Articles

Exemption clauses

The Professional Accountant March 2007
By Selwyn Cohen & Mark Costa

Today, exemption clauses, which are also sometimes known as exclusionary clauses or waivers or disclaimers, appear in almost every standard contract. They affect people who seek to enforce them and those against whom they are aimed and whose rights are intended to be curtailed or extinguished. We will refer to them as exemption clauses.

This article aims to set out the general position regarding the application and enforceability of exemption clauses. Because the law is very complicated and each case depends on its own facts, readers should regard this article only as a guide and should seek professional advice. Failure to follow legal requirements can (as will be seen hereafter) be very costly. Every party who intends to protect itself by an exemption clause and those against whom it is intended to be invoked, should if possible, take legal advice as to their position. Unfortunately, especially for the latter, this will not always be possible e.g. at a parking garage or hotel.

It is trite law that a party may exempt itself from the consequences of its own negligence but "[o]ver the years exemption clauses have attracted much scathing judicial criticism, most of it well deserved".

Some years ago a judge said:

"that (the right of a party to exempt itself) does not mean that the courts are not, or should not be, wary of contractual exclusions, since they do deprive parties of rights that they would otherwise have had at common law. In the absence of legislation regulating unfair contract terms, and where a provision does not offend public policy or considerations of good faith, a careful construction of the contract itself should ensure the protection of the party whose rights have been limited, but also give effect to the principle that the other party should be able to protect himself or herself against liability insofar as it is legally permissible. The very fact, however, that an exclusion clause limits or ousts common law rights, should make a court consider with great care the meaning of the clause, especially if it is general in its application."

Interpretation
Where the language of an exemption clause is clear enough, it must be given its clear meaning. Courts will consider the wording of the clause and then decide whether, on the facts of the particular case, the party who has signed it is bound.

Generally, the process of interpretation of exemption clauses is the same as that for any other legal interpretation.

There are however some differences in the interpretation process. The traditional approach is the following:

"In matters of contract the parties are taken to have intended their legal rights and obligations to be governed by the common law unless they are plainly and unambiguously indicated to the contrary. Where one of the parties wishes to be absolved either wholly or partially from an obligation or a liability which would or could arise at common law under a contract of the kind which the parties intended to conclude, it is for that party to ensure that the extent to which he, she or it is to be absolved is plainly spelt out. The strictness in approach is exemplified by the cases in which liability for negligence is under consideration. Thus, even where an exclusionary clause is couched in language sufficiently wide to be capable of excluding liability for a negligent failure to fulfil a contractual obligation or for a negligent act or omission, it will not be regarded as doing so if there is another realistic and not fanciful basis or potential liability to which the clause could apply and so have a field of meaningful application".

That the wording is critical is illustrated by the following:

"We have repeatedly refused to allow a party to a contract to escape from his just liability under it by reason of an exempting clause, unless he does so by words which are perfectly clear, effective and precise".

The result is that where an exemption clause is ambiguous, our courts will first examine the nature of the contract and decide what legal grounds of liability would have existed in the absence of the clause i.e. strict liability, negligence or gross negligence. The clause will then be given the minimum of effectiveness by being interpreted to exempt the party concerned only from the ground of liability for which he would otherwise be liable which involves the least degree of blameworthiness.

Also, where there is doubt, an exemption clause reasonably capable of bearing more than one meaning, is given the interpretation least favourable to the persons for whose benefit it is drafted. This is known as the contra proferentem rule, which requires that, where the clear meaning cannot be ascertained, the clause will be interpreted against the person for whose benefit the exemption is included and at whose behest it is drafted.

To avoid abuses of exemption clauses, our courts tend to interpret them narrowly. Public policy, which gives the courts more leeway plays a very important role. There are many judgments considering the effect of public policy in different circumstances and relating to differently worded exemption clauses. We deal later in more detail with public policy.

Onus of proof
A person who suffers an injury as a result of the wrongful conduct of another may base his claim either on contract (in appropriate circumstances) or delict. Delict requires fault, a claim based on contract does not. A delict consists of wrongful conduct which, in a culpable way, causes harm to another and entitles the victim to claim compensation from the wrongdoer.

