A Story of Exemption Clauses in Consumer Contracts

November 29, 2017 English Language

The inclusion of unfair terms in the form of exemption clauses in these contracts evinced the abuse of consumer rights and interests, thus calling for a view of corporate integrity and accountability in the realm of consumer protection. This paper demonstrates how the evolution of exemption clauses contributed to market failure and a denial of consumer rights. Applying the content analysis methodology which is based highly on literature review, this paper aims at exploring the legal position of exemption clauses in consumer contracts in Malaysia and selected countries.

In the course of rectifying market imperfection, one of the most important tool in ensuring corporate integrity and accountability is through legal means. This paper will attempt to demonstrate the Judicial approach to the problem of exemption clauses in Malaysia in the absence of a legislative control on exemption clause. In light of other country development, this paper shall also propose a legislative solution to this problem in Malaysia in achieving a fair balance between the rights of consumers and corporate bodies in this area of the law.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

This is in tandem with the current rise of paternalism and the aim to achieve sustainable development by way of corporate integrity and accountability. Field of Research: Contract Law, Consumer Protection Law, Corporate Responsibility. 1. Introduction The concept of corporate integrity and accountability has introduced a different dimension in the corpus of consumer protection law. This concept is in line with one of the main objectives of the world wide towards consumer protection legislation, namely, equity and social Justice.

Corporate responsibility (CRY) shifts the main aim of any corporations from ‘profit’ to ‘people, planet and profits’, as described by Doreen Macerate (2007), “CARS is not philanthropy, contributing gifts from profits, but involves the exercise of social responsibility in how profit are made. ” * Pariah Abdullah, PhD Candidate, Universities Sebastian Malaysia. Email: [email protected] Com ** Cassock. Proof. Dry. Akin Shack Mad Hyssop, Faculty of Law, Universities Sebastian Malaysia. Email: [email protected] Y 2052 To Racing (2007), consumer protection legislation contributes towards achieving bargaining equality as between players, namely, the trader and the consumer, by (I) correction of the imbalance in economic power between individual buyer and collective interests of producers and sellers in gods and services; (it) reduction in the incidence of purchase related losses and injuries by ensuring that buyers are protected from unfair trade practices and unsafe products; and (iii) the equitable striation throughout the community of such losses and injuries as continues to occur by appropriate product liability laws.

Seen as a tool for enhancing consumer welfare’s, the concept of CRY brings about awareness to corporations that the success of any corporation depends very much on consumer’s satisfaction in using their goods or services. In this globalizes transaction, the 21st century has seen the rise of consumerism as an instrument of market protection. The concept of consumerism has arisen due to the opposition of the wide spread belief of the cardinal concept of redeem of contract.

The concept of freedom of contract which saw consumers left to take care of themselves or ‘let the buyer beware’ was no longer a relevant concept in consumer contracts of this era. This cardinal concept was abused by unscrupulous traders who use it as a potent tool to discharge their liability through the utilization of manipulative method of drafting contract. According to Buckley (2008), contract is substantively unfair when its terms or price are excessively one-sided.

The courts gradually began to create Judicial creativity to protect the weaker party in their arraign in particular in standard form contracts. The Judiciary has adopted a new attitude in promoting the consumer welfare. Hence, the courts are called upon to play the paternalistic role in protecting the weaker party in business to consumer contracts (BBC). In light of competitive marketplace, consumerism dictates a fresh examination of the economic power of sellers in relation to buyers.

For any nation to be successful within the increasingly competitive global marketplace, it must not only ensure economic growth, but the rights of market players particularly the consumer, a significant contributor to economic growth, must also be at the heart of the social, economic, political and legal development. To strike at the heart of inequality, efforts must be made to minimize the disparities between consumers and traders.

An area of much concern which calls for a review of corporate responsibility is where traders attempts to exclude or limit their liability for breach of contract by including exemption clauses in consumer contracts. Understanding the development in this area of contract law brings us to the two rivalry concepts; the traditional concern for redeem of contract, the cardinal rule of contract law, and on the other hand, the concern to curb unfairness resulting from significant inequality of bargaining power, and in this context, known as the principles of consumer protection.

