Exclusion Clauses and Limiting Terms

There is the freedom to contract, which includes choosing what should or should not be part of the contract. This freedom extends to parties who wish to limit or exclude some obligations which might arise out of contractual undertakings. If X contracts with Y to help him deliver goods to Z, Y could decide to include at the agreement of X that he shall not be liable for whatever harm comes to the goods if it is not due to his negligence. These clauses that limit or exclude liabilities are known as limiting terms or exclusion clauses. These limiting terms and exclusion clauses are often found in standard form contracts which are contracts whose terms are contained in previous forms to be used for all contracts of the same kind. Lord Diplock mentioned two kinds of these standard form contracts in Schroeder Music Publishing Co. Ltd. v. Macaulay, those which are being used because they are the result of continuous negotiations over time and those that are enforced by the stronger party in a contract upon the weaker party. Some rules have been created by courts in an attempt to protect innocent parties from the consequences of exclusion clauses and limiting terms as regards both signed and unsigned documents. Naturally, it would be easier for a party to escape an unsigned document than a signed document.

Unsigned documents

The rules for when exclusion clauses and limiting terms will be binding and when it would not be if the document containing it is not signed was laid down in Parker v. South Eastern Ry. Co. In the case, Parker deposited his bag in a cloakroom at the defendant’s railway station and he paid 2 pence to the clerk. He received a paper on which was printed a number, a date, notices as to when the office would be open and the words “see back”. Several clauses were printed at the back which included that the company would not be liable for any package exceeding the value of 10 pounds. When Parker returned to claim his bag and it could not be found, he brought a claim for 24 pounds and 10 shillings. The defendants unsuccessfully tried to rely on the exclusion clause, and then appealed when judgment was delivered against them. The Court of Appeal laid down three rules regarding unsigned documents.

If the person who received the ticket did not see or know that there was any writing on it, then he is not bound by the conditions.
If he knew that there was writing on the ticket, and knew or believed that the writing contained conditions, then he would be bound by the conditions.
If he knew that there was writing on the ticket, but did not know that it contained conditions, it might not be binding unless the other party has done what is reasonably sufficient to give him notice that the writing contained conditions. If such notice has been given, it will be binding.

For the third rule, whether it would be binding if there is no reasonable notice depends on the nature of the ticket and if a reasonable person should expect it to contain conditions. So, a receipt issued to a motorist at a tollgate could reasonably be assumed by the motorist to contain only evidence of his payment and so conditions in it should not be binding if it is not brought to his notice. However, a party would be bound by the exception clauses in a bill of laden as it is common custom to include conditions in them.

The rule was applied in Odeniyi v. Zard & Co. where the court held that the plaintiff was not bound by the exclusion clauses which were not reasonably brought to his notice by the defendants. The exclusion clauses and limiting terms were also held by the courts to not be binding in Chapelton v. Barry U.D.C. and Thorton v. Shoe Lane Parking because not enough had been done to bring the conditions to the notice of the plaintiffs in both cases.

Terms and conditions excluding liability shall be binding if it is known that such documents generally contain such terms. In Iwuoha v. Nigerian Railway Corporation, the plaintiff/appellant delivered three packages to the respondent in Aba for conveyance to Bukuru, near Jos. The appellant was given a waybill after paying for the freight which stated that carriage was subject to the Nigerian Railway Corporation Act 1955 and tariff regulations made under it, and that copies were available to read through for free at every station. It was held by the court that the waybill was binding as it was a contractual document.

It should be noted that a large well-displayed notice is sufficient to exclude liability in a car park as stated by Edozie, J.C.A. in Imo Concorde Hotel v. Anya. On the other hand, a notice of a term excluding or limiting liability after a contract has been concluded would not be binding as in Olley v. Marlborough Court. However, where there have been previous dealings of that nature between the two parties then the exclusion clause shall be binding even if the injured party was only informed after the conclusion of the contract. He would be imputed with notice as a result of his previous dealings just like in Spurling v. Bradshaw. The exception to this is when the injured party had no knowledge of the conditions in previous dealings. In McCutcheon v. MacBrayne, the defendant’s ship sank while ferrying the plaintiff’s car across the sea, causing the loss of the car too. The defendant tried to rely on an exclusion clause to prevent his liability for the car. It was found that even though the plaintiff had signed some documents in previous dealings of that nature with the defendant, the plaintiff never read the contents. It was held that the exclusion clause could not be imputed since the plaintiff never had knowledge of it. While doing all that is reasonably necessary to bring exclusion clauses to the notice of the other party, simply giving the documents containing them to illiterates shall not be enough as held in Otegbeye v. Little.

