EXEMPTION CLAUSES AND IMPLIED TERMS IN CONTRACTS JOHN LIVERMORE LLB (Bristol) Diploma in Social Studies (Sheffield) CONTENTS PREFACE CHAPTER ONE Exemption Clauses : The Background 1 CHAPTER TWO Exemption Clauses : The Legislative Response 37 CHAPTER THREE The Deficiencies of the Sale of Goods Act 85 CHAPTER FOUR Statutory Control of Exemption Clauses in Commercial Contracts : Unreasonable- ness or Unconscionability? 134 CHAPTER FIVE Problems of Title and Statutory Warranties 212 CHAPTER SIX Privity of Contract and Exemption Clauses 270 CHAPTER SEVEN Exemption Clauses in Inter-Business Contracts - The Empirical Work 319 CHAPTER EIGHT Exemption Clauses - The Need for Further Control 335 CHAPTER NINE Conclusion 370 POSTSCRIPT 375 APPENDIX A Exemption Clauses : Examples APPENDIX B Draft Provisions for a Supply of Goods and Services Bill (Tasmania) vi PREFACE The current state of the law relating to exemption clauses „1 has been described, fittingly, as "unmanageably complex . These complexities, in part, have stemmed from the past failure of the courts to recognise that examption clauses are an integral part of a contract and should not be ignored in assessing the rights and duties of the parties to the agreement. This thesis has two functions. One is to examine the role and function of exemption clauses in contracts and the choice of controls which can be imposed upon such clauses. The second function is to assess the desirability of reform of the terms implied, chiefly by the Sale of Goods Acts and the Trade Practices Act, in contracts. Since exemption clauses often exclude, restrict or modify implied terms discussion of these terms has been drawn into the body of the thesis. A postscript has been added to include changes foreshadowed by the Trade Practices Amendment Bill 1985 (Clth.) which are relevant to the main parts of the thesis. The law as stated is that applying on January 1, 1986. I would like to thank my supervisors Mr Frank Bates, and Mr Donald Chalmers, respectively Reader and Senior Lecturer in Law in the Faculty of Law, University of Tasmania. Their suggestions, chiefly concerning organization of the material, were detailed and very helpful. I would also like to thank Mr Justice Kirby for his interest in the initial research and his encouragement. I am also grateful to members of the Tasmanian Law Reform Commission, particularly Mr Bruce Piggott, its Chairman and Mr Bill 1. D. Yates Exclusion Clauses in Contracts Sweet and Maxwell 2nd edition (1982), at p.264. Goudie, its former Executive Director for their comments upon earlier drafts and their dedication to reform of the law generally. I would also wish to record thanks to Associate Professor Derek Roebuck, University of Papua New Guinea, who, when Professor of Law at the University of Tasmania, commenced a research interest in 1978 by offering my name to undertake a reference on the thesis topic for the Tasmanian Law Reform Commission. Lastly, but no means least, I wish to record my warm appreciation to Mrs Karen Hanlon and Mrs Kayleen Cooper who produced a clear manuscript from a multiplicity of amendments. John Livermore Senior Lecturer in Commercial Law Department of Accounting and Finance University of Tasmania Ii CHAPTER ONE EXEMPTION CLAUSES: THE BACKGROUND Introduction The term "exemption clause" is generally used as meaning a clause in a contract or a term in a notice which appears to exclude or restrict a liability which would otherwise arise. 1 The term "exclusion clause", however, refers to a clause that sets out to exclude liability. Therefore, at the beginning, it must be made clear that throughout this discussion the wider term "exemption clause" has been used in preference to that of "exclusion clause". The reason for this is as follows: if the term exclusion clause were solely used then there could be no discussion of terms in contracts which restrict liability as opposed to excluding it. In relation to the Trade Practices Act 1974 (as amended) s68 refers to "Any term of a contract ... that purports to exclude, restrict or modify" (or has that effect). For that reason the term "exemption clause" is used throughout the ensuing text. The discussion of "indemnity clauses" is similarly justified in that such clauses have the effect of excluding, restricting, and modifying, in terms of s68. It should be noted that the Second Report on Exemption Clauses stated that an indemnity clause effectively operated as a provision restricting a right or remedy and should 1. See P.K.J. Thompson Unfair Contract Terms Act 1977, Butterworths, (1978) at p.7. See also Second Report on Exemption Clauses, the Law Commission (Law Corn. No69) and Scottish Law Commission (Scot. Law Corn. No.39) (1975) at paras.161-162. See especially B. Coote Exception Clauses, Sweet and Maxwell, (1964) at p.7 and his classification of exemption clauses in Chapter 1; see also Appendix pp.145 et seq. See Law Commission No.95, Implied Terms in Contracts for the Supply of Goods (1979) following Law Commission Working Paper No.71 (1977). For comment on this report see N.E. Palmer (1980) 43 M.L.R. 193. 