Business Law in Organization


It is critical for every business organization to stay aware of all the rights and obligations which contract law imposes on each of them. It is imperative to understand that a signed contract has the effect of binding all the parties to the specific terms of contract. In pursuance to the same businesses and their owners can be made liable for breach of any of the clauses. One of the greatest concerns which the businesses often face is that in relation to vicarious liability, in furtherance to which employers are made liable for negligent actions of their respective employees. Hence, in order to protect the interest of ones business, the term of exclusion is often included by the entities in their contracts (Lawson, 2011). This plays as one of the vital factors which purports to protect the organizations from certain uncalled liabilities. However, application of these terms is subject to certain exceptions which have been discussed in the present project with the assistance of a business scenario.

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Factual Scenario

The dining room for senior staff members has been refurnished by introduction of various modern catering facilities. Some of the significant additions are in the form a coffee vending machine as well as a small freezer. These two appliances were bought from Electrical Hardware Suppliers and in order to install them the entity had sent for their own plumbers, who are working in the name of Satisfaction Plumbers. The vending machine was connected and was being used by the staff members for about two months. However, it was observed that many people had fallen sick after consumption of coffee and were also complaining about the peculiar taste it had. Furthermore, the freezer so installed was also not working properly and had broken down to ruin all the food articles. A compliant was made to the Suppliers, pursuant to which an engineer came to check the installation. He was shocked to discover that the plumbers had connected the machine to a lavatory pipe instead of drinking water. On getting appraised by this fact Innocent Plc sued the suppliers. However, they are disclaiming the liability under the exemption clause, which was mentioned on invoice of appliances, given to Innocent Plc.

Validity of Exemption Clause

Exclusion clauses are the terms which are included in commercial contracts to restrict or limit the liabilities of one of the parties in the case of certain happenings. For instance if one of the parties who has breached the contract shall not be required to pay damages to the other party, in the event such a situation is covered by the exemption clause. The scope of exclusion clauses is wide enough to even include the liabilities which are imposed vicariously on the employers. It is not possible for the owner of business to undertaken each and every activity and hence, the employees are required to accomplish the tasks on behalf of the owner (McKendrick, 2014). However, there are many instances wherein the employees do not act in a reasonable manner and cause harm to others. In such cases the employers are made vicariously liable for all the actions of their employees. In order to protect from such liabilities the management often includes an exemption clause in the contract which also covers vicarious liabilities.

The terms can be considered operative only if it is properly incorporated in the contract with the assistance of an effective notice, it is completely legal and is in relation to only negligence. Proper incorporation of the exclusion clause refers to the requirement of informing the other party in respect of inclusion of such a term (Validity of Exclusion Clauses in Contract Law, 2014). Thus, an actual or constructive notice shall be appropriately communicated to the other party, before the entire contract comes into effect. In the case of Thornton v. Shoe Lane Parking Ltd. (1971) it was held by the court that notice of inclusion of an exemption clause shall be made before the parties enter into the contract. For instance such clauses mentioned at the back of acknowledgement receipt or tickets cannot be considered as valid, as the purchaser is only informed after the contract has been entered into by the parties. Thus, it is necessary the term forms a part of the contract from the beginning. The incorporation of these clauses can be through signing the contract, by notice or in the course of dealing.

Inclusion of these clauses through contractual documents which are signed by the parties are considered valid and automatically make the parties bound by all the terms . In the case of L'Estrange v. Graucob (1934) it was opined by the court that even if the parties sign the contract without reading the clauses, it shall be considered operative. However, in the event of any misrepresentation of inclusion of the term, the entire contract or a part of it shall be considered ineffective. A similar opinion was held in the case of Curtis v. Chemical Cleaning Co. (1951) wherein it was held that inclusion of exemption clause through a signed document shall always be considered valid. However, law for unsigned documents it not similar and requires the concerned party to communicate an actual or constructive notice to the other party. In pursuance to this law it is also required that the notice shall be reasonable and sufficient enough to inform the party about inclusion of such a term (Ayres and Schwartz, 2014). In the case of Parker v. SE Railway Co. (1877) it was opined by the court that such clauses can only be mentioned or included through contractual documents. In other words, such documents which a reasonable person would assume to be comprised of  terms of contract. Inclusion of these terms in normal documents which are generally given in the form of acknowledgement receipt or a ticket. Further, in the case of Chappleton v. Barry (1940) it was recognized by the court that the rationale behind this law is that no reasonable person would expect receipts or tickets to contain contractual terms, and hence would never be informed about the same (Anson and et. al., 2010.). Therefore, it is imperative to apply the test of incorporation which validates or invalidates the exemption terms of a contract.

