of contracts including IT and technology, construction, insurance, transport, and hospitality.??
In this article, the authors seek to explore this vital area in commercial contract law with the objective of;
i.?Drawing attention to unusual or onerous clauses, also known as exemption clauses;
ii.?Giving general guidance as the rationale, and how courts interpret such clauses; and
iii.?Getting parties to be more deliberate while negotiating commercial contracts to either limit or exclude liability.
B.?? Types of Exemption Clauses
There are two main types of exemption clauses:
i.??Limitation clauses?
Limitation clauses are a type of exemption clause that cap a party’s liability irrespective of the actual loss. The limitation clause caps liability, either for specific types of losses or all of them.
ii.??Exclusion clauses?
Exclusion clauses seek to exclude specific types of liability from the contract.
C.?? Why Exemption Clauses?
Many commercial contracts will have a contract value which is higher than the contractual risk. Therefore, exemption comes in handy to minimize this risk.?
For businesses dealing with consumer goods, exemption clauses are effective because the seller cannot be sure how the buyer will use the products. The seller would want to limit its liability in the event of misuse.?
D.?? History
The history of the English courts’ approach to the contractual clauses excluding or limiting liability was comprehensively traced by Lord Denning M.R. in?George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd.[2]
The history shows that for some years in the development of the common law, the English court introduced the doctrine of?“fundamental breach”?of a contract to obviate injustice which may be caused by an exemption clause in certain cases.? Under that principle, if a party with superior bargaining power, especially in standard form contracts, was guilty of breach of the contract which went to the root of the contract, he would not be permitted to rely on the exemption clause in the contract which absolved him from liability entirely.? That principle was? reversed by House of Lords and in some cases by Legislative intervention.?
In?Photo Production Ltd. vs. Securicor Transport Ltd.[3], the House of Lords discarded the doctrine of fundamental breach holding that there was no rule of law by which an exemption clause in a contract could be eliminated from consideration of the parties’ position when there was a breach of contract, whether fundamental or not or by which such a clause could be deprived of effect regardless of the terms of the contract.
The English Parliament has regulated the application of exemption clauses in one way or another in various statutes e.g. Supply of Goods (Implied Terms) Act, 1973; The Unfair Contract Terms Act 1977; The Sale of Goods Act 1979 and in Consumer Contracts Regulations, 1994.
Thus, under English law, the standard form contracts containing exemption clauses are in some cases governed by common law and in others, by statute.
In Kenya however, such contracts are purely governed by the common law.?
E.??Case law sampling
1.??? Ailsa Craig Fishing Co. Ltd. vs. Malvern Fishing Co. Ltd.[4]
The House of Lords applying George Mitchell (Chesterhall) Ltd. vs. Finney Lock Seeds Ltd (above), held that a limitation clause was not subject to the very strict principles of construction applicable to clauses of complete exclusion of liability or of indemnity.
Lord Wilberforce said in part[5]:
“Whether a condition limiting liability is effective or not is a question of construction of that condition in the context of the contract as a whole.? If it is to exclude liability for negligence, it must be most clearly stated and unambiguously expressed, and, in such a contract as this, must be construed contra proferentem.? …… Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion; this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives and possibly also the opportunity of the other to insure”.
Lord Fraser of Tullybelton on his part said[6]:
“There are later authorities which lay down very strict principles to be applied when considering the effect of clauses of exclusion or of indemnity.
…………………………….
In my opinion, these principles are not applicable in their full rigour when considering the effect of conditions merely limiting liability.? Such limitations will of course be read contra proferentem and must be clearly expressed, but there is no reason why they should be judged by the specially exacting standards which are applied to exclusion and indemnity clauses.? The reason for imposing such standards on these conditions is the inherent improbability that the other party to a contract including such a condition intended to release the proferens from liability that would otherwise fall on him.? But there is no such high degree of improbability that he would agree to a limitation of the liability of the proferens, especially when ……… the potential losses that might be caused by the negligence of the proferens or its servants are so great in proportion to the sums that can reasonably be charged for the services contracted for.? It is enough in the present case, that the condition must be clear and unambiguous”
2.?? Mott MacDonald Ltd v. Trant Engineering Ltd[7]
Trant is an engineering contractor was engaged by Mott, an engineering consultancy, to construct a new power station. A dispute arose and Trant commenced proceedings,. Parties then entered into a Settlement and Services Agreement (“SSA”) was entered into to settle the dispute. Under the SSA, Mott was to provide certain services with respect to Trant’s work on the power station. The SSA contained clauses limiting and excluding the liability which Mott would otherwise have to Trant in the event of a breach of the SSA.
