TEMASEK POLYTECHNIC

SCHOOL OF BUSINESS

LAW OF CONTRACT
NOTES 2

Law of Contract – Terms and Exemption Clauses

Learning Objectives

I. Terms of a Contract
1. To understand the difference between terms and representations.
2. To understand the difference between implied terms and express terms
3. To understand the various sources of implied terms
4. To understand the difference between conditions, warranties and innominate
terms.

II. Exemption Clauses

1. To consider the nature of the exemption clause, and the need to have rules
regulating their use.
2. To understand the various ways of avoiding Exemption clauses by:
a. Questioning whether the Exemption clause is part of the contract.
b. Questioning whether the Exemption clause has been made void by law
and to know the instances where the Unfair Contract Terms Act renders
certain Exemption clauses void
c. Questioning whether the Exemption Clause can be interpreted in such a
way that the wrongdoing party cannot rely on it and to know how the
Contra Proferentum Rule favours a disadvantaged party.

A Terms & Representations

A1 In the course of negotiating a contract, parties would often make statements which
may or may not be intended to be part of the eventual contract. Hence, not all pre-
contractual statements will be considered to be part of the contract. Once a contract
has been created, one must ascertain what the rights and obligations of each party are
which are contained in the terms of the contract.

A2 Terms are statements which form part of the agreement which set out the duties and
rights of each party. These can be oral or written or both.

Representations are statements which are usually made before the agreement is entered
into and which do not form part of the final contract.

If there is a dispute between the parties, their rights and liabilities are determined by
what the terms of their contract are and not by the representations made. Whether a
pre-contractual statement is a term or a representation depends on the intention of the

Prepared by Mrs. Annie P . Gomez, Page 1

Lecturer, Diploma in Law & Management
Temasek Polytechnic
 parties. The remedies available for a breach of a term differ from the remedies
available for a misrepresentation.

EXAMPLE

David sold his vintage car to a motor car dealer. He told the dealer that the car was a rare 1950
model since the registration book of the car showed the car to be first registered in 1950.
Unknown to David, the registration book had been tampered with and the car was actually a
1940 model. Is David’s statement that the car was registered in 1950 a term or a representation?
Consider the relative expertise of the parties in determining whether they intended the
statement to be a term or a representation.

B Express Terms and Implied Terms

Express Terms are terms which are actually communicated to each other by the parties.

Implied Terms are those which the parties have not communicated to one another but
which the law inserts into the contract as a term.

The reason why the law inserts these terms is because although the parties themselves
did not include the terms, the terms are so obviously necessary to the contract itself
that they must have intended such a term.

EXAMPLE

John agrees to sell to Jane a crate of mangoes for $50, delivery to take place on 1 August. It is
agreed the crate will be sealed with a special tape.

Express terms: Price, date of delivery, sealing of crate with special tape

Implied Terms: Must have adequate packing material, must be kept refrigerated during
delivery

C Sources of Implied Terms

Terms can be implied by:

i. the courts (e.g. The Moorcock)

ii. Statutes (e.g. section 14(2) of the Sale of Goods Act 1979 states that where there
is a sale of goods in the course of business, there is an implied condition that
the goods would be of satisfactory quality)

iii. customs and practices of a particular trade which have become so well-known
in that trade that it does not need to be expressed

Prepared by Mrs. Annie P . Gomez, Page 2

Lecturer, Diploma in Law & Management
Temasek Polytechnic
 The Moorcock

The Defendant was the owner of a wharf. He agreed with the Plaintiff that the
Plaintiff's ship, the Moorcock, could be moored alongside the wharf to load and store
cargo. The ship, however, suffered damage when it was grounded at low tide due to the
uneven river bed. When the Plaintiff sued the Defendant, the Defendant argued that
because there was no express term that the berth would be safe for the ship at low tide,
he would not be responsible for the damage.

Question: Must there be an express term in the contract that the berth would be safe for
the ship at low tide?

Held:

1. No. Even though there was no express term to that effect, there was an
IMPLIED TERM in the contract that the Defendant would take reasonable
care to see that the berth was safe.

2. A term will be implied if it is one which the parties themselves would have
included in the contract had they addressed their minds to it, so as to give
"business efficacy" to their contract.

D Conditions, Warranties and Innominate Terms

* (Innominate Terms are not covered in DLES Lectures)

All terms, whether they are express or implied terms, can be classified as conditions,
warranties or innominate terms.

D1 Conditions

A condition is a very important term of a contract, one which goes to the root of the
contract. It is so crucial to the contract that if it is breached, the innocent party can treat
the contract as being ended and can refuse to perform his part of the contract.

D2 Warranties

A warranty is a term which is not so important to the contract. If it is breached, the

contract is still intact, which means that the innocent party cannot refuse to perform
his part of the contract. His remedy is to sue the other party for damages.