Further, it is vital for the term to be in compliance with all the applicable legal framework. The consumer Protection Act requires the businesses to provide services or products which are fit for the purpose and match the quality standards. Hence, the provisions of these statute operate to protect the buyers from misleading or deceptive actions of sellers. Any exemption clause does not have the power to restrict the liabilities arising from breach of any of the provisions of applicable laws. Therefore, it is vital to to check the legality of these terms. Further, it is also important that an exclusion clause shall be worded clearly to protect the concerned party from a negligence. This was highlighted in the case of Craig Fishing v. Malvern (1983) wherein it was opined by the court that the approach of courts while interpreting such unclear clauses is to opine against the parties relying on it (Scope and validity of exemption clauses in contracts, 2011).

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Further, in the case of McCutcheon v. Mac Brayne (1964) it was opined by the court that even if there was an ineffective notice of inclusion of these terms, court shall still consider it as valid in presence of previous consistent transactions containing such a clause. In furtherance to the same, in Hollier v. Rambler Motors (1972) it was reiterated by the court that in the case of private customers, significant number of such transactions shall have been entered into by the parties (Cartwright, 2016). Another exception which has been recognized by the court in British Crane Hire v. Ipswich Plant Hire (1974) that inclusion of these term shall be considered valid if included through general trade usage or custom. Another doctrine which is applicable in this scenario is that of Privity of contract, in pursuance to which any party who is not a part of the contract shall be considered as a third party. Moreover, they shall not be protected by application of such exclusion terms. In the case of Scruttons v. Midland Silicones (1962) it was upheld by the court that employees of business organizations who have entered into a contract with another firm, shall not be protected by operation of exclusion clause mentioned in such a contract, on undertaking a negligent action (Andrews, 2015). Therefore, it is an established law that employees shall be considered as a third party in the context of contract entered into between two parties.

Application of Legal Framework

It is imperative for the exclusion clause to be in compliance with the provisions of Unfair Contract terms Act 1977 and Consumer Protection Act 2015. The former requires the parties to draft the clause in a clear and unambiguous manner. The legislation checks the reasonability of inclusion of such a term in the contract. The application of this statute is limited to all the liabilities which arise within the course of businesses and such other related liabilities. The Act provides for some of the specific instances which are unfair in nature and cannot be accepted by law (Turner, 2013). It is extended to tortious liabilities which arise from undertaking of negligent actions or under the Occupiers Liability Act, 1957. Section 2 (1) of the Unfair Terms Act provide a business cannot exclude its liability, through an exclusion clause, for death or personal injury which has been resulted from a negligent action. In furtherance to the same it has also been stated that this is an absolute provision and is not subject to need of reasonability. In the case of Ailsa Craig Fishing v. Malvern (1983) it was held by the court that apart from the above exception in S 2(1) the parties shall be subject to the test of reasonability (Schwenzer, Hachem and Kee, 2012.).

Consumer Rights Act 2015 is another legislation which requires the party to provide products or services which are of reasonable quality and fit to be used for the specific purpose. The legislation in essence operates to protect the rights of consumers and save them from inappropriate conduct of traders. Section 49 of the Act requires the service providers to act with reasonable amount of care and skill while delivering the concerned services to the consumers. Hence, in the event the trader fails to adhere to the requirement of providing reasonable skills and care, it shall not be protected from the liability arising from such non-compliances. Further, Section 65 of this legislation specifically states that no party shall be excluded from the liability arising from negligent actions which have caused personal injury or loss to others (Poole,  2012). Thus it can be concluded that every negligent action of business which does not clear the test of reasonability, shall not be empowered to take recourse under exclusion clauses. In the case of Director General of Fair Trading v. First National Park (2001) it was opined by the court that in the event it is found by the court that the concerned party has failed to exercise reasonable care and skills while providing the services, then the exclusion clause shall not be considered capable to restrict the liability.

Further in accordance to Supply of Goods and services Act 1982, every trader is under an obligation to provide services or goods of proper standards and reasonable quality. Section 3 of the said Act requires the traders to impose a condition in accordance to which goods delivered shall be fit to be used (Haigh, 2015). Further in accordance to section 4 of the Act states that the goods transferred in the course of business shall be of satisfactory quality and reasonably fit to be used for all the know purposes. In the event the traders are acting in breach of these provisions, there is no recourse available under Exclusion terms. In accordance to Section 14 of Sale of Goods act  goods or services delivered to the buyers shall adhere to the requirement of satisfactory quality and shall be reasonable fit for the stipulated purpose (Chen-Wishart, 2012). In the event of breach of these clauses from the end of seller, the buyer shall be entitled to claim damages for losses incurred or require specific performance.

Application of law on facts

(i) In accordance to the laid down laws it can be inferred that the Electrical Hardware Suppliers had provided a freezer which had an inherent defect. In addition the installation services provided by them through Satisfaction Plumbers also failed to abide by the requirement of providing reasonably fit services. This can be evidenced by the fact that the plumber connected the vending machine to the lavoratory pipe, in place of drinking water supply, which in turn caused personal injuries to many staff members. However, the suppliers are taking recourse under the exclusion clause which is mentioned on the invoice.

