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Reproduced with permission of 23 American Journal of Comparative Law (1975) 215-235

The Validity of Clauses Excluding or Limiting Liability

Gyula Eörsi [*]

  1. Historical Introduction
          1. Background and development
          2. The Socialist approach
          3. A comparison
  2. The Validity of Exculpatory Clause
    A. Minimal and absolute protection
          4. Minimal and absolute protection
          5. Fraud, intent, negligence
          6. Consumer contracts
          7. Forces of nature
          8. "Economic contracts"
          9. General clauses
    B. The battle of offensive and defensive weapons
          10. Rescue of exculpatory clauses
          11. The attack on exculpatory clauses
          12. Formal requirements
          13. Interpretation
          14. Substantive grounds for avoidance
                (a) Ordre public
                (b) Bonos mores
                (c) Treu und glauben
                (d) Laesio enormis
                (e) Manifestly unfair
                (f) Public policy
                (g) Unconscionability
                (h) The essence of the conract
          15. Control systems
          16. Prohibited areas
    C. Exclusion and restriction
  3. Specific problems
    A. "Unilateral" declaration
    B. Effect on third parties
  4. Conclusions

I. HISTORICAL INTRODUCTION

1. Background and Development. In the liberal era of the early 19th century exculpatory clauses enjoyed the protective umbrella of freedom of contract. Rapid industrialization from the last decades of the 19th century onward created mass production which was not possible without standardization of technology, standardization of technology required standardization of mass contracts and this resulted in a mass production of exculpatory clauses. One might have thought that this would lead to the heyday of volenti non fit iniuria, but that proved true only in part.

Capitalism arrived at a stage where the illusion of free contracts automatically ensuring fair balance on the market had gone. Liberté had devoured égalité, and fraternité was succeeded by the fierce competition of industrial giants. In the field now under discussion, the exculpatory clause was being increasingly used not only for standardization of contract terms but also for exploitation of economic power. At this point an important contradiction arose. The social effects of rapid industrialization in a private economy system created an acute conflict between the pure profit-interests of the corporations and the socio-political interests of Capital as a whole. The further development and, in some periods, the simple survival of the social system required a new social policy. It created in the field of law what is [page 215] termed droit social to mitigate the harsh consequences of large-scale private business. The protection of the weak became an order of the day. It could no longer be tolerated that big enterprise, through its standard contracts, misused its bargaining power and know-how and imposed standardized, unfairly-hard terms on consumers, destroying thereby freedom of contract of many through the freedom of contract of the law. "Disclaimers belong to the era of free enterprise, the rejection of disclaimers to the era of social welfare," says Fleming.[1]

The process of this development was and is not smooth; it was and is not accompanied by unanimous applause. It has to be fought out between the forces of the Old and the New, between the two tactics of handling the problem: one mainly concerned with the vested interests of business enterprise and the other with assuring the smooth running of the socio-economic system. This contradiction provides the energy for the battle between the Clause and its foes.

The battle was, of course, rationalised: ideas and theories were at hand to challenge and to meet the challenge. In the fight against the old abstract freedom of contract, first -- as usual -- old arguments came to support the new: bonos mores and ordre public changed their robes, particularly on the European continent. They began to mean what they never meant before. They were followed by an economic approach which continued to reflect the harsh, individualistic social-Darwinian approach in words, only to promote a lenient social purpose: every enterprise has to bear its own costs, damages included, or it has no place under the sun. This was followed by a version which already openly reflected the new social approach: the enterprise causing the damage is the best loss distributor either by distributing the loss among its consumers or clients through prices or, preferably, by distributing the loss among the group of those causing similar damage: through insurance. Such arguments appeared in practice to achieve a much stronger restriction on the validity of exculpatory clauses.

2. The Socialist Approach. With the advent of socialism the importance of the problem decreases and the approach to it undergoes important changes.

The decrease in the importance of the problem is due to the socialization of the bulk of the economy which brings about a much more intensive state activity in setting the rules of the game than under conditions of private ownership. State regulation extends also to the field which is largely governed by standand contracts in the West. It is much easier for the state to establish a fair balance in the distribution of risks where it does not have to reckon with the private interests of powerful private corporations and therefore, in contrast to [page 216] the laws in the West, there is hardly any need for a dividing line between business transactions and consumer purchases with respect to establishing fair balances. The rules are ab initio free from any bias in favour of egoistic interests.

This different approach to the problem is due to the fact that freedom of contract -- although it has its place in the contract laws of Socialist countries -- is no longer regarded as the main principle governing the law of contracts. The governing principle is the satisfaction of needs on the basis of an all-embracing national plan and freedom of contract comes into play only subject to and serving that principle.

3. A Comparison. Hence it can safely be stated that whereas the main problem in the West is in what field exculpatory clauses should be prohibited, in socialist countries it is to what extent should they be permitted. This might not be clear from the actual wording of the relevant rules; nevertheless it can be inferred from the rule prevailing in most socialist countries which gives mandatory effect to the legal provisions in contracts within the socialized sphere of the economy, unless otherwise provided.