Signed documents

The position as regards signed documents is that in the absence of fraud, duress and misrepresentation, exclusion clauses shall be binding whether or not the document is read. This was the issue in L’Estrange v. Graucob where the plaintiff tried to escape an exclusion clause by claiming that the print was too small. The court held that it was binding whether or not it had been read.

The condition would still be binding if a document which makes reference to it is signed. In Chagoury v. Adebayo, the plaintiff/respondent claimed he had won 500 pounds with the 1 pound he staked with defendants/appellants, a football pools company. The company refused to pay him his wins. When sued, the defendants relied on the “rules and conditions” of the Ambassador Fixed Odds Pools, which entitled the defendants to cancel any entry and refuse payment. The respondent had signed a document which said he had read and agreed to the rules and conditions. Since the rules and conditions were not contained in the document, the question was whether the appellants had done what was reasonably necessary to bring the rules and conditions to the notice of the respondent. While the court of first instance, a magistrates’ court, held that enough had not been done, the Lagos high court reversed the judgment upon appeal by holding that enough had been done to bring it to the respondent’s notice. The judgment was different in Chike Atu v. Face to Face Million Dollars Fixed Odd Pools Ltd. even though it had similar facts to the Adebayo case. A major difference is that Chike Atu’s case only had the words “read the rules” on the document signed, which referred to both the rules on the coupon and others. It was held by the court that it could not be relied on as not enough had been done to bring the others to the notice of the plaintiff. A reasonable person would easily believe that the rules to be read were only limited to those on the coupon if nothing else was said.

A document which has been signed would have its conditions binding in the absence of fraud, duress and misrepresentation. If the document signed refers to another document, then what is reasonably necessary must be done to bring such to the notice of the other party. In Currtis v. Chemical Cleaning and Dying Co., the plaintiff took a white satin dress to the defendant for cleaning. She was asked to sign a document which contained a clause exempting the defendants from all liability for damage to articles cleaned. The plaintiff asked the defendant’s servant why her signature was needed and she was told that the defendants would not accept liability for specified risks, in this case for any damage done to the beads or sequins on the dress. When the dress was badly stained, the plaintiff sued for negligence. The defendant was not allowed to rely on the exclusion clause due to the misrepresentation.

General rules

There are rules which are employed by the courts while interpreting and enforcing exclusion clauses to protect innocent parties. They are the contra proferentem rule and the interpretation when the exclusion clauses protect third parties.

(1) The contra proferentem rule

The contra proferentem rule is a rule which states that any clause considered to be vague should be interpreted against the interests of the party that included the clause in the contract.

Strict interpretation: The words of written documents are construed more forcibly against the party trying to rely on it. When there is ambiguity or uncertainty in the construction of words and the scope of the exclusion clause, the conflict would be resolved against the person who inserted it in the contract. In Baldry v. Marshall, the plaintiff bought a car from the defendant and the contract contained a term excluding “any other guarantee or warranty, express or otherwise.” The car turned out to not be suitable for the purpose for which it was purchased and it was a breach of the implied condition in section 14(1) of the Sale of Goods Act 1893. The court held that the exclusion clause did not apply since it was the breach of a condition and it only covered guarantees and warranties. Similar strict interpretations were also applied in Andrews v. Singer and Houghton v. Trafalgar Insurance.
Negligence: When a party’s contractual liability may arise either out of negligence or any other cause of action, any exclusion clause would be taken to only absolve liability arise out of any other cause of action besides negligence. This is because it is hard to believe that one party wants to make the other free from the consequences of their own negligence. In White v. Warrick, the plaintiff hired a bicycle from the defendants. It was a term in the agreement that nothing in the agreement would render the owners liable to any riders of the machine hired. When the defective saddle caused the plaintiff’s injury, an action was brought for negligence which succeeded despite the exclusion clause. The defendants also were not allowed to rely on exclusion clauses after they had been negligent in Attorney General of Bendel State v. UBA and Hollier v. Rambler Motors (AMC) Ltd.