If the action is based on contract, the plaintiff bears the onus of proving that the exemption clause does not bind him.

However, if the action is based on delict, whilst the onus of proving the fault lies with the plaintiff, the existence and enforceability of the exemption clause is on the party relying on it (e.g. the supplier).

Notice
The party relying on an exemption clause must prove that it was properly brought to the attention of the party against whom it is intended to be invoked. This was emphasised by the Supreme Court of Appeal in a judgment involving a manufacturer which failed in its attempt to exempt itself from consequential damages because the exempting clause, though properly worded, was not brought properly to the notice of the purchaser. This case is extremely important also in regard to the liability of a manufacturer for consequential damages and all manufacturers should be aware of it.

There are many reported cases which give guidance on how this requirement is complied with.

The caveat subscriptor rule
According to the caveat subscriptor rule, when a person signs a document he indicates his agreement to be bound by its contents and if these subsequently turn out not to be to his liking, he has no one to blame but himself.

Our law does not entitle a court to release a contracting party from the consequences of an agreement duly entered into by him merely because the agreement appears to be unreasonable, but there are indications that this may be changing.

As early as 1905 this rule was applied by the Transvaal Supreme Court where Innes CJ said:

"It is a sound principle of law that a man, when he signs a contract, is taken to be bound by the ordinary meaning and effect of the words which appear over his signature. There are, of course, grounds upon which he may repudiate a document to which he had put his hand …. [c]onsider the circumstances under which this note was signed … the language of the document was one which the consignor understood; no pressure of any kind was exercised. All that can be said is that the consignor did not choose to read what he was signing, and after he had signed did not know the particulars of the regulations by which he had agreed to abide. For the Court to hold upon these facts that the appellant is legally justified in repudiating his signature would be a decision involving far-reaching consequences, and it would be a principle unsupported by any principle of our law".

A well known and still often relied on case reported in 1958 involved Mr George who had concluded an oral contract with a hotel's receptionist and hired a room at a fixed amount per month and paid a deposit.

When he arrived at the hotel, the receptionist asked him to sign the hotel register. At the top of the form he filled in his name, date of arrival, tariff and nationality.

Between this and his signature was an exemption clause, exempting the proprietor for loss or damage to Mr George's property whether arising from fire, theft or otherwise by whomsoever caused, or arising from the negligence or wrongful act of any person in the employ of the proprietor.

When certain clothing and personal effects were stolen from Mr George's room, he claimed his loss from the hotel which in turn raised the exemption clause as a defence.

Mr George argued that he did not expect a new term to be introduced to their already concluded verbal agreement and that his attention should have been drawn to it.

The Appellate Division (as it then was) decided that Mr George was bound by the exemption clause and could not recover his loss from the hotel as he knew he was assenting to something, and indeed to something in addition to the terms he had himself filled in. If he chose not to read what that additional something was, he was, with his open eyes, taking the risk of being bound by it.

Further, the court stated that when a man is asked to put his signature to a document, he must not fail to realise that he is called upon to signify, by doing so, his assent to whatever words appear above his signature. This has been qualified in later cases which say that this principle applies only to what the signatory could reasonably have expected to be contained in that contract.

An example is the case where the signatory signed, on behalf of a company, an application for a credit card. The document clearly indicated that was its purpose. Hidden in the document were words in terms whereof it was sought to bind the signatory as surety. The court said that the signatory had not intended to bind himself as a surety and that his attention should have been drawn to the provisions.

Also relevant is a case which related to a claim by a man who visited a military installation and signed a book claiming to be an attendance register. What he did not know, and was not told, was that the book contained an exemption clause which a court later refused to enforce for a similar reason.

Each case will, however, depend on its own facts.

This rule will not apply in instances where a person has set a trap for the signatory by, for example, having the offending provision "hidden" in a contract. Our courts will not allow abuses of exemption clauses.