The problem of exculpatory clauses is thus in essence a Western problem.

II. THE VALIDITY OF THE EXCULPATORY CLAUSES

A. Minimal and Absolute Protection

4. Minimal and Absolute Protection. In most legal systems there are some rules providing for a general, express, unconditional (absolute) minimum protection to which all exculpatory clauses are subject, without respect to the circumstances of the case or to the terms of the contract other than the exculpatory clause.[2]

There are many possible ways to secure a minimal absolute protection. The "liability approach" focuses on the defendant and does not tolerate irresponsibility for certain conduct (infra s. 5). The "victim-oriented approach" is concerned with the minimal protection of the potential victim (infra s. 6, 7). The "planned economy" approach may exclude disclaimers from certain fields of contract, etc. (infra s. 8).

5. Fraud, Intent, Negligence. The oldest and most widespread minimal and absolute protection is sponsored by the liability approach [page 217] which -- if not combined with other principles -- avoids an exculpatory clause for fraud even if it had not caused serious damage whilst tolerating slight negligence even if -- in the given case -- it destroys the very essence of the contract.

The limits of tolerable conduct differ in different legal systems.

(a) Under English, West German, Japanese and Polish law -- at least originally -- the only intolerable conduct is fraud or intent. The German rule is particularly interesting: as pointed out in the national report, the rule is due to the liberalistic approach of the BGB promulgated as late as 1896. This liberalism was stronger here than the well-known addiction of the Pandectists to Roman and pseudo-Roman law: "culpa lata dolo aequiparatur" is left out of consideration. It should, however, be mentioned that gross negligence was added to fraud and intent by German court practice, although not uniformly. A reverse trend seems to have developed in Belgium where originally the maxim "culpa lata dolo aequiparatur" prevailed and thus fraud, intent and gross negligence were not open for exculpatory clauses. But in 1957 the Cour de Cassation rejected the notion of gross negligence altogether, thereby leaving its former field open for exculpatory clauses.[3] This, by the way, is the sole indication of any recent extension of the validity of exemption clauses in all the national reports received by the present writer. However, its importance should not be overestimated. Renard, when commenting on this decision, suggests that its theoretical importance is much greater than its practicality because the borderlines between intent and gross negligence are unclear and after the decision of 1957 the judges are free to classify conduct formerly grossly negligent as now fraudulent and thereby nullify the exemption clause.[4]

(b) In the law of the USA reckless conduct is added to fraud and intent.

(c) In French, Luxembourg, Italian, Swiss, Hungarian and Rumanian law the principle "culpa lata dolo aequiparatur" is accepted: in addition to liability for fraud and intent, liability for gross negligence can also not be eliminated or restricted by exculpatory clauses.

But because each oaf these groups employs indeterminate concepts: (fraud, intent, recklessness, gross negligence), homogeneity within the groups is also conceptual only. In fact the judicial practice in states belonging to the same group may differ considerably according to where the borderline is drawn between gross negligence and fraud (intent) on the one hand and slight negligence on the other. Hungarian [page 218] courts, for instance, apply very strict standards and thus restrict the validity of exculpatory clauses: gross negligence in the eyes of Hungarian judges may well be only slight negligence elsewhere.[5]

It should also be mentioned that in several countries only personal intent or gross negligence is hit by the "absolute" prohibition, not the conduct of those for whom the defendant is only vicariously liable, This is the situation in Belgium (at least since the decision of 25 September 1959,[6] in Italy,[7] as a rule in Switzerland,[8] and in the Federal Republic of Germany.[9]

6. Consumer Contracts. A characteristic "victim-oriented" absolute and minimal protection is provided by the Swedish Consumer Sales Act 1973 which gives a mandatory character to the rules vesting the consumer-buyer with rights and remedies which he cannot validly waive. Some other legal systems exclude exculpatory clauses from the field of liability for the violation of physical and personal integrity. These interests are regarded as non-negotiable and therefore the prohibition of exculpatory clauses belongs to the ambit of ordre public. Italian law recognizes no exculpatory clause in this respect, nor does French or Polish law.[10] Art. 19 II of the Swiss Code of Obligations declares exculpatory clauses void in respect of rights attached to personality, and some decisions have denied the power to renounce liability for loss of life and limb. Under Hungarian law (Civ. Code art. 87) there is a complete prohibition to restrict by contract or by unilateral declaration any right attached to human personality. In respect of death or injury -- unless they are regarded as rights attached to human personality -- there is but a fragmentary prohibition: only strict liability for dangerous activities cannot be reduced or excluded in respect of loss of life and limb under art. 345 I of the Civil Code. Fragmentary prohibition appears also in the [page 219] West German and the English law [11] in respect of transport contracts, as well as in the USA in respect of injury to employees.[12]

7. "Forces of Nature." A further absolute bar to exculpatory clauses relates to damage caused by "forces of nature" (steam, gas, electricity, combustibles, etc.) employed in industry and transportation under art. 437 of the Polish Civil Code. As already mentioned, Hungarian law contains a similar rule but limited to loss of life and limb only.