(2) Third parties

Based on the doctrine of privity of contract, a third party cannot seek benefit in a contract which they are not a party to. An exclusion clause will not protect anyone who is not a party to the contract. In Adler v. Dickinson, the plaintiff was a passenger who fell from the gangway of a ship. He sued the captain for his injury from the fall. The captain tried to rely on a clause in the ticket for protection which stated that the company would not be responsible for any injury whatsoever to the person of any passenger arising or occasioned by the negligence of the company’s servant. The Court of Appeal held that the clause only protected the company, and even if it also protected the company’s servants, the defendant could not rely on it since he was not a party to the contract. Similarly, the defendant, a bus driver, could to rely on the exclusion clause in Cosgrove v. Horsfall because he was not a party to the contract.

The principle was confirmed in Scruttons v. Midland Silicones Ltd. A drum of chemicals was being shipped from New York to London upon the terms of a bill of lading which exempted the carriers from liability in excess of 179 pounds per package. The defendants, a stevedoring company, were engaged by the carriers to discharge the vessels in London and act as their agents in delivering the goods to the plaintiffs. The defendants negligently dropped the drum, causing damage to the tune of 593 pounds, and then tried to rely on the exclusion clause when an action was brought against them. The court held that they could not rely on the exclusion clause of a contract they were not a party to. This decision has been criticized by some, as goods being carried by sea are insured with the intention that any damage to them shall be set to normal by the insurance companies who are financially in a better position to bear the loss than company servants. In New Zealand Shipping Co. v. Satterthwaite, the defendants were allowed to rely on the exclusion clause. According the court, the promise in the contract to exclude any agent or independent contractor of the carrier from liability was a unilateral offer which was capable of acceptance upon performance. The performance in this case was unloading the goods.

It would still be difficult for a third party to rely on the exclusion clause of a contract they are not a party to, especially if such a third party is an agent or a servant and not an independent contractor.

Fundamental breach

Fundamental breach has been defined by Lord Diplock in Photo Productions Ltd. v. Securicor Transport Ltd. as an event resulting from the failure by one party to perform a primary obligation which has the effect of depriving the other party of substantially the whole of the benefit which it was the intention of the parties that he should obtain from the contract. Until the recent decision in the Suisse Atlantique case, the position was that no exclusion clause could protect a party guilty of a fundamental breach. There was the belief that an exclusion clause was not to give the parties an opportunity to escape their contractual obligations.

The Privy Council did not allow an exclusion clause to protect suppliers of cloth when the goods supplied were found to be of inferior quality to the sample which formed the agreement in Adel Boshalli v. Allied Commercial Exporters Ltd. According to the court, an exclusion clause may only avail a party carrying out his contractual obligations in its fundamental aspect. The defendants were also not allowed to rely on an exclusion clause in Shotayo and Arunkegbe v. Nigerian Technical Co. when the lorry supplied to the plaintiff kept breaking down.

Although the consequences of a fundamental breach and the breach of a fundamental term are almost always the same, the two are different. The breach of a fundamental term has to do with the breach of a term which underlies the entire contract and changes the nature. A fundamental breach, on the other hand, has more to do with the consequences of the breach on the contract. If A contracts with B to buy beans, the delivery of peas instead of beans would constitute the breach of a fundamental term while the delivery of spoiled beans would constitute a fundamental breach. Both a fundamental breach and the breach of a fundamental term have their remedies in repudiation. The breach of a fundamental term or a fundamental breach traditionally could not be covered by an exclusion clause no matter how well-phrased. Some of the instances in which the principle has been applied are as follows.