In a judgment delivered by the Appellate Division in 1919, M was found to be not bound by a memorandum he concluded with U which contained a guarantee and which he had signed without reading or understanding it on the representation of U's representative that he was merely acknowledging receipt of a cheque.

Recently a bank failed in its attempt to enforce a suretyship not read by the signatory before he signed it. It was accepted by the court that the arrangement was that the liability of the signatory would be limited. The one he signed was unlimited. This case is very important also in that it said that there was an obligation on the bank official to explain a complicated document to the signatory. This imposes a severe onus on the party who prepared the document and indicates the path our courts are following.

The English case of Curtis v Chemical Cleaning and Dyeing Company Limited provides another example of this. The facts were that the plaintiff, when delivering a dress to the defendant company for cleaning, was asked to sign a document which contained a clause that the dress "is accepted on condition that the company is not liable for any damage howsoever arising".

The plaintiff asked why she had to sign it, and was told that the defendants would not accept liability for damage done to beads and sequins on the dress.

Relying on this, the plaintiff signed without reading the whole document. The court decided that she was not bound by the wider indemnity contained in the document.

Incidentally, the use of the word "indemnity" in this context is not correct. This is discussed in more detail below.

Another example is where a man, who wished to sell his business, went to an estate agency which had the following advertisement: "Our motto: no sale, no charge".

He was then given a document which, in direct conflict with the advertisement, contained a reference to commission.

The man's attention had not been drawn to the fact that the terms of the advertisement were being departed from, so he was held not to be bound by the term. Today of course, most advertisements contain terms and conditions, albeit usually in very small illegible print, which make what is offered not so attractive.

In a judgment, not yet reported, the Supreme Court of Appeal considered the enforceability of an exemption clause.

Mrs Hircock was a visitor to South Africa from America. She went on an adventure tour, operated by Drifters, to Namibia. Whilst a passenger on a tour bus, which was negligently driven by an employee of Drifters, she suffered injuries.

Drifters admitted that the injuries resulted from the negligent driving of its employee but relied on the exemption clause signed by Mrs Hircock prior to the commencement of the tour.

The court accepted that the exemption clause had been brought properly to the notice of Mrs Hircock but nevertheless held Drifters liable, stating in the last sentence of the judgment "[c]ontracting out of this liability would be so perverse that we cannot accept that the appellant (Drifters) would have done so".

We feel that this was because Drifters was obliged by law to take out the insurance for a prescribed minimum amount (the specific amount was not mentioned). As always all cases must be looked at upon their own facts and it is probable that, had Drifters not been obliged to take out the passenger liability insurance, the court may have found differently.

It is disappointing that the court did not deal with what the position would have been if the claim was for an amount in excess of that which should have been covered by the insurance. In such an instance would it still have been "so perverse" to contract out of liability for the excess. We do not know what amount was claimed by Mrs Hircock as the court was considering only the question of liability and not quantum.

This last sentence of the judgment sends a warning to those who include exemption clauses in their contracts. It indicates that new criteria may be applied by courts in considering the extent to which exemption clauses can be enforced.

In the Hircock case and in another judgment delivered by the same court at about the same time the court described the exemption clauses as indemnities. This is a pity and very surprising because, as you will read later, the two are very different and have very different consequences.

Legislation
In England, Wales and Northern Ireland the legislature, acting in terms of the Unfair Contract Terms Act of 1977, has declared some exemptions unreasonable.

In South Africa, the Consumer Protection Bill has been published for comment. It will provide protection for consumers affected by unjust or unfair contractual terms and give courts enormous powers to achieve this.

For example, section 53 states that a transaction is unfair or unjust if it is excessively one sided in favour of any person other than the consumer, or if the terms of the transaction are so adverse to the consumer as to be inequitable.

Under these circumstances, a court will then have the power to amend or rescind the contract.

We are told that because of representations made the Bill has been amended and a new version will be published shortly.

The Constitution
In 2002 the Supreme Court of Appeal rejected the notion that the Constitution and its value system confer on Judges a general power to declare contracts invalid because of what they perceive as unjust, or to declare that contractual terms cannot be enforced on the basis of imprecise notions of good faith.