8. "Economic Contracts." Another, less general, but nevertheless very important absolute bar to exculpatory clauses exists in socialist laws. Under Rumanian and Polish law (art. 558, Civil Code) no exemption clause is valid in the field of the so-called "economic contracts" concluded between the socialized units of the national economy (state enterprises, certain cooperatives). This is particularly important with respect to the penal clauses the minimum amount of which is fixed by mandatory rules. The justification of this prohibition lies in the protection of the national plan fulfilled through "economic contracts" in view of the simulative effect of penal clauses. Hungarian law takes an even broader approach: no exculpatory clause is valid if it operates against social property (goods owned by or in use of state enterprises, cooperatives" and social organizations such as trade unions; Civil Code, art. 314). There is but one exception: research institutes are permitted to exclude or reduce liability in the so-called "research contracts" because the obligations under such contracts -- to use French terminology -- frequently qualify as obligations de moyen.[13]

9. General Clauses. It could be thought that "general clauses" (ordre public, public policy, bonos mores, Treu und Glauben) also constitute absolute bars to exculpatory clauses. Yet this general report does not treat them as such, for several reasons. First, "because they frequently serve only as justification for a more specific prohibition of exculpatory clauses: e.g., the exclusion of fraud is ultimately explained by ordre public or bonos mores. Secondly, because their scope is undefined and vague to such an extent that they have but "a relative effect in everyday practice: their application depends on all circumstances of the case. Nowadays, in the hands of the courts, they have become the most important offensive weapons in the battle raging for and against exculpatory clauses.

We shall turn our attention to this battle now.

B. The Battle of Offensive and Defensive Weapons

10. Rescue of Exculpatory Clauses. The fight against freedom [page 220] of contract is led mainly by legislation and by the courts resorting to certain devices; in turn other devices are invented and used by the parties to the contract to fight the limitations imposed on exemption clauses. If there is a bar across the road, some are tempted to slip through and others to circumvent it. Limiting damages to a derisory sum is but one example of flying in the face of a prohibition against total exclusion of liability. Much more frequent is the endeavour to circumvent the obstacle. One method is to transfer the matter from the field of liability to the domain of obligations: one may not be free to stipulate an exculpatory clause but may be free to define one's contractual obligations. Another device might be, instead of stipulating an exculpatory clause, to impose an obligation on the other party. This is, for instance, the only way to defeat s. 6 of the British Defective Premises Act 1972 which expressly prohibits the landlord to exclude or limit his liability for injury or damage caused through defects in the state of the premises: for it is not prohibited to shift the duty to repair to the tenant and to deprive the landlord of the right to reenter for the purposes of repair. Thus the development of offensive weapons in the hands of legislation has led to the development of defensive weapons in the hands of the parties. Another -- unsuccessful and yet attempted -- device in Hungarian practice to get rid of mandatory rules in contracts of delivery or undertaking (locatio-conductio operis) is to call the contract a contract of sale or mandatum the rules of which are non-mandatory.[14]

Thus where exculpatory clauses lose ground, in many instances the skill and shrewdness of drafters of contracts and particularly of standard contract forms try to regain some of the ground. Those with superior bargaining power are likely able to hire the best drafters, thereby promoting not only their own interests but also legal formalism which tries to find loopholes in legal principles by finding, using and explaining magic words in contracts and contract forms.

11. The Attack on Exculpatory Clauses. On the other hand the courts and sometimes the legislators have found a number of devices to invalidate exculpatory clauses even in the absence of an express rule defeating the clause, particularly where the clause was born in a standard contract. These devices fall roughly into three groups. These reflect also the historical process of the fight against exculpatory clauses but may also coexist in the same legal system. They reflect the historical process insofar as they follow a pattern frequently followed to bring about changes in the law: The New appears first in the robes of the Old, uses traditional means to promote change and only after having gained a stronghold in the mind does it come out in a straightforward way, developing its own new principles and methods. [page 221] This turning point frequently involves a catalyst: in our case the spread of standard contracts and the abuses involved therein.

The three groups of these devices are:

(a) Formal requirements have to be observed, otherwise the consensus in respect of the exculpatory clause is negated or the clause is void. This device saves the principle of freedom of contract and salves the conscience: no wrong is done to the ignorant consumer of these formal requirements are observed. There is much wishful thinking in this reasoning and the effectivity of these formal requirements is doubted by many.

(b) The interpretation of contracts is an activity which can serve many purposes beyond establishing the strict meaning of contracts. It may become a strong weapon in the hands of the courts to reach results harmonizing with the judicial belief in what the law should be. Many a good result can be achieved in this way but it is difficult to develop a coherent legal policy and to work out strong ideas thereby. Further it waters down the interpretation of contracts and opens a new battlefield between offensive and defensive weapons: as mentioned by Fleming, it "leads to artificial constructions which match in ingenuity and artfulness the very drafting techniques they condemn."[15]

(c) In the third group express, substantive prohibitions are developed. This is done in two different ways: through general clauses arid similarly broad concepts (infra s. 14) and by expulsion of exculpatory clauses from certain fields (infra s. 16). In the first case the clause is overtly attacked, in the second it is deemed intolerable to live with any exculpatory clause in certain neuralgic situations.