In accordance to the mentioned laws in the previous section, the exclusion clause mentioned in the facts shall be analyzed. The terms mentioned on unsigned documents shall not be considered valid, until and unless the other party is specifically informed about the same. In the instance case no such notice can be seen to be communicated to Innocent Plc. However, at this point it is important to consider the fact that these are the usual suppliers of Innocent Plc, which implies that there is a possibility that the two parties have been consistently dealing in the same manner, and such exclusion clauses have been a part of all the previous dealings. In accordance to the law followed in McCutcheon v. Mac Brayne (1964), such inclusion of exemption clause shall be considered valid, irrespective of being communicated through the invoice (Qing-lin, 2011). Hence, the exclusion clause mentioned on the invoice given to Innocent Plc by the suppliers is completely valid in nature as it has cleared the test of incorporation.

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Further, it is important to assess the compliance of various legislations which are made applicable on the suppliers. Firstly, in accordance to varied above mentioned provisions of Consumer Rights Act 2015, Sale of Goods Act and Supply of Goods and services Act 1982 the supplier is under an obligation to exercise reasonable care and skills in providing the services. Moreover, it is also required by the supplier to provide services which are fit for the stipulated purpose. However, the supplier has failed to abide by the requirements of these provisions as the plumber connected the coffee vending machine with the lavatory pipe which in turn caused personal injuries to various staff members. This action has attracted Section 2 (1) of the Unfair Terms Act which clearly states that a business cannot exclude its liability, through an exclusion clause, for death or personal injury which has been resulted from a negligent action (Pretorius, 2010). In furtherance to the same the suppliers cannot take recourse under the exclusion clause as the staff members of the company have sustained personal injuries.

In addition, there is a question of legality involved as the supplier has failed to provide services and goods of satisfactory quality, which are fit to be used, in accordance to Consumer Rights Act 2015. There exists a clear non-compliance of the provision from the end of supplier. This further restricts the application of this exclusion term and makes the supplier liable to pay the requisite damages. Thus, Electrical Suppliers shall be imposed with a contractual liability against Innocent Plc as they were bound by the terms of contract to act in a reasonably skilful manner. Further, the sale of goods act require the parties to provide goods of satisfactory quality , however, the suppliers have failed to adhere by the same as they provided a freezer which broke within a period of two months. Thus, in this case also the suppliers cannot take recourse under exclusion clause to restrict the imposition of contractual liability.

(ii) Further, in the case of liability which is imposed on the suppliers directly against the staff members shall be tortious liability. The rationale behind the same is that the contract which was entered into was between innocent Plc and Electrical Suppliers. In Scruttons v. Midland Silicones (1962) it was opined by the court that employees of the companies shall be considered a third party to the contract which is formed with the suppliers or other stakeholders. This infers that there does not exist privity of contract between employees of Innocent Plc and the suppliers. In light of the same it can be concluded that there does not exist any contractual liability of Electrical Suppliers against the staff members. However, in accordance to the law laid down in Donoghue v. Stevenson (1934) there exists a tortious liability on the Suppliers against the the employees who have fallen sick. The suppliers were under a specific duty to act in a reasonable manner and install the appliance in the correct manner. However, there is breach of this specific duty as the plumber failed to connect the water supply pipe to the vending machine. Further, the breach of this duty has led to causation of damage to the employees who have fallen sick only after consumption of coffee from the said machine. Lastly, the consequence of the same was not remote in nature and could have been foreseen easily by the plumbers if they had acted in a reasonable manner. Thus, all the elements of negligence have been established in the present case, which clearly imposes the tortious liability on Electrical Suppliers against the staff members.


It can be inferred from the above discussion that traders are under an obligation to act in a reasonable manner while providing services or goods to their stakeholders. Contractual liability in such cases can be imposed on either of the parties in case of direct breach of any of the terms of contract. The exemption clauses act a shield to protect the organizations from different forms of liabilities which can be imposed on them in the course of business. However, it is imperative for the entities to assure that such a term is incorporated in a proper manner and is absolutely legal in nature. Once these factors are complied with the concerned party shall be entitled to take recourse under the exemption clauses.


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  • Ayres, I. and Schwartz, A., 2014. The no-reading problem in consumer contract law. Stan. L. Rev. 66. p. 545.
  • Cartwright, J., 2016. Contract law: An introduction to the English law of contract for the civil lawyer. Bloomsbury Publishing.
  • Chen-Wishart, M., 2012. Contract law. Oxford University Press.
  • Haigh, R., 2015. Legal English. Routledge.
  • Lawson, R. G., 2011. Exclusion clauses and unfair contract terms. Sweet & Maxwell.
  • McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
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