However, it reasserted that the courts will invalidate agreements offensive to public policy and will not enforce agreements that are in conflict with it.

It must be emphasised though that public policy is now derived from the founding constitutional values of human dignity, the achievement of equality and the advancement of human rights and freedoms, non-racialism and non-sexism.

As a result, courts are obliged to take fundamental constitutional values into account while performing their duty to develop the law of contract in accordance with the Constitution.

This is in line with section 39(2) of the Constitution which provides inter alia that when developing the common law, every court must promote the spirit, purport and objects of the Bill of Rights.

The mere fact that a term is unfair or may operate harshly does not per se lead to the conclusion that it offends against the constitutional principles.

In 2006 the Supreme Court of Appeal had to decide on the constitutionality of a time-bar clause which limited to 90 days an insured's time within which to serve summons on the insurance company.

It was contested that this infringed the insured's constitutionally entrenched right of access to courts.

One of the arguments advanced by the Plaintiff was that he was forced to agree to the time-bar clause as a result of the imbalance in bargaining power between himself and his insurer.

The court reiterated that the Constitution prizes dignity and autonomy, and in appropriate circumstances these standards find expression in the liberty to regulate one's life by freely arranged contractual arrangements. Their importance should not be underestimated.

The Constitution requires the courts to employ its values to achieve a balance that strikes down the unacceptable excesses of "freedom of contract" while seeking to permit individuals the dignity and autonomy of regulating their own lives.

This is not to envisage an implausible contractual paradise; it is to respect the complexity of the value system the Constitution creates. It also recognises that intruding on apparently voluntarily concluded arrangements is a step that Judges should countenance with care, particularly when it requires them to impose their individual conceptions of fairness and justice on parties' individual arrangements.

In the case mentioned, the evidence was so scant that the court said that one could only speculate on the Plaintiff's bargaining position in relation to the insurer.

This was because there was no evidence regarding the market in short-term insurance products; whether a variety of such products were available; the number of suppliers and their relative market share; whether all or most short-term insurers impose a time-bar; whether a diversity of time-limits is available to those seeking short-term insurance cover, and over what range they fall; whether for a person in the Plaintiff's position short-term insurance was an optional convenience or an essential attribute of life.

All this was critical to the question whether the Plaintiff in effect was forced to contract with the insurer on terms that infringed his constitutional rights to dignity and equality in a way that required the Court to develop the common law of contract so as to invalidate the term.

On the evidence, the court decided not. It was not permitted to speculate. Perhaps with more and better evidence the result may have been different.

A judgment delivered by Judge Blieden in 2001 also gives an indication of the courts' thinking on this aspect. He said, in relation to an exemption clause contained in a contract used by a well known car-rental company:

"It went against what any reasonable man would have expected, namely that those who purported to run a reputable car hire business in a reputable manner were not responsible for their breaches of contract… A party letting out vehicles has a duty to apply expertise in ascertaining and checking the conditions of such vehicles when it rents them out …. The renter or hirer of the vehicle from a reputable renting company cannot be expected to test the vehicle once he hires it. If one is sufficiently fortunate to have eyesight capable of reading the faint and small printing which characterizes the terms and conditions printed on the reverse side of the document concerned, one would become aware that there are a number of obligations to which the "renter" is binding himself."

The right to health care services
One of the rights contained in the Bill of Rights is the right to have access to health care services.

Mr Strydom had been admitted to hospital for an operation and post-operative medical treatment. Upon admission, an agreement was concluded between him and the private hospital.

After the operation, as a result of the negligent conduct of one of the nurses, complications set in, resulting in Mr Strydom suffering damages.

Mr Strydom argued that the negligent conduct of the nurse constituted a breach of the agreement by the hospital.

The admission document signed by Mr Strydom contained an exemption clause, providing inter alia that he absolved the hospital and/or its employees and/or agents from all liability. The hospital relied on the clause to avoid liability.