EXAMPLE 1

A, a pop star, signs a contract with Temasek Polytechnic to perform live during
Temasek's orientation program, for which Temasek will pay $5000. A fails to turn up.
Can TP refuse to pay?

Prepared by Mrs. Annie P . Gomez, Page 3

Lecturer, Diploma in Law & Management
Temasek Polytechnic
 This is a breach of a condition, because the contract between TP and A depended on A
performing at TP. TP can therefore treat the contract with A as ended and not only
refuse to pay A the $5000, but can also engage someone else to perform.
EXAMPLE 2

A, the same pop star, agrees with TP that he will appear for 3 rehearsals before the orientation
week. He appears only for one rehearsal and goes on to perform live as agreed. Can TP refuse to
pay A?

The term requiring A to rehearse 3 times is only a warranty. It is not so crucial to the contract
for TP to refuse to pay A. The main purpose of the contract was the live performance. So TP
can only sue A for damages and cannot treat the contract as ended and engage someone else.

D3 Innominate Terms * (Not covered in DLES Lectures)

Sometimes, the relative importance of a contractual term is debatable and such a term
would not fit neatly into the classification of conditions and warranties. These terms
are known as innominate terms.

Depending on how an innominate term is actually breached, the consequences can be

trivial or very serious. Hence, it is not possible to pre-determine whether the parties
intended any breach of such a term to be a “condition” or a “warranty” without
considering the extent of damages arising from the breach.

The remedy for breach of an innominate term therefore depends on the seriousness of
the breach. If the innominate term is breached in a trivial manner, then the injured
party is only entitled to damages. If the innominate term is breached in a serious way,
then the injured party is entitled to treat the contract as discharged.

Hongkong Fir Shipping Co Ltd v. Kawasaki Kaisen Kaisha Ltd

Kawasaki chartered the plaintiff’s ship for 2 years. The plaintiff admitted that the crew were
insufficient in number and incompetent and that this breached a term in the charter that the
ship was to be “in every way fitted for ordinary cargo service”. Kawasaki repudiated the
contract and refused to pay for the remainder of the remainder of the charter.

Issue: Did the breach of the term entitle Kawasaki to discharge himself from the contract?

Held: The term by itself could not be classified as a condition or a warranty. Treating the term
as an innominate term, the breach itself was not serious enough to deprive Kawasaki of
substantially the whole benefit of the contract. Hence, the extent of the breach was not serious
enough to entitle Kawasaki to repudiate the contract. Kawasaki was therefore able to only claim
damages.

Prepared by Mrs. Annie P . Gomez, Page 4

Lecturer, Diploma in Law & Management
Temasek Polytechnic
II Exemption Clauses

A1 What is an Exemption Clause?

An exemption clause is a type of contractual term which is inserted into contracts for
the purpose of excluding or limiting the liability of the party who breaches the
contract.

EXAMPLE

"The management shall not be responsible for any damage caused to any vehicle while it is
parked in this car park. Owners of vehicles park at their own risk."

B2 Why are there rules regulating Exemption Clauses?

Exemption clauses can be abused, especially in contracts where the terms are dictated
by one party and imposed onto the other (i.e. standard form contracts).

EXAMPLE

Dr Tan, a surgeon, requires Jack, a patient suffering from severe backache, to undergo a spinal
operation. Dr Tan requires Jack to sign a consent form which contains the following clause:
"...the hospital or its staff will not be responsible for any loss, damage, pain or suffering that
may be result as a direct or indirect consequence of this operation." Jack becomes paralysed
after the operation.

Can Jack sue Dr Tan or the hospital?

If a wrongdoing party (e.g. Dr Tan in the example above) tries to use the exemption
clause to protect himself, the innocent party can challenge it by asking 3 questions:

B2.1 Has the exemption clause been made part of the contract itself?

If an exemption clause is contained in a document which is signed by the innocent

party, the general rule is that he is bound by all the terms in that document, including
the exemption clause.

An exemption clause which is contained in a document given to the innocent party

after the contract has been concluded cannot be relied on.

Chapelton v Barry UDC

P hired 2 deckchairs from D on a beach. P took the chairs, made payment and was given two
tickets which he put into his pocket without reading. The tickets contained an exclusion clause
excluding liability on D's part for any damage arising from the hire of the chairs. The deckchair
collapsed when P sat on it and P was injured. He sued D who relied on the exemption clause.

Can D use the exemption clause to escape liability for P's injuries?
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Lecturer, Diploma in Law & Management
Temasek Polytechnic
 Held: No. The exemption clause on the ticket did not form part of the contract between P and
D. The ticket was only a receipt which was given to P after the contract was concluded and
was therefore too late to form part of the contractual terms.