In this context, consumer protection dictates that consumers be protected and the government is called upon to play their paternalistic role. Seed Mad Lasagnas (2006) points out that, “These (exemption) clauses may appear in printed tickets, notices or receipts which are brought to the customers’ attention at the time of the agreement which, in cost cases, the customer has no time or energy to read the printed words. Even if he reads them, he would probably not understand them.

It is 2053 only when a dispute arises that the consumer realizes how much of his rights have been excluded by these clauses. ” According to Andrew Pang Boon Leone (1998), “The common law has long been familiar with the attempt of one party to a contract to insert terms excluding or limited liabilities which would otherwise be his. The situation frequently arises where a document purporting to express the terms of the contract is delivered to one of the parties and is not read by him.

The average citizen will certainly find that the vast majority of the most important contracts he makes in life are made on terms more or less imposed on him. For example if he buys a house, he has to agree to the terms stipulated by the housing developer; if he buys goods on hire-purchase he is subject to the terms of the agreement drafted by the finance company; if he wants essential service, like water, electricity and telephone he is again subject to the conditions stipulated by the relevant authorities.

If he wishes to travel by train, he is subject to the conditions stipulated by the Railway Ordinance or f he wishes to post a parcel he is again subject to the conditions in the Post Office Ordinance. These are but a few of the more important types of contracts which any ordinary citizen enters into. In all such cases he has absolutely no bargaining power as against the powerful authorities.

He merely has to adhere to the standard form contract which has been drafted by the stronger party such as commercial traders who have abused their position and strength for the sake of doing business and making money without exposing themselves to any risks whatsoever (Chris Thorpe and John Bailey 1999). 2. Evolution of Exemption Clauses By definition, ‘exemption clause’ refers to “any clause in a contract or term in a notice that purports to restrict , exclude or modify a liability, duty or remedy that would otherwise arise from a legally recognized relationship between the parties. (David Yates 1986). It was commonly used in the 19th century, as a result of the doctrine of freedom of contract, viewed as a legitimate exercise of bargaining power. Tahiti (1995) observed that “An exemption clause may take many forms, but all such clauses have one thing in common in that they exempt a party from liability which he would eave borne had it not been for the clause. ” Whereas G. H. L. Friedman (1994) notes that such a clause excludes or modifies contractual obligations.

It affects the nature and scope of a party performance. Termite (1984) however acknowledges that the advantage of exemption clauses is it enables the parties to know in general, what sort of risks they will probably have to bear; and thereby enable them to take up insurance coverage. However the worst scenario is that, it is opened to abuse especially when it involves private consumers who are too weak in bargaining power, knowledge or resources.

The function of exemption clauses, according to Yates & Hawkins (1986), is to delimit the extent of the obligations undertaken by the professes in the contract. The mischief of exemption clauses of exemption contract has been expressed by Hugh Belle (1989), “… Most customers faced with contract containing, ‘small print’ do not know what it contains or understand the effect of the clauses, and they do not think it worthwhile to spend the time and money necessary to find out or have the small print explained to 2054 them. Instead they tend to ignore it and shop in terms of price. The Law Commission 1975) describes it in the following passage: The mischief is that they deprive or may deprive the person against whom they may be invoked either of certain specific rights which social policy requires that he should have (for example the right of a buyer in a consumer sale to be supplied with goods or merchantable quality or the right of a person to whom a service has been supplied to a reasonable standard care and skill on the part of the supplier) or the rights which the promise reasonably believed the promise had conferred upon him…

Yates (1982) who discovered that one of the reason such clause was included in a entrant was that “everybody does it” and pointed out that a standard form contract containing an exemption clause acts as a tool of oppression of the consumers as the terms are not subject to negotiation by both parties to the contract. The abovementioned arguments fit comfortably within the exploitation theory of exemption clause in consumer contracts (F. Kessler 1943).

These arguments which are based on the inequality of bargaining power assume a monopolistic situation in which a consumer is confronted with lack of choice or having no choice at all but to accept the offer based on these terms if the consumer wishes to obtain the goods offered (David Ought 1991). According to Jill Poole (2008), types of exemption clause are enormous and it is hard to catalogue them. The contracts’ draftsmen are very creative, thus overriding the courts’ continuous attempts to curb unscrupulous exemption clauses.