The devices of the first two groups use the inventory of the old law. They are in Fleming's words, "covert attacks on substantive unfairness."[16] But with the rise of the devices belonging to the third group -- to quote Fleming again -- "a semantic attack is no longer the only weapon for striking at oppressive terms"; we are faced with a "frontal attack rather than mainly outflanking manoeuvres."[17] Now the New appears not only in the guise of traditional forms but in robes fitting the new requirements. It has to be mentioned, however, that the new inventory consists of a mixture of old and new general clauses and broad concepts and that the "frontal assault" should not be conceived as the beginning of a decisive battle: frontal attacks are launched without an assault on the citadel. They have but a moderate aim: not to eliminate the effects of economic power over the weak [page 222] but to set certain limits to the exploitation of economic supremacy in a straightforward way. The new barriers do not constitute" a coherent system and they leave playgrounds of very different size in different legal systems for the maneuvers of economic power.[18]

As rightly mentioned by Fleming; when there is a broad field for devices belonging to the third group (substantive barriers), the need for artificial constructions of exculpatory clauses decreases.[19]

12. Formal Requirements. The formal requirements are mainly conceived with a new dilemma: the standard contract is signed by a consumer who frequently does not read it at all and, were he to read it, would frequently not understand the implications of the document. He is frequently faced with a shrewd and sophisticated drafting designed by masters of expressing and yet concealing what is disagreeable. Formerly this was irrelevant: caveat who signs a contract. This is no longer true, at least not in the field of standard contracts. Where the law shrinks back from direct substantive attacks against unfair clauses, the fight is transferred to the field of contractual consensus: new -- formal -- requirements are invented to enable the courts to rule that despite the signature of the consumer there was no agreement in respect of unfair clauses. The signature creates a presumption which is however defeated where the exculpatory clause was hidden, was brought to the knowledge of the other party in an indirect way (e.g. by reference to another document) or where the, contract was concluded unusually swiftly.[20] Illegible and hidden clauses are no longer parts of the consensus.[21]

The same applies to terms which are beyond the range of reasonable expectation.[22] Here the standard contracts are defeated by their own characteristics: an unexpected clause has no place in a standardized contract. The reasoning clearly shows the indirect character of the assault: unexpected are bizarre, oppressive terms; terms which eliminate the dominant purpose of the contract, which are [page 223] unconscionable.[23] Not that the unfair terms are attacked as yet but the consensus is denied; the substantive devices of the third group (supra s. 11(c)) appear only as a kind of prima facie evidence of the absence of agreement. There is nothing wrong with these illegible or hidden terms if they are not illegible or hidden (even if the party signing the contract has not read them), nor with unexpected clauses if the attention of the party has been called to them, even if the party has no other choice but to take it or leave it, or has not even that option. The same applies to the rule in Israel which upholds standard contracts when the party affected has signed a special declaration that he agreed to the terms.[24] This means that one signature is not sufficient to assure the validity of unfair terms but two suffice, as also under Italian law in cases of standard contracts drafted unilaterally: the Civil Code (art. 1341) enumerates certain oppressive terms frequently used and provides that these are void unless the party expressly approves them in writing.[25] Again, the German BGB (§ 701 II) provides that an otherwise permissible exculpatory clause in a hotelkeeper's contract must be signed by the guest and not contain any other term -- a rule taken over by the European Convention on the Liability of Hotelkeepers Concerning the Property of Their Guests (art. 2(d)).[26]

A further manifestation of formal requirement appears in the Danish law under which onerous clauses must be printed in large type,[27] and in West German law according to which such clauses must be explained.[28] In the USA the exclusion or limitation of sales warranties must be conspicuous and in writing and mention the word "merchantability." Also, if liability for negligence is to be excluded, the word "negligence" must appear in the text. On the whole, disclaimers must appear "in clear and explicit language or expressed in unequivocal terms."[29]

13. Interpretation. To the second group of offensive weapons belong the various tricks of interpretation. The most radical among them is "interpreting out" the exculpatory clause: the court finds that the clause has not become part of the contract. As a matter of fact, this has been dealt with in the previous section. Yet another manifestation of "contracting out" is where the court finds that what is purported to be an exculpatory clause is in fact something else. [page 224] This method gives very little guidance for change in the law.[30] A third manifestation of the "interpreting out" technique: where a party has reason to know that the other party believes or assumes that the contract does not contain a particular term, the term is not part of the agreement.[31]

Less radical is the "contra proferentem" rule: in case of doubt the clause must be construed against the party which drafted the contract.[32] A similar rule provides that the onerous clause has to be construed against the party relying on it [33] or in favour of the party which deserves protection.[34]

Finally there is the simple rule: exculpatory clauses must be given a narrow interpretation.[35]

14. Substantive Grounds for Avoidance. To the third group belong the substantive weapons of overt attack. General clauses and other broad principles are frequently used here which give a dual character to some modern Western laws. They oppose principles and rules of equity to the strict rules and thereby duplicate the law in many fields, granting the courts an option between a lenient and a strict line to follow. This hardly promotes certainty of the law, yet permits the development of a legal policy serving the modern needs of the given socio-economic system.