The party relying on the exemption clause must take reasonable steps to bring the
exemption clause to the notice of the other party before or at the time the contract is
made. Otherwise, the exemption clause cannot be relied upon.

Thornton v Shoe Lane Parking

In the defendant’s automated car park, the machine issued a ticket at the pint of entry. The
ticket referred to conditions which were displayed inside the car park. These conditions
included an exemption clause denying liability for personal injury suffered in the car park.
Thornton suffered injury because of an accident while collecting his car and the defendant
sought to rely on the exemption clause to disclaim liability.

Held: For the exemption clause to be incorporated into the contract, there must be reasonably
sufficient notice prior to or at the time the contract is formed. Since the contract was formed
when the ticket was issued, the exemption clause cannot be relied upon because notice of the
exemption clause was given later when Thornton was inside the car park.

B2.2 Is the exemption clause void by law?

Even if the exemption clause has been made part of the contract, it can in some cases,
be rendered void by law.

A very important statute which has this function is the Unfair Contract Terms Act.

THE UNFAIR CONTRACT TERMS ACT (UCTA)

Some important provisions in the UCTA:

1. An exemption clause which excludes liability for death or personal injury due
to negligence is void. [Section 2(1)]

2. An exemption clause which excludes or limits liability for any other loss or
damage is valid only if it is reasonable under the provisions of the Act. [Section
2(2)]

Look at Dr Tan's example (paragraph B2, page 1) again. In the light of the UCTA,
would your answer be the same?

B2.3 Is the exemption clause clear and unambiguous?

Even if you fail to stop the use of the exemption clause using the first two questions,
you may still be able to prevent the wrongdoing party from using the exemption
clause by interpreting the clause very strictly, i.e. the words of the exemption clause
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Lecturer, Diploma in Law & Management
Temasek Polytechnic
 must be clear and unambiguous. If they are not, the courts will not allow the
wrongdoing party to rely on it.

When the words in the exemption clause are not clear and are capable of more than
one interpretation, the courts will choose the interpretation which is less
advantageous to the party relying on the exemption clause.

This is called the CONTRA PROFERENTUM RULE. (* this rule is not specifically
mentioned or covered in the DLES Lectures)

EXAMPLE

Andrew was driving his small Mini carrying 6 passengers when it crashed into a tree. The
car's contract of insurance contained the following exemption clause: "The insurance company
shall not be liable for any damage caused while the car is carrying any load in excess of that for
which it was constructed."

The insurance company used this clause to argue that since the Mini was carrying more
passengers than it was designed for, the company will not be liable for the damage.

Andrew can use the Contra Proferentum Rule to argue that the word "load" in the exemption
clause is vague. It should not mean passengers but goods which vans and lorries carry.
Therefore, the ambiguity should be used against the insurance company who must bear the
loss.

Even when the words in the exemption clause are clear, the courts will construe the
words strictly. E.g. a clause excluding liability for the breach of a warranty will not
exclude liability for the breach of a condition.

If the words of the exemption clause are very clear, then the party relying on it can
escape liability for any form of breach, subject to the UCTA section 2.

Photo Production v Securicor Transport Ltd

Facts: P agreed with D for the provision of a night patrol service for the P's factory. The
contract was on D's printed form with standard conditions, including an exemption clause:
"...would not be responsible for any injurious act or default by any employee of the company
unless such an act or default could have been foreseen and avoided by the exercise of due
diligence on the part of the Ds as his employer."

An employee of the Ds deliberately lit a small fire which got out of control and completely
destroyed the P's factory. P sued D.

Question: Can D rely on the exemption clause even though there had been a fundamental
breach?

Held: Yes. The words of the exemption clause and would cover deliberate acts as well as
negligence, so that the D would not be responsible for any damage arising from such acts.
Prepared by Mrs. Annie P . Gomez, Page 7
Lecturer, Diploma in Law & Management
Temasek Polytechnic
C. Exemption Clauses in the IT Age

For the purposes of the World Wide Web and all forms of digital media, the
incorporation of the terms and conditions will remain subject to the rules above.

A shrink-wrap licence is a familiar vehicle for licensing software distributed in

physical form such as a diskette or CD-ROM. The software is delivered in a package
or envelope. However the terms and conditions are only seen just before (or
sometimes after) the customer installs the software. Most software packages now
prevent the execution of the installation process without the acknowledgement of
the user that he or she accepts the terms. The legality of this process has not been
tested yet, but given the rules in Thorton v. Shoelane Parking and Chapelton v.
Barry UDC, it might be difficult to defend.

Similarly several websites which offer on-line services or products may fall into the
same trap whereby terms and conditions are introduced to the customer only after
the latter has paid for the service product.

Prepared by Mrs. Annie P . Gomez, Page 8

Lecturer, Diploma in Law & Management
Temasek Polytechnic