However, in general it may be suffice to categories these clauses into three broad perspectives: I) Most common: The clauses purporting to exclude liability completely for part at least of what would otherwise be included in the contractual undertaking. For example, excluding liability for consequential losses and those clauses limiting liability to a reticular sum. For example, the price payable under the contract.

Other common forms: Which limit the remedy available either by imposing a short time-limit during which claims for breach must be made, or by imposing onerous conditions on obtaining the remedy such as payment of costs of transport of defective goods to and from the supplier’s place of business. More difficult to control: Clauses which, rather than exempting liability for breach, purport to modify the performance obligation, so that no breach occurs. 3. Legal Position of Exemption Clauses in Consumer Contracts in Malaysia And the

United Kingdom 2055 In Malaysia, case law development in this area of contract law has shown grave concern for consumer protection. The current law of contract has not been a great champion of the rights of consumers. The Contracts Act 1950 contains no provision on contents of an agreement and such does not govern the inclusion of exemption clause. As pointed out by Nick Ramada Manhood (1993): Being the parent law, the Contracts Act 1950 attempts to codify only the basic principles of contract law.

As such it does not have specific provisions dealing with contents or the terms of a contract. Hence no mention is made of clauses which limit or even exclude one party’s liability, clauses which incorporate terms in other documents into the contract… Let is perhaps for this reason that the Malaysia Judiciary has, hitherto, upheld the validity of clauses that seem to be unfair to consumers. One of the legislations in Malaysia affecting exemption clauses is the Sale of Goods Act 1957.

Further, as defined in section 4 of the Sale of Goods Act 1957, the Act applies to contract for the sale of goods. The Act incorporates into statutory form important principles established in case law. The Sale of Goods Act 1957 which governs dealings between business and business (BIB) and business and consumers (BBC) simultaneously accords no protection to consumers as far as exemption clauses are concerned. Instead of regulating the use of exemption clauses in sales, the 1957 Act by virtue of section 62 allows exemption of the implied terms and conditions by ‘express agreement’.

This section reads as follows: Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negative or varied by express agreement or by the course of dealing teen the parties, or by usage, if the usage is such as to bind both parties to the contract. The introduction of Consumer Protection Act 1999 in Malaysia has to a certain extent enhanced consumer rights in contract. The 1999 Act however fails to address other important areas of protection, in particular the protection of consumers in contractual dealings involving the use of exemption of traders’ contractual liabilities.

Although section 6 of the 1999 Act prohibits contracting out of the provisions of the Act, it fails to cover the wide spectrum of exemption clause which exists in consumer contracts. Despite the introduction of 1999 Act, it nevertheless transpires that there are several major flaws. Although the 1999 Act is an Act long awaited by consumers and consumer movement groups, to their dismay, their hope has been set back by its very nature. The 1999 Act is very limited in its application.

By virtue of section 2(4): The application of this Act shall be supplemental in nature and without prejudice to any other law regulating contractual relations. Consumer contracts in Malaysia are governed mainly by the Contracts Act 1950, the Sale of Goods Act 1957 and the Consumer Protection Act 1999. The Contracts Act 1950 governing contractual relationships is silent against unfair or unreasonable terms, 2056 whilst the Sale of Goods Act 1957 is not a consumer protection oriented piece of legislation (Akin 2009).

The very nature of the long awaited Consumer Protection Act 1999, being supplemental and without prejudice to any other law regulating contractual relations has indeed reduced the effectiveness of paternalistic legislation. In England, the courts’ hostility towards unfair bargain created through the use of exemption clauses in cases involving inequality of bargaining power is part f the common law manifestation of its support to the 20th century doctrine of consumer welfare’s. Thus the courts have developed certain rules of construction in dealing with exemption clauses.

Prior to the enactment of the Unfair Contract Terms Act 1977 (ACTA), the principles of English contract law are mainly to reduce some of the imbalances that flow from the use of exemption clauses on the basis of inequality of bargaining power. This could be seen in a later case of Leveling v Patent Steam Carpet Cleaning Co Ltd when Lord Deeding relied on this newly established principle o negate an exemption clause in a standard form contract because of unreasonableness. Another example is in the case of Holier v Rambler Motors, which involved a contract between a garage and a private motorist for the repair of his car.

