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ENFORCEABILITY OF EXEMPTION CLAUSES IN CONSTRUCTION CONTRACTS: A COMPARATIVE STUDY OF APPROACHES IN ENGLAND AND AUSTRALIA Steve Donohoe 1 and Jeremy Coggins 2 Exemption clauses are commonly provided in contracts by parties in the construction industry in an attempt to limit their liability for loss or exclude such liability altogether. The operation of exemption clauses in a legal context, however, has proved to have been fraught with great difficulties in both England and Australia. This paper seeks to address the question, How does the enforcement of exemption clauses under Australian Law differ from the law of England? A doctrinal legal research approach is used to establish the legal rules relating to the enforceability of exemption clauses in England and Australia. Once established, these rules are then compared and contrasted. The research found that, although the relevant law in both jurisdictions shared a common origin (the traditional English common law), there are now significant differences. These differences are primarily due to statutory regulation of exemption clauses introduced into England but not Australia, and the development and divergence of the Australian common law with respect to interpretation of exemption clauses. This paper provides a useful summary of the law pertaining to exemption clauses and, as such, will be of interest to construction and legal professionals and academics. The comparison of the law between England and Australia with respect to exemption clauses highlights an important debate as to whether freedom to contract should be regulated in commercial contracts. Keywords: exemption clause, construction contract, contract law, unfair contract terms INTRODUCTION As modern construction becomes more complicated, technical and sophisticated this has been reflected in contract documentation used in the construction industry. Parties involved in the construction process face potentially catastrophic losses and therefore often seek to exclude or limit liability for such losses. Werremeyer (2006) noted that construction contracts primarily involve the transfer of risks. Fewings (2013, p267) observed that there are various techniques in dealing with risks which include retaining risks, insuring against risks, spreading risks as part of a portfolio or moving away from the activity or specialising in managing it. There are a number of ways parties may seek to exclude or limit financial losses in a construction contact. One of the most frequently used methods used to exclude or limit such losses in a contract is 1 2 Donohoe S and Coggins J (2013) Enforceability of exemption clauses in construction contracts: a comparative study of approaches in England and Australia In: Smith, S.D and Ahiaga-Dagbui, D.D (Eds) Procs 29 th Annual ARCOM Conference, 2-4 September 2013, Reading, UK, Association of Researchers in Construction Management, Donohoe and Coggins through the use of exemption clauses (ECs). Graw (2008: pp ) defines an EC as a term of the contract inserted to exclude or limit liability, and explains that: An excluding term (an exclusion clause) is one that completely excludes one party s liability... A limiting term (a limiting clause) of much the same nature. However, it does not exclude liability entirely; it merely limits it to a particular fixed or determinable monetary amount. For the reasons set out above ECs are part of the modern world of construction contracting and therefore understanding of ECs is important for academics and practitioners in construction management. Whilst the idea behind the EC is a relatively simple one of trying to exclude or limit liability, the operation of ECs in a legal context has been shown to be fraught with great difficulties. Although English and Australian law share the same sources, the current approach of their respective courts shows a difference in their treatment of cases involving ECs. Whilst both countries started with the contemporaneous English common law as a basis, England has since passed the Unfair Contracts Terms Act 1977 (UCTA), which dramatically altered how the courts deal with EC cases. Whilst Australia has enacted various legislation in the field of consumer protection law, there is nothing as far reaching as UCTA in Australia. This means that despite the historical and traditional links between the laws of England and Australia, UCTA does not apply in Australia and therefore decisions in the Australian courts use the common law as a yardstick in cases concerning ECs. The interpretation of ECs is often problematic and controversial in both countries. This paper addresses the research question, How does the enforcement of ECs under Australian Law differ from the law of England? Using a doctrinal research approach, common law and legislation are considered in each jurisdiction to establish the current set of legal rules pertaining to ECs. As such, court decisions in several legal cases are considered. Although the facts of these cases are not always directly relevant to construction contracts, the legal principles emanating from the decisions are. Further, using a comparative legal research approach, the rules identified in each jurisdiction are compared and contrasted. The paper concludes by summarising the differences between English and Australian law with respect to ECs. EXEMPTION CLAUSES IN ENGLAND CONSIDERED There is a dichotomy in the law of contract: on the one hand, there is the doctrine of freedom of contract (i.e. the ability to contract on whatever terms one likes) and, on the other hand, the injustice caused by onerous and oppressive contract conditions which may be imposed by contractual parties with dominant bargaining power. Advocates for the freedom of contract justify their approach on the notional basis that if you don't like the contract terms, then don't enter into the contract . Support for this approach may be found in the words of Forbes J, in Salvage Associate v CAP Financial Services [1995] FSR 654, who stated: Generally speaking where a party well able to look after itself enters into a commercial contract and with full knowledge of all the relevant circumstances willingly accepts the terms of the contract which provides for the apportionment of financial risks of that transaction, I think that it is very likely that those terms will