(a) Ordre public. To begin with clauses in European Continental languages, the vaguest among them is ordre public, which is an honourable expression for what cannot be tolerated; it is frequently used to justify the absolute barriers (supra s. 9). It might be argued that this notion is entirely superfluous for our purposes as rules of ordre public are mandatory -- "very" mandatory rules -- which cannot in any way be eliminated from contracts. It is not however as simple as that. Perrin states that ordre public "constitute une réserve en faveur de l'ensemble des principes fondamentaux et généraux (écrits ou non écrits) de notre systeme juridique de droit privé."[36] It would go far beyond our task to define ordre public in this paper but we [page 225] are certainly not concerned with instances where it is used as justification for a statutory or judge-made rule. Only those cases belong here where ordre public is used as a direct barrier against an exculpatory clause. This, however, is a rare case. It appears in art. 1229 of the Italian Civil Code in this role. In Bessone's view, it is a last obstacle ("limite ultérieure")[37] in the way of onerous exculpatory clauses, summing up violations of the fundamental principles of procedure.[38] It may operate also in cases of slight negligence but the number of such cases is very restricted. Ordre public bars exculpatory clauses in respect of statutory duties (duties under family law or acts constituting serious criminal offenses in Italy).[39]

(b) Bonos mores. The next Continental general clause is bonos mores, applied also in the law of Israel. German courts used to apply art. 138 BGB to violations of bonos mores where a monopolistic situation was unilaterally and unjustifiably exploited without respect to the justified interests of the other party, but subsequently they switched to Treu und Glauben, the famous Mädchen für Alles of German equity. The English version, called "public morality," is much narrower than bonos mores: Shalev does not assume that an onerous clause could be considered as offending morals. On the other hand, he attaches great importance to bonos mores, particularly as a ground for culpa in contrahendo [40] which is an interesting Continental black sheep in the flock of the common law. Bona fides is another general requirement similar to bonos mores. According to the Swiss national reporter (Perrin), art. 2 of the Swiss Civil Code offers very broad possibilities for avoiding exculpatory clauses for lack of good faith: e.g., it is against good faith to assume serious obligations and simultaneously to decline liability for their fulfillment. Yet he has to admit with great regret that the courts do not use art. 2 to defeat onerous exculpatory clauses.

(c) Treu und Glauben. The German Treu und Glauben (BGB § 242) is coupled to the concept of abuse of economic power in the field of standard contracts: the abusive pursuit of unilateral interests runs against the principle of Treu und Glauben.[41] The principle also serves as an umbrella of substantive law over phenomena which were discussed within the context of the first group of "interpreting out" certain clauses (supra s. 13): unexpected clauses violate Treu und Glauben. Unexpectedness no longer precludes agreement of the parties [page 226] but is a direct barrier: this is how the "covert attack" is transformed into an "overt attack."

(d) Laesio enormis. Perrin advocates that the old and "noble" principle of laesio enormis (art. 21, Swiss Code of Obligations) should also be mobilized against unfair exculpatory clauses but has to admit that Swiss courts have not yet resorted to this device.[42]

(e) Manifestly unfair. On the road from Continental to common law language, it might be mentioned that the Flucht von den General-Klauseln (flight from 'general clauses'), characteristic of traditional Scandinavian legal thinking, has led the courts to reject bonos mores and the like, but in order to find a general justification for the rejection of exculpatory clauses they have adopted instead the rather common-law-like general clauses of "manifestly unfair" or "manifestly improper."[43]

(f) Public Policy. In the common law orbit a lately arrived parallel to ordre public is "public policy," the force and effectiveness of which has been considerably increased in the last decades. The expression is used by Fleming (p. 114) in a way similar to the use of ordre public by Perrin,[43a] viz. as comprising an entire, manifold attitude in respect of disclaimers: he speaks about "the public policy against disclaimers of tort liability" but in contrast to Perrin's view this public policy is not unqualified and exigent: in our terminology it does not constitute an absolute bar to exculpatory clauses. Public policy expresses merely a general animosity against disclaimers in the field of liability in tort but not a judge-made rule erecting a bar against them. There is, however, at least one case group where public policy serves as a justification for avoiding exculpatory clauses: the abuse of grossly disproportionate bargaining power, considered in West Germany as violating Treu und Glauben, may qualify as violating public policy in the USA for the purposes of attacking disclaimers.[44] In Israel, public policy, for the purposes of avoiding exculpatory clauses, means morally or socially undesirable clauses.[45]

(g) Unconscionability. A typical general clause in the sales law of the USA is "unconscionability." Art. 2-719 UCC provides that the exclusion or limitation of liability for consequential damages is void if it is unconscionable; in respect of consumer sales any limitation of consequential damages for personal injury is prima facie unconscionable. These principles tend to extend beyond sales law. [page 227]