The garage’s exemption clause stated that the garage ‘is not responsible for damage caused by fire to customers’ cars on the premises’. While in the garage, the car was badly damaged by a fire caused by the garage staffs negligence. The defendant relied on the exemption clause. The Court of Appeal held that the clause was ambiguous and unclear. Thus, the garage could not deny liability for the car’s damage. In the case of Lloyd Bank Ltd v Bundy, Lord Deeding had attempted to establish a general principle of unconscionably when holding the bank could not enforce the charge on the farm.

There is a principle of ‘inequality of bargaining power’. By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance r infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.

The infamous case is Photo Production Ltd v Security Transport Ltd : “any need of this kind of distortion of the English language has been banished by Parliament’s having made these kinds of contracts subject to the Unfair Contract Terms Act 1977 (ACTA)”. Unfair Terms in Consumer Contracts Regulations 1999 (OUTCRY) resulted from the 1972 national implementation of the 1993 European Directive on Unfair Terms in Consumer Contracts. The 1999 OUTCRY came into force n 1st October 1999.

These Regulations apply in relation to unfair terms in contracts concluded between a seller or a supplier and a consumer mainly added protection over those conferred by common law and ACTA relating to terms which have not been ‘individually negotiated’. In the first case on the Regulations, Director General of Fair Trading v First National Bank PL, the Court of Appeal expressed their approach to the issue of good faith as follows: 2057 … He good faith element seek to promote fair and open dealing, and to prevent unfair surprise and the absence of real choice. A term to which the consumer’s attention is not specifically drawn but which may operate in a way which the consumer might reasonably not expect may offend the requirement of good faith. Terms must be reasonably transparent and should not operate to defeat the reasonable expectations of the consumer. The consumer in choosing to whether enter into a contract should be put in a position where he can make an informed choice. 4.

Discussion of Finding: Judicial Approach to the Problem of Exemption Clauses in Malaysia In Malaysia, the legal approach to exemption clauses could be traced back as early as he late 19th in the case of See Ha Tong Bank Ltd v Rambler Cycle Co Ltd. (Akin 2009). Many of Malaysian cases on exemption clauses have been those relating to the liability of the port authorities in respect of bailsmen contracts (Akin 2009). In cases involving a consumer, the attitude of Malaysian Courts towards exemption clauses is difficult to ascertain due to Judges’ different ideologies and perspectives (Akin 2009).

Contract law and independent Judiciary are two critical elements for the economic prosperity (F. H. Buckley 2005). Several Malaysian cases have demonstrated he court’s increasing concern, in particular, on the use of standard form exemption clauses in consumer contracts. In dealing with exemption of liability clauses, the courts’ intervention varies based on different ideologies. The main rules which are used are those of ‘incorporation’ and ‘construction’. In the area of exemption of liability in Malaysia, by virtue of section 3 and 5 of the Civil Law Act 1956, the common law principles have been applied.

The courts were hampered by the theory of contract and consequently unable to prohibit exemption clauses, but within this hero they developed strict rules relating to the incorporation of such clauses as terms of the contract as well as interpreting them contra procurement defined as the court will interpret the terms against the party who rely on it. I. Rules of incorporation There are two (2) types of incorporation, one is incorporation by signature and the other one is incorporation by notice.

This is the most commonly used incorporation in interpreting exemption clauses is the later in controversial document of a ticket or a receipt. It affects the document such as the ticket or the receipt whereby one would to expert to find terms of a contract. The document containing the exemption clause must be one which a reasonable man would expect to contain contract terms. What if a reasonable man least expect there to be any terms on it, for instance, a funfair ticket. In the case of Chaperon v Barry I-CDC, the court of appeal held that the ticket was a mere receipt.

It was not a document on which the customer would expect to find contractual terms, and the exemption clause printed on it was therefore unincorporated. The court made a distinguishable from, for example, a railway ticket which contains upon it the 2058 ERM upon which a railway company agrees to carry the passenger. The test of reasonableness lead the court to categorize which document should fall into, depend on the nature, information, terms as the court think that a reasonable individual would expect to find on it.

