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A breach in the promise

Feature Articles

Cite as: April 2012 86 (04) LIJ, p.52

A High Court decision shows that the party relying on an exclusion clause must ensure it is worded appropriately to provide the protection sought.

By Daniel Khoury

The use of an exclusion clause to limit or exclude a party’s liability for breach of contract has long been recognised by the common law. However, this recognition has been tempered by a general hostility to such clauses, especially where the parties to the contract were not of equal bargaining power.

In contractual disputes involving the application and effectiveness of an exclusion clause, courts often need to determine whether the clause provides the protection sought. This has three important aspects:

  • the court has to be satisfied that the clause is, in fact, a part of the contract – if that cannot be proved the whole clause will be inoperative;
  • the wording of the clause will be assessed to determine whether it is adequate to cover the breach that occurred, which may result in a finding that although the clause is a part of the contract, by its wording it did not cover the breach; and
  • the court has to determine whether the efficacy of the clause is affected by legislation.

In relation to the first aspect, where the exclusion clause is contained in a document, the court must first be satisfied that the document (whether signed or unsigned) is “contractual” in nature. If so satisfied, it must then determine whether reasonable notice was given of its existence. If the clause is not contained in a document – as where, for example, it is in a sign on a shop counter – only the latter is relevant.

The second aspect involves interpretation of the exclusion clause itself. In this context it has been said that the clause should be construed “according to its natural and ordinary meaning read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract”.1

The third aspect reflects the fact that the common law relating to exclusion clauses is now affected by significant statutory intervention. On the one hand, legislation may operate to render the clause inoperative, usually because of what it aims to exclude (such as the terms implied in consumer contracts by statute)2 or for being “unfair” in the circumstances;3 on the other hand, it may specifically allow an exclusion clause.4

The difficulties associated with the second aspect – that of interpreting the words of an exclusion clause to find its “natural and ordinary meaning” – were revealed in the decision of the High Court in Insight Vacations Pty Ltd v Young (Insight Vacations).5 It shows that great care should be taken with the wording of a permitted exclusion clause if it is to provide the protection sought.

INSIGHT VACATIONS – THE FACTS

In February 2005 Mrs Stephanie Young and her husband purchased a 20-day European tour package from Insight Vacations. They joined the tour in London in October that year. On 14 October, while travelling in a tour coach on a motorway between Prague and Budapest, Young was injured when she fell backwards after the driver braked suddenly to avoid hitting the rear of a car.6 At the time, Young was out of her seat retrieving an item from the overhead compartment. Her seat was fitted with a safety belt.

Young brought an action against Insight Vacations based on breach of contract and, alternatively, tort (although the latter was not pursued). The contract claim was based on s74(1) of the Trade Practices Act 1974 (TPA)7 which provided that in every contract for the supply by a corporation of services there is an implied warranty that the services will be rendered with due care and skill.

Insight Vacations argued that it was protected by an exclusion clause found in its contract with Young. The exclusion clause provided as follows:

“Where the passenger occupies a motorcoach seat fitted with a safety belt, neither the Operators nor their agents or co-operating organisations will be liable for any injury, illness or death or for any damages or claims whatsoever arising from any accident or incident, if the safety belt is not being worn at the time of such accident or incident”.

DID LEGISLATION PRECLUDE USE OF THE CLAUSE?

Before the meaning of “exclusion clause” had to be considered, the courts had to determine whether the relevant legislation allowed such a clause at all. If the legislation forbade such a clause, discussion of its meaning was not warranted (unless by way of obiter dicta). Young argued that the exclusion clause was void under s68(1)(c) of the TPA.8 In effect this provided that a term of a contract that purported to exclude, restrict or modify the liability of a corporation for breach of a condition or warranty implied by the TPA (such as the implied warranty under s74(1)) was void.

Insight Vacations, on the other hand, argued that s74(2A) of the TPA9 allowed it to rely on the exclusion clause, notwithstanding the operation of s68.10 Section 74(2A), which commenced operation on 13 July 2004, provided that where there was a breach of the warranty implied by s74(1) and a law of a state or territory was the proper law of the contract, a state or territory law that operated to exclude or limit liability for the breach of the warranty operated as a surrogate federal law. Insight Vacations argued that as the contract was governed by the law of New South Wales, s74(2A) operated to pick up s5N of the Civil Liability Act 2002 (NSW) which provides that “a term of a contract for the supply of recreation services may exclude, restrict or modify any liability . . . that results from breach of an express or implied warranty that the services will be rendered with reasonable care and skill”.11

If s74(2A) operated in this way, interpretation of the exclusion clause itself would be vital; if it did not so operate, the clause would be void (under s68(1)(c) of the TPA) and of no consequence. The court at first instance,12 a majority of the Court of Appeal of the Supreme Court of NSW13 and a unanimous High Court14 found that s5N of the NSW legislation was not the type of provision picked up by s74(2A).

This was because s5N does not, of itself, apply to exclude, restrict or modify liability – it only operates to permit parties to certain contracts to do so.15 Consequently, Insight Vacations was held liable for breach of s74(1) of the TPA.16 Only Spigelman CJ found for Insight Vacations on this issue and this required his Honour to examine the scope and application of the exclusion clause. Although the High Court found against Insight Vacations, it, too, undertook (by way of obiter dicta) a similar examination, the Court finding that “[a]lthough it is not necessary . . . it is desirable to say something about that matter”.17

DID THE CLAUSE COVER THE BREACH?