be held to be fair and reasonable. A case which upholds the attitude of the judiciary in a construction context can be found in Lord Pearson s speech in Trollope& Colls Ltd v North West Metropolitan Hospital Board (1973) 9 BLR 60, where Lord Pearson stated: 740 Procurement The basic principle [is] that the court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvements might be. The court s function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings; the clear terms must be applied even if the court thinks some other terms would have been more suitable [emphasis added]. This speech encapsulates the argument that the courts will not interfere where the words used are clear and unambiguous. The counterpoint to this approach, however, is the view that the law ought to take cognisance of unequal bargaining power and oppressive behaviour. Accordingly, the courts throughout the years have tried to steer a middle path, attempting to uphold the parties' rights to make contracts on any terms they choose (as long as the contract is not tainted by illegality) whilst at the same time frowning upon extreme instances of what might be perceived as sharp practice or unconscionability . As such, ECs have long been regarded as controversial and attracted the attention of the courts. For example, as long ago as 1877, the case of Parker v SE Railway Co (1877) 2CPD 616 considered the validity of an EC on the back of a left luggage ticket. In the landmark case of L Estrange v Graucob [1934] 2 KB 394, it was finally established that where a person signs an agreement which includes an EC then that person is bound by it whether or not the person bothered to read the agreement or not. However, the extent of L'Estrange was limited by a decision in Curtis v Chemical Cleaning Company [1951] 1KB 805 where it was decided that an EC in a signed document is ineffective if the other party has made a misrepresentation. Where a document containing an EC is unsigned, however, the traditional stance of the common law has been to generally require that reasonable and sufficient notice of the EC be given in order that the EC be valid (Olley v Malborough Court [1949] 1 KB 532; Thompson v LMS Railway [1930] 1 KB 41; Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163). For a number of years it was argued than an EC could not exclude a fundamental breach of contract (see, for example, Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936). This view, however, was rejected in UGS Finance v National Mortgage Bank of Greece [1964] 1 Lloyds's Rep 446 (henceforth UGS ) on the grounds that such a rule of law interferes with the parties freedom of contract rights. The decision in UGS was re-affirmed in the Suisse Atlantique [1967] 1 AC 361 and later in Photo Productions Ltd v Securicor Transport [1980] AC 827. The latter two cases confirmed the principle that liability for a fundamental breach of contract can be excluded by an EC. However, this principle is affected by a technical rule known as contra preferentem (against the preferred) discussed below, and UCTA discussed later. Where ambiguity in the wording of ECs has rendered their meaning uncertain, the courts have applied the contra preferentem rule, thereby interpreting the EC against the interests of the party seeking to rely upon the EC (Baldry v Marshall [1925] 1 KB 260; Houghton v Trafalgar Insurance Co [1953] 2 All ER 1409; White v Warwick [1953] 1 WLR 1285). It should not be thought that contra preferentem represents English Law from a by-gone age. As recently as July 2012, in Markerstudy v Endsleigh [2009] EWHC 281 (henceforth Markerstudy ), the court had to decide on the meaning and extent of the following passage: 741 Donohoe and Coggins 742 Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of good will, loss of business, loss of anticipated profits or savings and all other pure economic loss) arising out of or in connection with this agreement. As Robinson (2010) commented: It was common ground this clause excluded indirect and consequential loss and that, by itself, this was of limited effect as it did not prevent recovery of losses which flow naturally from a breach without other intervening cause and independently of special circumstances.the contentious issue was other heads of loss in the parenthesis. Were they: freestanding, so that both direct and indirect loss of goodwill, business, profit and economic loss are excluded. This would be a potent exclusion and would severely hamper Markerstudy s ability to recover; or qualified by the words indirect or consequential - i.e. loss of goodwill, business, profit and economic loss is to not be excluded if it flows naturally from the breaches The judge decided that the latter view was correct and, as a consequence, the EC offered much less protection than Endsleigh had anticipated. The decision in Markerstudy also reflects the traditional view of the English common law that consequential losses may be distinguished from direct losses according to the two limbs of damages in the test of remoteness laid down by court in the landmark case of Hadley v Baxendale (1854) 9 Exch 341. In other words, direct losses are to be equated with losses flowing naturally from the breach (the first limb ), and consequential losses are to be equated to losses which were within the reasonable contemplation of the parties as a probable result of the breach at the time they made the contract (the second limb ). The Unfair Contracts Terms Act 1977 In an attempt to regulate the potential for a contractual party to impose an unduly harsh or unfair EC on the other party, the UK Parliament passed the Unfair Contracts Terms Act 1977 (UCTA). Adriaanse (2010, p263) observed that, Despite its name, the Unfair Contracts Terms Act 1977 ( UCTA ) deals with exclusion clauses, and not with terms that are unfair . UCTA (s 2(1)) provides that any term or notice excluding or restricting liability for death or personal injury is void. UCTA (s 2(2)) further provides that in the case of other loss or damage, exclusions or restrictions of liability are subject to a requirement of reasonableness . Crucially reasonableness is not defined. However, the Act provides the following guidelines (in Schedule 2 to the Act) in order to assess reasonableness: (a) the strength of the bargaining positions of the parties relative to each other, taking into account among other