Exclusion Clause in Contract Law

Discuss About The Mckendrick E Liu Q Contract Law Australian.

Under the common law, particularly in context of the contract law, a substantial rule of law relates to exclusion clause. Exclusion clause is such a clause, which is inserted in the contract, and which has the ability of restricting the liability of one party, in case of certain events[1]. Where the exclusion clauses are legal, for the reasons of being properly inserted in the contract, and being legal, the party inserting the exclusion clause is safeguarded from the liability arising on certain occurrences. It is crucial to note that the exclusion clause is invalid, where it restricts or limits the applicability of any law. As stated earlier, it is important to properly incorporate the exclusion clause in the contract, for it to be valid[2].

Any party, which attempts to rely on exclusion clause, needs to show that a reasonable notice had been given to the other party, regarding the presence of exclusion clause. In other words, it needs to be shown that reasonable steps had been undertaken to bring the exclusion clause to the notice of the other party. In Spurling v Bradshaw[3], the exclusion clause was deemed to be incorporated based on the previous dealings. In this case, the defendant used the services of warehouse on regular basis, and signed invoice covering the exclusion clauses each time. Upon the damages to orange juice, a claim was brought in context of exclusion clause not being incorporated, but this claim was rejected by the court. This resulted in defendant being denied a right of claiming compensation for the damage.

The present case has an invoice being signed every time the services of Mike’s Auto are taken up by John and every time John being given with an invoice covering exclusion clause. This clause safeguarded Mike’s Auto from damage or loss to cars of customers by any mode. There is a similarity being the present case and the precedent set through Spurling v Bradshaw. So, the ruling of the former can be applied in the present case study. For the exclusion clause to be valid, it needs to be shown that it was properly incorporated. Based on the quoted case, the exclusion clause would be deemed to have been incorporated based on previous dealings. This means that the loss of GPS navigation system or the accident caused by manager of Mike’s Auto cannot be claimed upon Mike’s Auto due to the correct incorporation of exclusion clause.

Incorporation of Exclusion Clause

Hence, based on the incorporation clause being properly incorporated based on previous dealings, Mike’s Auto would not be liable for the damages caused to John’s car, based on the operation of exclusion clause, which protects Mike’s Auto from loss caused to customer’s cars.

Whether Peter, David, John and Lynette would be able to use the defence covered under section 180(2) of the Corporations Act, or would they be made liable for contravention of section 180(1) of the Corporations Act?

The Corporations Act, 2001[4] puts certain duties and obligations on the directors of the companies. One of such sections, covering these duties, is section 180. As per this section, the directors have a civil obligation of using their powers, and fulfilling their duties, based on a degree of care and a degree of diligence, which would be exercised by a reasonable person, where such a reasonable person would have held the office of the director in similar situation and had the same responsibilities as the director of the company[5]. Where the provisions of this section are breached, the civil penalties covered under section 1317E are contravened[6].

This section not only provides the criteria which would lead to breach of duty of care and diligence, but also presents the directors with a defence, referred to as the business judgment rule. As per this section, the director of the company would be deemed to have complied with the provisions covered under subsection 1 of this section, based on business judgment rule, where the following conditions are fulfilled:

• The director makes the judgement for a proper purpose and in good faith,
• The director does not have any material personal interest in the judgment’s subject matter,
• The director has informed themselves regarding the judgment’s subject matter to such an extent that they believe it to be proper and suitable, and
• The directors rationally believe that the judgment being undertaken is in best interest of the company[7].

In the present instance, the directors of Australian Motor Corporation, i.e. Peter, David, John and Lynette, have a case being initiated against them by the ASIC for contravention of section 180(1). The directors were provided with advice of internal and external auditors on the financial statements of the company. Instead of doing through these financial statements themselves in proper detail, they merely relied on the advice of the internal and external auditors and believed that the financial statements were true and correct. No attempts were made or efforts were put in by the four directors in checking that the provided financial statements were indeed correct.

The business judgment defence is available only when the directors inform themselves on the judgment’s subject matter, instead of putting in blind faith on the information being provided to them. A reasonable director, holding their position, having same responsibility, and facing same situation, would have carefully analysed the information. They would have raised questions or cross referenced the matter provided to them, to check the authenticity of the advice provided by the internal and external auditors of the company. By not doing so, section 180(1) was breached, and the failure of not informing themselves on this matter resulted in the business judgment rule not being available to them.t scenario, the four directors of Australian Motor Corporation, i.e. Peter, David, John and Lynette, would be held to have contravened section 180(1) and the lack of informing themselves regarding the judgment’s subject matter would result in defence present under section 180(2) not being available to the directors.

Directors’ Duty under the Corporations Act

Under section 181 of the Corporations Act, another duty has been laid down for the directors of the company. As per this section, the directors have a civil obligation of working for a proper purpose, in good faith and in the best interest of the company[8]. Where the provisions of this section are not fulfilled, the civil penalty provisions, as are covered under section 1317E become applicable[9]. It is important to note here that the directors have to refrain from working for an improper purpose. This includes both taking advantage for self[10], or for defeating the existing shareholders’ voting power by new majority being created[11].

In Howard-Smith v Ampol Petroleum Ltd[12], the court held that the directors had abused the powers given to them, where they acted out in a manner where the objective was of defeating the voting power of the already present shareholders by forming a new majority through new shares being issued. This was seen as steps taken against the best interest of the company as a whole, and was deemed as breach of directors’ duties. Similar ruling was given in Punt v Symons & Co Ltd[13], where the directors were held to have abused their powers by issuing new shares to secure passing of shares, as it was seen as act done in person interest, instead of an act done in interest of the company.

In the present instance, the sole purpose of issuance of special category of shares by Paul to Cleo was to take away the power from the hands of “B” class shareholders and give it to Cleo upon his death. This was not in the best interest of the company, and was instead done keeping in view the best interest of Cleo, as a result of Paul marrying on Cleo and getting attached to her. As a result of this, the interest of the already present shareholders was maligned. Applying the ruling given under Howard-Smith v Ampol Petroleum Ltd, this would be deemed as an abuse of powers by Paul as he acted out in a manner where the objective was of defeating the voting power of the already present shareholders, by forming a new majority through new shares being issued. Based on Punt v Symons & Co Ltd, this would be seen as an act undertaken in Cleo’s or Paul’s best interest, instead of an act done in interest of the company.

Conclusion

Hence, based on the present scenario, the issuance of special category of shares to Cleo would be deemed as a breach of duty of Paul as is covered under section 181 of the Corporations Act.

References

Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31^st ed., 2012)

McKendrick E, and Liu Q, Contract Law: Australian Edition (Palgrave Macmillan, 2015)

Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614

Howard-Smith v Ampol Petroleum Ltd [1974] AC 821

Mills v Mills (1938) 60 CLR 150

Punt v Symons & Co Ltd (1903) 2 Ch 506

Spurling v Bradshaw [1956] 1 WLR 461

Corporations Act, 2001 (Cth)