A dispute arose under the (SSA) and Mott commenced proceedings against Trant for unpaid payments amounting to approximately ￡1.7 million. Trant countered Mott’s claim asserting that it was Mott which had “fundamentally, deliberately, and wilfully breached its obligations under the SSA” by failing to complete the required design.
Trant alleged that, as a consequence, it had suffered a loss of approximately ￡5 million. Mott argued that even if the breaches were to be established and were found to have been fundamental, wilful, or deliberate, the exclusion and limitation clauses in the SSA would nonetheless operate to exclude or limit its liability. The relevant part of the relevant clause limited Motts liability in “contract or in tort, in negligence or for breach of statutory duty or otherwise, …to ￡500,000…”
The Court upheld Mott’s argument. In doing so, the court cited?Photo Productions Ltd v. Securicor Transport[8] in which the House of Lords rejected the former doctrine that an exclusion clause did not operate to prevent liability where a contract had been brought to an end by a fundamental breach by the party seeking to rely on such a clause (the ‘fundamental breach’ doctrine). The Lords in that case set out the correct approach to the construction of exclusion clauses as:
3.?? Goodlife Foods Limited v Hall Fire Protection Limited[11].
Goodlife contracted Hall Fire to install a fire suppression system at its factory. Clause 11 of the standard terms and conditions sought to exclude all liability as a result of Hall Fire’s negligence. After the system was installed, a fire broke out at the factory which the system failed to stop. The factory burned down and Goodlife suffered extensive losses, far in excess of the price of the contract with Hall Fire.
Goodlife sued Hall Fire for damages to recover its losses from the fire. Hall Fire sought to rely on an exclusion clause in its standard conditions of contract. Hall Fire had also, on the first page of its standard conditions, drawn Goodlife’s attention to the specific conditions containing the exclusion clause.
The Court ruled that the clause was binding on the parties and held that the exclusion clause was not "particularly onerous or unusual" as this depends on the "context of the contract as a whole".
4.? In Blu-Sky Solutions Ltd v Be Caring Ltd[12]
Blu Sky, a supplier of mobile phones and telecommunication services, brought proceedings against Be Caring Ltd ("Be Caring"), a social care provider, under a contract for the supply of a mobile network service to Be Caring, in which BSky was to provide connections for 800 mobile phones for a minimum period of 48 months for a monthly rental of ￡9,600. Blu-Sky had an agreement with the third party as the network provider for its mobile phones.
Be Caring signed an order form which purported to incorporate, by reference, the standard Terms & Conditions (STCs). The STCs contained a clause which stated that if a customer sought to cancel before the connection of the telecom services with the network provider, the customer would be subject to a ￡225 ‘administration charge’ per connection. Be Caring cancelled the order after signing the order form but before connection of the telecom services with the third party. Blu-Sky claimed it was owed ￡180,000, being the ￡225 administration charge for each of the 800 connections.
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The High Court held that a clause within those terms that required the customer to pay early cancellation fees had not been incorporated into the contract, on grounds that it was onerous and the supplier had not done enough to draw the customer’s attention to it.
The judge reiterated the settled principle that a condition which is “particularly onerous or unusual” will not be incorporated into the contract, unless it has been fairly and reasonably brought to the other party’s attention. ?Furthermore,?“the offending clause itself was … cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate” and Bly-Sky made no attempt to draw it to Be Caring’s attention before the order form was signed.
5.?? Securicor Courier (K) Ltd v Benson David Onyango & another[13]
Benson David Onyango took two parcels to the offices of Securicor Courier, at Thika for delivery to his wife at Naivasha.? One of the parcels contained a Sony Television and the second parcel, a JVC system.? This was not known to Benson. Their total weight was 34 kilograms.? He was charged Kshs.980 for the service.? He signed the Consignment Sheet which contained Conditions of the Service overleaf.?? The goods were received at Securicor Courier’s premises at Naivasha by one Julius. Thereafter Julius received a telephone call from a man calling himself Benson Onyango who told him that he would send one John Abuto to collect the goods.? Shortly thereafter, a man who identified himself as John Abuto arrived at the offices of the Securicor Courier ?at Naivasha.? He had the parcel numbers and the goods were released to him after signing for them.? Benson went to the Securicor Courier’s offices at Naivasha about half an hour later to collect the goods.? He was informed that the parcels had already been collected by John Abuto.? Benson denied authorizing John Abuto to collect the goods.?? On those facts, Benson sued Securicor Courier for? negligence? and? breach of contract of carriage.? Securicor Courier denied negligence or breach of contract and further pleaded that the contract limited the appellant’s liability for loss or damage to goods at KES 1,000/=.