1 be treated as an exemption clause. One further introductory point needs to be made: an exemption clause may by a contractual provision limit or exclude or modify liability not only in contract but in tort. For example, liability for death or injury to property or persons arising from negligence may be governed by such a clause. Therefore the desirability of extending control of exemption (and indemnity) clauses in contract that have this effect in tort is later considered. The preliminary analysis of the topic of this discussion proceeds in the following sequence. Firstly, the definition of exemption clauses (including indemnity clauses) is dealt with; secondly, the control of exemption clauses under the common law is reviewed, with particular reference to the historical background and to the origins and development of fundamental breach. Thirdly, the principal common law rules of construction used by the courts in relation to exemption clauses are examined. Definition of Exemption Clauses It is common for parties to written contracts to insert clauses that apparently remove, limit or qualify legal rights, duties, liabilities or remedies which would otherwise apply. Such clauses may be termed "exemption", " exclusion" or H ex ce pt ion " clauses or take the form of specific exclusions of warranties or conditions under the general heading of a "guarantee" or " warranty". Terminology used may also include such phrases as "sold as is" or "with all faults". In other cases such clauses appear to limit or exclude the right to reject, to limit the amount of damages claimable, or place a time limit on claims or their reception. These clauses may additionally attempt to acknowledge that facts which amount to a breach of contract have not occurred. In the analysis that follows, an exemption clause is generally defined as any term in a contract excluding, restricting or modifying a remedy or 2. See Chapter Eight. 2 3 liability arising out of a breach of a contractual obligation. Indemnity Clauses Indemnity clauses effectively operate as provisions restricting a right or a remedy. Therefore they fall within the general definition of an exemption clause used throughout this discussion. A contracting party, A, may attempt to avoid the consequences of liability by making the person with whom he contracts, B, bear the loss resulting from his, A's, own breach of duty. For example, a car ferry operator may contract with a car owner on terms that the latter will indemnify the operator against third party claims arising from damage caused to other cars or their occupants on the ferry by the negligent positioning of the car by the operator's employees. A clause may, exceptionally, require A to indemnify B against liability B incurs to A, so that if A sues B, A has to pay back to B what he recovers from B. Such a situation arose in Smith and Anor v. South Wales Switchgear Co Ltd. ' Chrysler (Scotland) Ltd contracted with the defendants on the basis of Chrysler's standard form general conditions of contract. Part of this included the following clause: "In the event of the order involving the carrying out of work by the supplier and its subcontractors on land and/or premises of the purchaser, the supplier will keep the purchaser indemnified against; (a) All losses and costs incurred by reason of the supplier's breach of any statute, by-law or regulation; (b) Any liability, loss, claim or proceedings whatsoever under statute or common law (i) in respect of personal injury to, or death of any person whomsoever, (II) in respect of any injury or damage whatsoever to any property, real or personal, arising out of this or in the course of or caused by the execution of this order. The supplier will insure against and cause all subcontractors to insure against their liability hereunder". 3. D. Yates Exclusion Clauses in Contracts, Sweet and Maxwell, 2nd edition (1982), at p.1. See also Second Report on Exemption Clauses, n.1 at para.161. 4. [1978] 1 W.L.R. 165. 3 In carrying out the work at Chrysler's premises an employee of South Wales Switchgear suffered injury due to an accident caused by negligence and breach of statutory duty by Chrysler. Chrysler claimed to be indemnified in respect of the liability by virtue of the indemnity clause quoted above. In allowing that appeal by the supplier, the House of Lords held that the clause, on its true construction, was to be determined on the basis of tests laid down in Canada Steamship Co Ltd v. The King 5 that applied equally to exemption and indemnity clauses.