(h) The Essence of the Contract. The most widely used barrier to exculpatory clauses is connected with the notions of "fundamental breach," the "core" or the "essence" of the contract, "deviation" from the contract, Wegfall der Geschäftsgrundlage, etc. The underlying idea is that the contract should not be radically changed by the exculpatory clause. If scrap metal is delivered instead of a vehicle, a valid exculpatory clause would defeat the main purpose of the contract. The same applies to the delivery of an aliud.[46] It is stated in the official comments to Art. 2-719 UCC that it is of the very essence of the contract that at least minimum adequate remedies be available.[47] Belgian courts also hold that no exculpatory clause may destroy the essence of the contract; if this would be the result, not even liability for slight negligence can be excluded. For instance an agence de renseignements is not permitted to exclude or limit liability for slight negligence because the contract would no longer be serious. Renard comes to the conclusion that Belgian law is not far from keeping out professionals altogether from the field of exculpatory clauses.[48] Perrin is of the opinion that in the field of mandatum no exculpatory clause can be tolerated because diligence belongs to the very essence of such contracts. In the Federal Republic of Germany no exculpatory clause is tolerated the operation of which would destroy the image (Leitbild) of the contract; e.g., liability for unseaworthiness of a ship cannot be defeated by exculpatory clauses.[49]

This test is operative in extreme cases only. Nevertheless it reflects a modern approach to contracts in general: it is concerned with the more or less objective function of contracts and therefore can be regarded as a cousin of the doctrine of frustration. It concentrates on the function of the contract and not on the conduct of the parties and therefore -- in the extreme cases where it is operative -- can be used where no other barrier is operative. In this respect it serves as an ultima ratio similarly to ordre public, the only difference being that ordre public is an ultima ratio in the realm of morally imbued legal principles while the doctrine of fundamental breach refers to the ultima ratio of economic facts.

15. Control Systems. Substantive rules controlling exculpatory clauses open the possibility of institutionalizing the fight against [page 228] unfair clauses through the establishment of governmental, judicial or ombudsman control of standard contract forms. This might seem to be very effective but raises some problems.

To oblige everybody to submit all such forms to a state agency would involve immense costs, loss of time and an increase of red tape; in fact, it is hardly feasible except in the field of well-defined types of contract such as the standard conditions of insurance contacts. Such standard conditions are in many legal systems under compulsory government control. The legal effects of such control are governed by two approaches. One holds that once the controlling government agency approves such conditions, the exculpatory clauses therein can safely be deemed valid, although in the Federal Republic of Germany even such clauses may in very exceptional cases be annulled.[50] On the other hand, in Japan administrative control does not affect the validity of an exculpatory clause (severance theory).[51]

To leave it to the drafter whether he wants to submit his standard conditions to preliminary control is not very effective, as shown by the experience in Israel where such a system was introduced ten years ago [52] with the result that the very interesting statute was hardly ever used in the first decade of its life: it "turned out to be stillborn," writes Shalev.[53]

The third possibility is to leave it to the party which seeks protection to take the initiative and the fourth is to empower and oblige a public authority to keep a watchful eye on standard contracts, and if necessary to investigate and take appropriate actions. The latter two approaches were introduced in Sweden when the Marketing Practices Act 1970 established the office of the Consumer Ombudsman and a special Market Court, and the Act Prohibiting Improper Contract Terms 1971 extended the activities of the two new institutions to the field of standard contracts concluded with consumers. The Ombudsman may take actions upon the request of individuals or on his own, he may settle the problem through negotiations or bring an action before the Market Court; if the Ombudsman refuses to take action; any association of entrepreneurs, consumers or employees may also do so. The Market Court has the power to issue an injunction [page 229] prohibiting the use of a clause under penalty. In addition fines can also be initiated in an ordinary court by the public prosecutor.[54]

We have penetrated into the sphere of standard contracts in general; we have to withdraw now to the more modest field of exculpatory clauses.

16. Prohibited Areas. The second manifestation of overt attack on exculpatory clauses consists in their expulsion from certain fields. Some of the relevant case groups belong to the "absolute barriers" (supra s. 5). Another area (supra s. 14(h) ) might be that of the activities of professionals and particularly certain groups of professionals dealing with "consumers" in the broad sense of the word, such as hotel-keepers. Art. 6 of the Annex to the European Convention on the Liability of Hotel Keepers contains a prohibition of any exculpatory clause in respect of liability concerning the property of guests.[55] West German statutory law bars exculpatory clauses from certain labour relations and in certain case groups of carriage and forwarding.[56]

A further important field under the banner of consumer protection is discussed in the national report from the USA: The enlarging field of public services.[57] Enterprises offering a public service are denied the right to contract out of liability for negligence because their duty is not only to serve the public but to serve it properly. Traditionally the duty of public service covered warehousemen, innkeepers and public utilities (gas, electricity, etc.), only to be later extended to other professional bailees open to all comers, such as parking garage, parking lot and parcel check room operators. Recently the courts have even gone beyond bailees and extended this policy to towing contracts, publicly financed universities and hospitals as well as to other modern typical public service relations such as those of banks arid Increasingly to landlords (especially public housing authorities), but amusement and recreational facilities remain outside the field.