The trial magistrate agreed with Benson and awarded him KES 25,000/= being general damages for breach of contract and KES 76,150.90 being special damages (value of the goods).
Securicor Courier appealed to the High court against the quantum of damages only contending that the subordinate court erred in awarding more than KES 1,000/= being the maximum liability under the contract and in awarding general damages for breach of contract.? The High court dismissed the appeal in its entirety by reasoning that:
“The provision [a claim for loss of the items conveyed will not exceed a maximum of KES 1,000/= for every item or KES 20,000/= in any one year] is at the back of the receipt to which the client is referred at the front thereof.? Further, the clerk who received the parcels did not appear to have drawn Bensons attention to the conditions of service.”
On further appeal to the Court of Appeal, the Court held: -
“The fact that the exemption clause is in small print and at the back page of a contract is not a valid ground for rejecting such a clause.? Moreover, the findings of the superior court that literate persons would never have time to read such clauses and that courier companies do not have competent counter clerks were mere speculation as they were not based on any evidence.
That notwithstanding, the statement of the law by the superior court to the effect that a party cannot be bound by a contract which has not been brought to his attention is no doubt correct.? Indeed, where clauses incorporated into a contract contain particularly onerous or unusual condition, the party seeking to enforce that condition has to show that he did what was reasonably sufficient to bring it to the notice of the other party, otherwise, the condition does not become part of the contract.?
An exemption clause can be incorporated in a contract by,?inter alia, signature or notice.? Generally speaking, if a party signs contractual documents containing an exemption clause, he is bound by it even though he has not read the terms, unless he signed the documents through fraud or misrepresentation.”?
The Court of Appeal also held that the justification for enforcing such clauses is that the risk that the defending party may be exposed to might be so great in proportion to the sums that can reasonably be charged for the services contracted for; and that the other party has the opportunity to insure.?
F.??? When are exemption clauses enforceable by the court?
From the above case law, which are by no means exhaustive, courts tend to look more favourably on limitation clauses, while being suspicious of exclusion clauses as they take away all responsibility. They are enforceable;
i.?if signed.
ii.?by notice. The party seeking to exclude liability must take “reasonable steps” to draw the other party’s attention to it before or at the time they make the contract.
iii.?if there’s been a “previous course of dealings”.
G.?? Common exclusions in IT contracts
These will often exclude liability for, amongst other things:
???? i.?Indirect and consequential losses;
??? ii. Loss of profits;
?? iii.?Loss of savings;
?? iv.?Loss of business; and
??? v.?Loss of goodwill.
H.?? Tactics in Allocating Risk
Identify main risks. Consider the likely extent of loss you might suffer if the other party defaults. For example, typical initial questions on risk in a technology contract might cover what loss might be caused by the following:
I.???? Conclusion
From the above, we trust we have persuaded you that having clear? and enforceable exemption clauses requires a deliberate and ‘all hands on the deck’ approach. The mistake many parties make is to leave it to their legal advisors to incorporate the clauses. Then the legal advisors, with little or no robust consultation with the client, just incorporate the clauses by simply copying the same from other, sometimes unrelated contracts. Sometimes, they don’t, leaving the client totally exposed.
Authors: Daniel Musyoka , Maxwell Maelo and Solomon Opole
[1] This is a true case but the parties’ identities have been omitted for confidentiality purposes
[2] [1983] 1 All E.R. 108 from page 111 – 117.
[3] [1980] 1 All E.R. 556
[4] [1983] 1 All E.R. 101
[5] at page 102 -103 j
[6] at page 105 h – j
[7] [2021] EWHC 754 (TCC)
[8] Ltd?[1980] AC 827
[9] (Arnold v. Britton?[2015] UKSC 36 [2015] AC 1619).
[10] (Rainy Sky SA v. Kookmin Bank?[2011] UKSC 50 [2011] 1 WLR 2900).
[11] [2018] EWCA
[12] [2021] EWHC 2619
[13] [2008] eKLR
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