As noted, it is a rule of construction that an exclusion clause should be given its natural and ordinary meaning. Interestingly, applying that rule of construction, the High Court and Spigelman CJ found a different (contradictory) meaning. The issue was whether, according to its natural and ordinary meaning, the clause applied to protect Insight Vacations only if a customer had a seat fitted with a seat belt and was injured while sitting in the seat with the belt not being worn. Neither the High Court nor Spigelman CJ identified this as a case involving ambiguity and the possible application of the contra proferentem rule.18 The judgments of both rely on identifying the natural and ordinary meaning of the words of the clause, particularly the introductory words, namely: “where a passenger occupies a motorcoach seat fitted with a seat belt”.

Spigelman CJ found that the introductory words were “not a reference to a particular point of time, but a reference to the availability of the seat belt in the particular seat at a time when the vehicle is in motion”.19 On this basis, the word “occupies” was “not to be understood in the sense that the tourist is in fact sitting down at the relevant time, but that he or she has a seat which has a seat belt”.20 In fact, the “intent of the clause was to ensure that the tourist wore the seat belt at all appropriate times, specifically whilst the bus was in motion”.21 On this basis, the exclusion clause protected Insight Vacations because Young occupied a seat fitted with a seat belt and was injured as a result of it not being worn.

Likewise, the High Court emphasised the introductory words (referred to above) and held that they should be given their “ordinary meaning”.22 However, it found an “ordinary” meaning fundamentally different to that espoused by Spigelman CJ. According to the High Court the “words ‘occupies a motorcoach seat’ should be understood as meaning sitting in the seat and able to wear a safety belt”.23 It could not refer to “times when the passenger stands up to move around the coach or to retrieve some item from an overhead shelf or for some other reason”.24 This view was supported by the fact that the “contract of carriage did not require passengers to remain seated at all times while the coach was in motion. The provision of a lavatory at the rear of the coach shows that the operator accepted that passengers could, and sometimes would, get out of his or her seat”.25

CONCLUSION

The nature of exclusion clauses and the courts’ attitude to them mean a practitioner drafting such a clause must take care to make its meaning and scope readily apparent.

Inadequate wording can render the clause ineffective: this could result from (inadvertently) leaving out a word or even including a word that operates to restrict the scope of the clause.

The latter occurred in Insight Vacations v Young. After finding the exclusion clause in that case to be ineffective to cover the breach that occurred, the High Court indicated that the result sought by Insight Vacations may have been achieved if the word “seat” had been removed from the introductory words of the clause.

If that had been done “it might have been possible to say that the exemption clause applied to any occasion when the passenger was aboard (or ‘occupie[d]’) a motorcoach fitted with seat belts, regardless of whether and why the passenger got out of the seat”.26




DANIEL KHOURY is a sessional academic at Victoria University and Swinburne University of Technology. He was formerly senior lecturer in law, Department of Business and Taxation, Monash University.

1. Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510 (HCA). Emphasis added. Any ambiguity in the clause is to be resolved against the party seeking its protection: the contra proferentem rule.

2. See, for example: s64(1)(a) Australian Consumer Law, Schedule 2 of the Competition and Consumer Act 2010 (Cth).

3. See, for example: Part 2-3 Australian Consumer Law.

4. See, for example: s32N Fair Trading Act 1999 (Vic) which allows the supplier of recreational services to limit their liability in certain instances.

5. [2011] HCA 16 (11 May 2011). The first and third aspects were not issues in the case.

6. It was accepted that the accident was a consequence of a road rage incident that had occurred earlier between the motorcoach driver and the driver of the car.

7. Since repealed. See now s60 Australian Consumer Law.

8. Since repealed. See now s64(1)(c) Australian Consumer Law.

9. Since repealed.

10. It was accepted that the proviso in s68B of the TPA, which allowed certain exclusion clauses in relation to s74 where the contract was for the provision of recreation services, did not apply because Young’s contract did not fit within the definition of “recreation services” under s68B(2).

11. The equivalent provision in Victoria is s32N Fair Trading Act 1999 (Vic).

12. Young v Insight Vacations Pty Ltd (2009) 8 DCLR (NSW) 369 (Rolfe DCJ).

13. Insight Vacations Pty Ltd v Young [2010] NSWCA 137 (Spigelman CJ, Basten JA and Sackville AJA).

14. Insight Vacations Pty Ltd v Young [2011] HCA 16 (11 May 2011) (French CJ, Gummow, Hayne, Kiefel and Bell JJ).

15. The High Court also found that s5N only applies to the supply of recreation services in NSW.

16. In the District Court, Young was awarded $22,371 (plus costs), comprising $11,500 for the injury suffered, $8000 for disappointment (for her inability to enjoy the remainder of the tour) and $2871 being interest on the latter component. In the Court of Appeal, the appeal against liability was dismissed (Basten JA and Sackville AJA, Spigelman CJ dissenting) but the quantum of damages was reduced (unanimously) by the amount awarded for disappointment and the interest thereon. In the High Court the appeal against liability was dismissed (unanimously).

17. [2011] HCA 16 at [37].

18. See note 1 above.

19. [2010] NSWCA 137 at [71].

20. Note 19 above.

21. Note 19 above.

22. [2011] HCA 16 at [38].

23. At [39].

24. At [38].

25. Note 24 above.

26. At [39].

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