This field is overlapping with that of the professionals. A developing doctrine of "transactions with a public interest" emerges and this seems to be a very important phenomenon. The underlying principle is quite similar to that governing the entire socialist law where all transactions are regarded as involving, besides traditional individual [page 230] interests, also public interests. In this particular field a Western law "converges" -- of course not intentionally -- on socialist laws, without sacrificing any element of the hard core of the Western systems.

C. Exclusion and Restriction

A final word concerning the distinction between clauses which exclude liability in toto and those which merely restrict it. The question may be asked whether these are two distinct categories or are but two manifestations of the same phenomenon. Theoretically the answer depends on the justification given to liability. For those who attach a great importance to the preventive or educative function of liability, who see an important deterrent in it, the difference is or ought to be crucial, as in the case of total exclusion of liability the preventive function of liability is absent whereas in the case of partial exclusion this function remains operative.[58] This statement on legal policy would lead to the conclusion that in legal systems attaching utmost importance to the preventive function there should be no room for a total exclusion of liability. This, however, is not the case. Nowadays the function of prevention or deterrence has its most powerful strongholds in socialist laws and yet the Hungarian and Rumanian laws do not make any difference between a total and a partial exclusion of liability with respect to their validity. Moreover, under Polish law a total disclaimer is void only in cases of intentional acts but a partial exclusion also in cases of gross negligence, although this difference is largely reduced by the general rule avoiding all stipulations not in conformity with the rules of life in a socialist society .[59]

It should be noted at this point that the Italian national report, while stating that "immorality" justifies only the prohibition of a total exclusion of liability and that another justification is needed for the restriction of a partial exclusion,[60] does not find any difference between the two in respect of the rules restricting the validity of either of these clauses. The French national report also does not discern any difference in this field, but Starck is very critical about it, commenting that it is "perhaps ... but a temporary mistake."[61] It might also be noteworthy that the French, West German and English national reports accord special treatment to total and partial exclusion, but the main rules governing their validity appear to be the same.

III. SPECIFIC PROBLEMS

A. "Unilateral" Declarations

17. "Unilateral" declarations cover a wide range of case groups: [page 231]

(a) the "ticket" cases: the exculpatory clause is printed on the back of a ticket, e.g. in the field of carriage;

(b) a public notice excluding or limiting liability at a place open to all comers who usually enter into a contract with the person who put up the notice at a restaurant, bistro, guarded parking lot, barber shop, etc.

(c) a public notice by the occupier of an area excluding or limiting his liability for damage suffered on the premises whether or not a contractual relation is established between him and the visitor.

18. When is the notice binding? The expression "unilateral" was set in quotation marks because a unilateral declaration never suffices to bind another person; nobody can unilaterally set aside an onerous provision of law to the detriment of others. Thus the first question in connection with such "unilateral" declarations is whether or not the conduct of the other party can be construed as an acceptance of the exculpatory clause hanging on a tree or wall. According to English courts there are two preliminary conditions to this:

(a) The notice should be clearly legible, should not be hidden. In the ticket cases reasonable steps have to be taken to bring the terms to the customer's attention; if the document is faded, torn, the print is microscopic, obliterated, the clause has no effect. In other cases the notice must be displayed in a prominent place containing a suitably worded exemption clause.[62]

(b) The party to be bound should have the possibility to read the notice at least at the time of entering into the contract. If the notice is placed on the wall of the hotel room and the guest has already checked in when going to the room or if it is placed in a parking lot in such a way that it can be read only after the party has already checked in and entered the place, its contents do not become part of the contract. But it is not required that he should have read the notice.[63]

Even if these requirements are satisfied it might still be an open question whether or not the notice has been accepted by the other party. For instance under West German law it is not permitted to limit or exclude liability for violation of the "Verkehrssicherungspflicht" (traffic safety duty) by a notice on a road crossing an area open to the public; because one taking part in traffic may not make a contractual offer.[64] Further if somebody enters a bar, reads the notice and has a drink, it can be argued that this does not mean that he submitted himself to the exculpatory clause. Under Socalist laws [page 232] such notices are not binding on visitors,[65] unless there is -- besides the coat hangers around the tables -- also a guarded wardrobe. Such a notice serves at best the purpose of rendering the guests more attentive. In most Western laws, however, such notice would suffice to bind the visitor.[66] Under English law the general rule holding such notices valid does not apply to persons entering as of right rather than by invitation, like a bailiff, policeman or fireman. Under Swiss law such notices seem to bind the other party in contract but not in tort, and in Belgium they are subject to restrictive interpretation.[67]

B. Effect on Third Parties

19. An exculpatory clause may affect third parties in two opposite ways:

(a) It may benefit persons in breach other than the parties to the contract and

(b) it may leave without remedy victims not parties to the contract who could have recovered in the absence of the exculpatory clause.

