Onerous terms

Whether forming an original contract or amending one, the offeree needs to be made aware of onerous terms that may deprive you of something important or obligate you to do something you don’t want to do. If a term of a contract is very harsh or highly unexpected, then its existence must be brought to notice first. In J Spurling Ltd v Bradshaw, Denning LJ said: ‘…[some] clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.’[1]

 

Exclusion Clauses

Exclusion clauses exist in contracts to limit liability. It may be liability for the breach of a contract term, or any other sort of liability. The limitation of liability for breaches of negligence law is common. These terms are usually valid, like any other contractual term. But courts usually interpret exclusion clauses narrowly, or where it is relevant to do so, against the party trying to rely on them...

 

If there is no signed contract, the norms of common practice play a role in what liability can be excluded. Statutory laws (which supersede common law) in the Federal Consumer and Competition Act make certain exclusion clauses in consumer contracts invalid.

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Penalty Clauses

The party hurt by a breach of contract can sue for damages equalling the cost of the breach. Contracts may contain a pre-determined sum called liquidated damages. The amount must be a reasonable estimate of the cost of breach. It cannot be a larger, punitive sum. Only a court can determine larger demands and will only grant them if it finds one party has acted unreasonably.

 

Anything greater than a reasonable estimate is called a penalty and is invalid. An example is the ongoing bank fees litigation. Another is the $88.00 fee imposed by certain car parking companies which has the appearance of a fine rather than a literal cost for failure to pay $2.00.

 

Construction companies often incorporate what they call ‘penalties’ into their contracts with each other to enforce timely completion. As long as it is a genuine pre-estimate of the cost of delay, then it is enforceable. Mere terminology does not make a difference.

 

A old but important case on penalty clauses is Dunlop Pneumatic Tyre Co v New Garage & Motor Co in which a retailer selling Dunlop Tyres was misbehaving so as to damage Dunlop’s brand. Dunlop sued on a term in its contract demanding £5 per tyre sold. There was no evidence of a calculation to determine whether this was a real pre-estimate of the cost of brand damage. The court recognised there was great difficulty in establishing how great the cost of this ostensible brand damage would be. It ruled that as long as an estimate is reasonable then it is likely to be a genuine pre-estimate of the cost and is valid. Averaging of costs of breaches occurring in different ways was found to be permissible.

 

It is well to keep in mind, however, that these days things are done with greater sophistication, and there are mathematical tools and data available for creating a reasonably reliable estimate of something as nebulous as brand damage losses. A court may not be so permissive of rough guesses any longer, and plaintiffs with substantial technical resources may have some viable evidence to call upon.

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[1] J Spurling Ltd v Bradshaw [1956] 1 WLR 461.

[2] Consumer and Competition Act 2010 (Cth).

[3] Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79.

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