Hire-purchase: In Karsales (Harrow) Ltd. v. Wallis, Wallis agreed to buy a buick car under a hire-purchase agreement which included the clause: “No condition or fitness for any purpose is given by the owner or implied therein.” One night the car was towed to Wallis’ house. When he found it the next morning, some parts of the car were missing, some were broken, and the car was incapable of self-propulsion. Wallis refused to pay the installments and was sued. When the plaintiff tried to rely on the exclusion clause, the court held that it did not exclude liability of that gravity.
Bailment: In Alexander v. Railway Executives, the plaintiff deposited his trunk boxes at the defendants’ “left luggage” office. The defendants permitted another person to have access to the plaintiff’s luggage in his absence and some of the items were unlawfully removed. When the plaintiff brought an action, the defendants tried unsuccessfully to rely on an exclusion clause which excluded liability for loss, misdelivery or damage to articles exceeding 5 pounds. The court held that by the defendants had committed a fundamental breach by allowing an unauthorized person access to the luggage.
Sale of goods: As was stated by Lord Abinger in Chanter v. Hopkins, if a person supplies beans in a contract to supply peas, it is not a breach of a condition but non-performance. In Ogwu v. Leventis Motors, the respondent sold the appellant a four-year old lorry in place of a one-year old lorry. The respondent tried in vain to rely on an exclusion clause. The court held that the exclusion clause could not be relied upon as the contract had not been performed in its essential aspect.
Deviation cases: It has been held in several cases that ship-owners who deviate from the agreed upon route cannot rely on exclusion clauses. The assumption is that since they have gone out of the path agreed on, then they have stepped out of the contract and cannot come back to rely on the exclusion clause in the contract. In Thorley v. Orchis SS. Co. Ltd., the deviation did not cause the damage of the cargo of beans which happened when the beans got mixed with poisoned earth. The deviation still prevented relying on the exclusion clause. Deviation cases also extends to carriage of goods by road and rail and even storage in warehouses. In Gunyon v. South Eastern and Chatham Ry. Co.’s managing committee where fruit was carried by goods train when the contract stipulated that it should be carried by passenger train, an exemption clause was held to not apply. In Lilley v. Doubleday, the defendant who, having agreed to store goods in his warehouse stored them in another warehouse where they were destroyed by fire, it was held that an exemption clause made for his benefit did not apply.

The position for a long time was that an exclusion clause, no matter how widely it was phrased, could not extend to fundamental breaches. The decision in the Suisse Atlantique case changed this. In the case, the defendants agreed to charter a vessel from the plaintiffs for the carriage of coals from the United States to Europe. The charter was to remain in force for two years. The ship was to be loaded at a specified rate as the number of voyages it could make would be in the favour of the plaintiff. The agreement provided that if the ship was detained beyond the loading or unloading time, the defendants were to pay $1,000 per day in demurrage. Almost a year later, the plaintiff chose to treat the contract as repudiated by reason of the defendants’ delays in loading and discharging the vessel. This was not agreed to by the defendants, and they both agree a month later that they would continue with the contract. The plaintiffs brought an action to get back the money lost for the delay. The court held that the limiting term in the contract was binding and the plaintiff was only entitled to $1,000 for every day of delay even though it was a fundamental breach. Other cases after have also held that exclusion clauses may cover fundamental breaches if they are phrased well enough.

In Photo Productions Ltd. v. Securicor, the plaintiffs, a company which owned a factory, entered into a contract with the defendants, a security company, by which the defendants were to provide security services at the factory including night patrols. While carrying out a night visit to the factory, an employee started a small fire which got out of control and burnt the entire factory and stock valued at 615,000 pounds. The plaintiffs sued the defendants on the ground that they were liable for the acts of their employee. The defendants relied on an exclusion clause which excluded liability for the actions of their employee. The trial court dismissed the action, while the Court of Appeal held that an exclusion clause could not protect a fundamental breach. The House of Lords reversed the decision of the Court of Appeal, stating that there existed no rule of law which prevented exclusion clauses from covering fundamental breaches, breaches of fundamental terms or any other kind of breach.

There have been conflicting decisions in Nigeria as regards exclusion clauses extending to fundamental breaches. While Nigerian courts have held that exclusion clauses cannot cover fundamental breaches in cases like Niger Insurance Ltd. v. Abed Brothers by the Supreme Court, Alhaji Tiamiyu Iyanda v. Midfield & Niger Insurance case and DHL v. Chidi, the courts have also held that exclusion clauses may cover fundamental breaches in cases like Narumal & Sons Nigeria Ltd. v. Niger Benue Transport Company Ltd. by the Supreme Court, Akinsanya v. UBA also by the Supreme Court and Union Bank of Nigeria v. B. U. Umeh & Sons Ltd. The Supreme Court is yet to overrule any of its decisions regarding whether or not exclusion clauses should extend to fundamental breaches and breaches of fundamental terms at the time of writing this.