things) alternative means by which the customer s requirements could have been met; (b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term; (c) whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); (d) where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; (e) whether the goods were manufactured, processed or adapted to the special order of the customer. Procurement Despite the guidelines set out above, sometimes the concept of reasonableness can be difficult for the courts to deal with. This is demonstrated below in two recent cases involving ECs, namely The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137 (TCC) (henceforth TTPM ) and Allen Fabrications Ltd v ASD Ltd (2012) EWHC 2213 (TCC) (henceforth Allen ). TTPM and Allen considered In TTPM, the project managers (TTPM) failed to arrange for the formal execution of a construction contract for works known as H5 , which was the provision of bedrooms and other facilities for students at a private boarding school. TTPM had issued a series of letters of intent to the contractor working at the site but crucially had not warned their client of the inherent risks of using letters of intent. The works were completed late and the College (Employer) sought to recover liquidated damages under the contract. Due to the fact that no formal contract had been executed, and no mention of liquidated damages had been made in any of the letters of intent, the College was unable to recover any liquidated damages and therefore sued TTPM alleging professional negligence. TTPM denied negligence and pointed out a condition in their terms of engagement limiting their liability to the amount of their fees (which was 111,321). The College's claim was far higher than the amount paid in fees. TTPM argued that the wording of the EC was clear and, as the parties had equal bargaining power, the EC ought to be considered to be reasonable . The judge agreed with TTPM that the wording of the EC was clear, yet he still found it to be unreasonable. TTPM's terms required them to maintain 10 million of professional indemnity insurance (effectively paid for by the College via TTPM's fees), but the EC limited liability to 111,321. In effect this meant that the College was paying for 10 million worth of insurance, which was more or less worthless because liability had been capped at such a low amount. Furthermore, the parties had worked together on two previous projects without this onerous EC being incorporated, yet TTPM had not specially drawn the College's attention to it when it was used in the terms of engagement for the H5 works. For the reasons stated above, the EC in TTPM was deemed to be unreasonable and unenforceable. In Allen the works comprised the construction of a two storey workshop. The Client was a boat building company, Bembridge. The main contractors were PB Structures who were responsible for constructing a platform for entry and removal of boats from the workshop. PB Structures sub-contracted construction of the platform frame to Allen. The platform required a steel grating to be placed over the steel frame to take the weight of the boat, trolley and labourers. Allen subcontracted the supply of the gratings to ASD. In September 2006 an employee of Bembridge was standing on the platform pushing a boat into the workshop when the grating gave way. The employee fell 3.4 metres and the employee was severely injured which left him incapacitated. Bembridge did not contest the employee's claim and paid out 7 million in compensation. Bembridge sought contribution from various parties including PB Structures which produced a domino effect , i.e. PB Structures sued Allen who, in turn, sued ASD alleging that the latter, as suppliers of the grating, failed to supply the correct number of fixings and /or failed to advise Allen on the correct method of fixing. 743 Donohoe and Coggins Counsel for ASD argued that it had no contractual obligations to Allen other than supply and that they (ASD) sought to rely on their standard terms and conditions which contained the following: We are not liable for any other loss or damage (including indirect or consequential loss, loss of profits or loss of use) arising from the contract or the supply of goods or their use even if we are negligent. Our total liability to you (from one single cause) for damage to property caused by our negligence is limited to one million pounds. For all other liabilities not referred to elsewhere in these conditions our liability is limited in damages to the price of the goods. Allen sought to prove that the ECs above were onerous and as such that they were required to be specifically brought to Allen's attention. The inference was that ASD's ECs were unreasonable and therefore ought to be stuck down by UCTA. The judge rejected this argument making the point that, having conducted business together over 250 times, Allen must have been sufficiently aware of ASD's terms. The judge also noted that Allen's standard terms contained similar wording to ASD s and, therefore, could not be construed as being unreasonable. Therefore ASD's contribution was limited in this case to the purchase price of the goods i.e The judge also noted that Allen was adequately protected by insurance. The two recent cases discussed above show that despite UCTA s guidelines, the courts still have problematic issues to deal with when deciding reasonableness . EXEMPTION CLAUSES IN AUSTRALIA CONSIDERED To consider the use of contractual ECs in Australia, it is necessary to categorise contracts into two types: Contracts for the supply of goods or services to a consumer which are covered by the Australian Consumer Law (Competition and Consumer Act 2010 Schedule 2); and All other commercial contracts. Contracts for the supply of goods and services to a consumer The Australian Consumer Law ( ACL ) aims to protect consumers who have entered into contracts by implying certain guarantees into contracts for the supply of goods and services such as, amongst others: guarantees relating to title (s 51), undisturbed possession (s 52), undisclosed securities (s 53), acceptable quality (s 54), fitness for purpose (ss 55 & 61), and due care and skill (s 60). The ACL (s 64) renders void any contractual term that purports to exclude, restrict or modify any of the guarantees implied into such con
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