In this case, since the chairs were taken, paid for the hire, followed by 2 tickets on the back of which was a condition which purported to exclude the respondents’ liability for any injury which the hirer should sustain. The hirer did not read this condition. Due to defective canvass on one of the chairs, it elapsed and injured the appellant. This case illustrated that the ticket was provided too late, as it was held that the contract was formed when the chair was taken for use, the ticket was provided later.

However, the Malaysian court in the case of Forbidding Bin Hajji Cantata v American International Assurance Co Ltd did not follow the ruling in Chaperon v Barry DC. George J clarified that not all notices on receipts have no effect because each case depends on its particular circumstance. The ticket was of no effect in Chaperon case (Seed Mad Lasagnas 2006) due to the reassurances in which the ticket was issued. It did however have effect in cases where the conditions were printed on the reverse of railway tickets, cloakroom tickets or documents issued by baileys when they take charge of goods.

In the case of Ghee Seen Motor v Ling See Ting, the court held that the onus is on the party seeking to rely on the clause to prove that he has taken adequate steps to bring the existence of the exemption clause to the knowledge of the other party. The requirement of reasonable notice was emphasizes by the court in one of the leading 20th century eases on exemption clause, Thornton v Shoe Lane Parking Ltd where the plaintiff parked his car at the defendants’ automatic car park. On entering the car park he passed through an automatic barrier, taking a ticket from the machine at the barrier.

On the ticket, in small print, it was stated that the ticket was issued subject to conditions displayed on the premises. To find where the conditions were displayed plaintiff would have to drive the car into the garage and walk around. The conditions were lengthy but included one exempting defendant not only from liability for image to cars but also from liability for any injury to customers. The plaintiff later returned to collect his car and there was an accident in which he was seriously injured.

The Court of Appeal held that the defendants were not protected by the exemption clause. In order to show the plaintiff was bound it, it was necessary to show either that he knew of it or that the defendants had done what was reasonably necessary to draw it to his attention. For this purpose, where the clause was exceptionally wide and was one which was not usual in that class of contract, it was to enough to show that the plaintiff had been given the notice that the ticket was issued subject to conditions.

It must be shown that adequate steps had been taken to draw his attention in the most explicit way to the particular exempting condition relied on. Here the defendants had failed to show that the plaintiff knew of the condition or they had taken sufficient steps to draw his attention to it. Lord Deeding (1971) held that: The ticket is no more than a voucher or receipt for the money that has been paid, on terms which have been offered and accepted before the ticket is issued. In the present case the offer was contained in the notice at the entrance giving the charges for garaging and saying ‘at owner’s risk…

The offer was accepted when 2059 the plaintiff drove to the entrance and, by the movement of his car, turned the light from red to green, and the ticket was thrust on him. The contract was then concluded, and it could not be altered by any words printed on the ticket… The customer is bound by the exempting condition if he knows the ticket is issued subject to it or, if the company did what was reasonably sufficient to give him notice of it. The eider or more unexpected the exemption clause is, the clearer the notice expected.

In Spurning v Bradshaw, Lord Deeding held that, “Some exemption clauses I have been would need to be printed in red ink on the face of the document with red hand pointing to it before the notice could be held to be sufficient”. It. Rules of interpretation Once it is established that the exemption clause is incorporated into the contract, the whole contract will be construed to see whether the exemption clause is clear and wide enough to cover the breach. The exemption clause must be clear and unequivocal otherwise it shall be inoperative.

If there is any ambiguity or uncertainty as to the meaning of the meaning of the exemption clause, the court will construe it contra procurement, which is, against the party who inserted it in the contract. In both See Ha Tong Bank Ltd v Rambler Cycle Co Ltd and Assyrian Lee Hang Sad Bad v Port Sweeteners Authority, on appeal to the Federal Court by the plaintiffs, the Federal Court held “that the contra procurement rule should apply to the construction of Rule 91 (1) Just as much as it does to any exemption clause in a contract. ” Malaysian Airlines System Bad v Malign Nathan & Nor [1986] 1 ML 330,

Malaysian Airlines was sued for breach of contract for failing to fly the first respondent, a fourteen year old pupil back to Koala Lump. In denying liability, MASS relied on Condition 9 under the condition of contract printed on the airline ticket.


I'm Amanda

Would you like to get a custom essay? How about receiving a customized one?

Check it out