ASSESSING THE REASONABLENESS OF EXCEPTION CLAUSES

• Citation: (2011) 23 SAcLJ 577
• Date: 01 December 2011
• Published date: 01 December 2011

In consumer as well as in business-to-business contracts, exception clauses are used to allocate risk and liability in the event of a breach. The validity of such clauses turns upon issues of incorporation and construction and, where the English Unfair Contracts Terms Act 1977 (“UCTA”) applies, the satisfaction of the requirement of reasonableness. While the first two issues have received considerable discussion in Singapore cases, there is a dearth of authority on the third requirement, notwithstanding that it was affirmed in 1993 that UCTA applies in Singapore. The issue of reasonableness or fairness, however, has been widely considered, particularly in England and in a few other common law jurisdictions. Although courts must be given a wide discretion to determine what is reasonable on a case-by-case basis, the guidelines formulated in other jurisdictions may serve as broad points of reference. This article will focus on the requirement of reasonableness and suggest the broad criteria that may be applicable in appropriate cases.

I. Introduction

1 Exception clauses are commonly found in contracts across all industries. Their function is to shift all or some of the risks of loss to the non-breaching party as a cost-effective measure in the event of a breach. This is achieved by means of either a total exclusion or a limitation of liability clause as the case may be. Generally speaking, the court may regard clauses which restrict liability with less hostility as these are more likely to accord with the intention of the parties that some liability should attach in the event of a breach.1

2 The approach to business-to-business contracts is to presume that commercial parties are of equal bargaining power and aware of the business risks and how these might be insured against. Hence, it makes economic and commercial sense to provide for exception clauses in commercial contracts and to factor them into the contract price so as to reduce business costs. Thus, if commercial parties enter into a low-cost contract and agree to exclude liability, then the non-breaching party has elected to bear the risk of loss in return for paying a lower price. This will be a relevant factor in persuading the court to adopt a non-interventionist policy, consistent with the basic principle of freedom of contract. This principle is based on the assumption that parties are of equal bargaining power, negotiate on an equal footing and have a full understanding of the terms of the contract and their legal effect. This was reiterated by Chadwick LJ in Watford Electronics Ltd v Sanderson CFL Ltd2 in these terms:

[Experienced businessmen] … should be taken to be the best judge on the question whether the terms are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other - or that the term is so unreasonable that it cannot have been understood or considered - the court should not interfere ….

3 In reality, the principle of freedom of contract should not apply where the other contracting party is perceived to be the weaker party as in the case of consumers or even small businesses. Thus, where the particular circumstances of a case so warrant, courts are willing to strike down exception clauses in order to ensure that the party in breach should not get off scot-free.

4 Where the validity of an exception clause is in issue, the court will first determine whether the clause has been properly incorporated into the contract,3 and if so, whether or not, upon its true construction, it applies to the breach in question.4 The Singapore court has no general

power to strike down an exception clause for being unreasonable except under the Unfair Contract Terms Act (“UCTA”),5 although it may achieve the same result as a matter of construction. The question of reasonableness is the most difficult issue of all as much turns on the facts of the case and upon the discretion of the judge. Singapore courts rarely encounter this issue due to the fact that exception clauses are usually struck down at the incorporation or construction stage.

II. Scope of UCTA and the requirement of reasonableness

5 It is well known that the title of the Act is a misnomer. It does not deal with the fairness of contract terms in general but regulates only exception clauses in certain types of contracts6 by striking down certain exception clauses and subjecting others to the test of reasonableness. UCTA applies to both consumer (“B2C”) and business-to-business (“B2B”) contracts and also to terms or notices excluding certain liability in tort. Section 2 addresses the restriction or exclusion of negligence liability by reference to any contract term or to a notice given generally or to specified persons. Such a term or notice cannot exclude or restrict liability for death or personal injury resulting from negligence. For other loss or damage, liability cannot be excluded or restricted unless the term or notice satisfies the requirement of reasonableness.

6 Under s 3(2), the party relying on the clause (proferens) cannot (a) exclude or restrict liability for breach; or (b) claim to be entitled to render a contractual performance substantially different from that which was reasonably expected of him; or (c) render no performance at all in respect of the whole or any part of his contractual obligation except in so far as the contract term satisfies the test of reasonableness. Section 37 applies where one party deals as a consumer8 or on the other‘s written standard terms of business. Notwithstanding that standard form contracts can be used to promote standards in commercial dealings and reduce transaction costs, this is outweighed by the need to protect the presumably weaker party, the consumer or a small business, confronted with a “take it or leave it” standard form contract containing exception clauses which may be unfair or one-sided. The vital question whether or not a contract is “standard” so as to bring it within the scope of s 3 was considered in Yuanda (UK) Co Ltd v WW Gear Construction Ltd.9 Edwards-Stuart J concluded 10 that “the conditions have to be standard in that they are terms which the company in question uses for all, or nearly all, of its contracts of a particular type without alteration”. He also agreed with Judge Forbes11 on the relevance of the following factors in deciding whether a particular set of terms may constitute a party‘s standard terms of business: (a) the degree to which the standard terms are considered by the other party as part of the process of agreeing to the terms of the contract; (b) the degree to which the standard terms are imposed by the proferens on the other party; (c) the degree to which the proferens is prepared to entertain negotiations with regard to the terms of the contract generally and the standard terms in particular. He attached much importance to the final factor and concluded that the difference between the proferred terms and the final concluded terms must be significant. The present case was not one in which the claimant had dealt on the other‘s written standard terms of business for the following reasons: (a) the claimants negotiated some material alterations to the proferred standard terms and so could not be said to

have dealt on the other‘s standard terms of business; (b) while the terms proferred could be said to be standard, few of the contracts involved had been concluded on the same terms.

7 With regard to consumer contracts, UCTA “plays a very important role in protecting vulnerable consumers from the effects of draconian contract terms”.12 It provides in s 6 that in consumer sale and hire-purchase contracts, liability for breach of seller‘s/hirer‘s obligations as to title, conformity with description or sample and quality or fitness for a particular purpose, cannot be excluded or restricted by reference to any contract term. In business-to-business sales and hire-purchase contracts, the obligation as to title cannot be excluded or restricted. Other obligations can be excluded or restricted but only in so far as the term satisfies the requirement of reasonableness. Reasonableness means that “the contract term must have been a fair and reasonable one having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made” (s 11(1)) and not when it was breached. The onus is on the proferens to show that it is reasonable. UCTA, however, does not formulate any specific definition of reasonableness as the requirement could vary from case to case. Instead, it provides certain guidelines for certain situations. Where the clause restricts liability to a specified sum of money, s 11(4) requires the court to have regard to available resources and insurance in determining the issue of reasonableness. Section 11(2) provides in Schedule 2 general guidelines for the application of the test for sale of goods and hire-purchase business-to-business contracts, even though the English courts have been willing to apply them more widely in other contexts.13 This gives the courts a wide discretion to assess the reasonableness of an exception clause in the context of a particular case.

8 This article will now examine the various approaches to the question of reasonableness that have been adopted in common law jurisdictions.

III. Singapore

9 The first case to give some insight into the criteria used in upholding the exclusion clause is Metro (Pte) Ltd v Wormald Security (SEA) Pte Ltd14 (“Metro”). Metro engaged Wormald Security to install

and maintain security alarm systems at their departmental store. The “Installation and Service Agreement” was for a period of 12 months at a fee of $7,086 for installation, followed by a...