It was decided by the court that the admission clerk was under no duty to draw attention to the exemption clause in the admission document which constituted the contract; the exemption clause was not hidden away in small print and there was no evidence that Mr Strydom was in a weak bargaining position. There are other cases to this effect.

The result is that if a person signs a document, without proving that he was coerced into doing so because of the imbalance in bargaining powers, he will be bound by its terms subject of course to him fulfilling all other requirements.

It must be remembered though that the decisions turned on the evidence presented (or lack thereof).

If it could be proved that all hospitals follow this approach, then it may violate the constitutionally entrenched right of access to health care services as it would effectively prevent a person, who refused to accede to the exemption clause, from obtaining health care. Whether it would be sufficient to lead this evidence only in regard to private hospitals (and not take the option of public hospitals into account) is a question not yet considered.

Duress
In our law, if a person’s consent to a contract is obtained by some form of pressure regarded by the law as improper, the person concerned may rescind the contract. He may also, in appropriate circumstances, recover delictual damages for any loss which he has suffered. The two main forms of pressure which our law regards as improper are duress and undue influence.

The three elements required in South Africa to establish a defence of duress are:

• there must be a threat of imminent evil, for example to the life, person, honour or property of a person or a member of his family;

• the threat must be unlawful;

• the threat must have induced the threatened party to enter into the contact or to agree to terms to which he would not otherwise have agreed.

At present economic duress does not, in South Africa, permit a party to avoid a contract. It is an acceptable defence in England.

Once the elements mentioned have been established, the threatened party then has a choice to abide by the contract or to have it set aside.

The victim exercises the election to avoid the contract either by raising the duress as a defence against an action on the contract or by claiming restitutio in integrum (i.e. restoring the parties to the position they were in before the contract was concluded). Whether the victim decides to rescind or uphold the contract, he is entitled to delictual damages.

What would be the position of a person, who wishes to be admitted to a hospital and is confronted with an admission form which contains an exemption clause meaning that the only way to gain entry into the hospital is for him to sign it?

Would that person be able to avoid the operation of the clause by contending that he had signed the contract under duress? That he was forced to do so because, had he not done so, he would not have had access to health care?

It remains to be seen whether our common law of duress will be developed in terms of section 39(2) of the Constitution to include this type of situation. At present it seems unlikely.

Exemption and indemnity clauses
Exemption provisions are often accompanied by indemnities.

The consequences of indemnity provisions are potentially far more serious than exemption provisions whether or not they appear together. Every reader of this article is probably a party to a contract which contains one or both of them; probably both. Briefly, and put very simply, an exemption clause deprives a person of a claim he might otherwise have had. On the other hand an indemnity requires him to make good to the indemnifier a loss the latter has suffered even if he had nothing to do with it and was not otherwise liable.

Most readers probably do not understand the provisions and have no idea whatsoever of the very, very serious consequences that may arise from them. For instance, an indemnity can very easily cause financial ruin. Almost every lease of a commercial property has an indemnity.

We have already said that the Supreme Court of Appeal has, in two yet unreported judgments, incorrectly classified exemption provisions as indemnities.

Third parties are also affected by exclusionary clauses but that goes beyond the scope of this article.

Conclusion
This article does not deal in detail with the law relating to exemption provisions. It is intended only to draw attention to some of the problems which may arise both for those seeking to enforce the provisions and for those sought to be bound. The former should ensure that the provision they seek to impose is properly worded, properly brought to the attention of the party whom it is sought to be bound and complies with all other requirements, including the Constitution. Very soon the provisions of the Consumer Protection legislation will also be very relevant. Every exemption provision should be reconsidered and if necessary reconstructed.

Hopefully readers have now realised that the subject of exemption clauses is a complex one and those seeking to rely on them should take legal advice.

Routledge Modise has a team which has dedicated itself to the proposed new legislation and is able to advise on any contractual aspects, including exemption clauses. When the new legislation is finalised, seminars (unfortunately with only limited attendance being possible) will be held, as was the case with the National Credit Act some of which is already in operation, but the majority of which will come into force this year.

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Selwyn Cohen

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