20. Third Parties in Breach. The first question is whether or not an exculpatory clause effaces the personal liability of persons for whom the party to the contract is vicariously liable (servants, Erfüllungsgehilfen or Hilfspersonen, préposés). On the one hand, many legal systems find it difficult to extend the effects of an exculpatory clause to persons not parties to the contract. On the other hand, it seems to be increasingly repugnant to hold an employee liable when his master is free from liability, unless the employee is covered by liability insurance taken out by the employer in his behalf.

Both opposite principles are reflected in the West German law. There, on the one hand, the German version of privity of contract prevents the validity of exculpatory clauses in favor of third persons. This difficulty is, however, overcome with the help of successful efforts to save the doctrine of privity and yet to permit exculpatory clauses to be effective in respect of third persons, too. A legal-technical [page 233] device is used for this purpose: liability arises in respect of third persons despite the exculpatory clause but the clause is construed as a pactum de non petendo: liability exists but the party is under the obligation not to claim damages and this is enforceable under BGB § 328.[68]

Japan, on the other hand, does not permit exculpatory clauses to affect third persons.[69] The original approach of the common law was also to deny all effect to an exculpatory clause in respect of damage caused by persons not parties to the contract, persons who gave no consideration for being relieved from liability. This is still the law of England.[70] But American courts have moved away from this position: if the plaintiff clearly expresses his intent that the exculpatory clause should also cover a third party, the latter is protected by the clause although the consideration came not from him but from the other contracting party.[71]

In most socialist laws the problem is by and large resolved by the rule which makes the employer alone liable for damage caused by employees both in contract and in tort.

21. Third Party Victims. In the second group the victims are not parties to the contract. This may occur for instance in the chain of distribution from the manufacturer to the ultimate buyer; or where as a consequence of the breach of contract by a landlord the guest of a tenant is injured; or where the benefit of warranties was extended to the buyer's family and his guests or employees.

In the chain of distribution it was held that a disclaimer does not "run with the goods": the exculpatory clause cannot be used against persons not parties to the contract. On the other hand, in the case of warranties extended to family members, etc., both in the USA and the Federal Republic of Germany the effect of the disclaimer was extended to them so as to bar their recovery in contract. This, however, does not prevent such parties from suing in tort.[72]

IV. CONCLUSIONS

22. The general trend of development in the field of the admissibility of exculpatory clauses is twofold: [page 234]

(a) to restrict the field for exculpatory clauses, particularly in standard contracts,

(b) to resort more and more to overt attacks through substantive devices.

Both tendencies are most developed in socialist legal systems, mainly due to their nationalized and planned economies. As a matter of fact, Western laws are forced by economic and social development to approach the standpoint of socialist laws in this respect. This is accomplished in the teeth of the original principle of freedom of contract but, due to this contradiction, in a piecemeal, fragmentary [73] and inconsistent manner: no coherent solutions have yet emerged. This development, moreover, strives only for modifying the balance between the freedom of contract of the more powerful and better informed and the interests of the weaker and more ignorant who frequently harbor a naive belief in standard contracts drafted by respectable corporations and used by millions of fellow citizens. It follows from the very essence of modern economy based on private ownership that the exploitation of economic power does not itself justify the invalidity of an exculpatory clause.

23. But, despite the aforementioned trend, exculpatory clauses have their place under the sun. The general requirements of admissible exculpatory clauses could in the opinion of the present writer be as follows:

(a) they should not be the consequence of an abuse of economic power,

(b) they should not destroy the essence of the contract,

(c) they should not tolerate seriously reproachable conduct,

(d) they should be reflected in the price of the goods or services -- although not necessarily separately stated in the contract,

(e) under the conditions of a planned economy they should not conflict with the exigencies of the existing system of planning. [page 235]


FOOTNOTES

* GYULA EÖRSI is Professor of Law, Budapest.

This paper is an abbreviated version of a general report to the IXth International Congress of Comparative Law held in Teheran from 24 Sept. to 5 act. 1974. It is based mainly on the national reports by Professors Renard (Belgium), Starck (France), Stoll (Federal Republic of Germany), Harmathy (Hungary), Shalev (Israel), Bessone (Italy), Kitagawa (Japan), Delvaux (Luxembourg), Warkallo (Poland), Cosmovici (Rumania), Perrin (Switzerland), Loosemore (United Kingdom), Fleming (USA). The report by Renard was published in Rapports beIges au IXe Congrès international de droit comparé (Bruxelles, 1974) 89-104; Stoll in Deutsche Landesberichte zum IX. Internationalen Kongress fur Rechtsvergleichung (Tübingen, 1974) II at 1-23; Harmathy in The Comparison of Law -- La comparison de droit (Budapest, 1974) 59-72; Bessone in Rapports nationaux italiens au IXe Congrès International de Droit comparé (Milano, 1974) 133-160; Fleming in Law in the United States of America in Social and Technological Revolution (Bruxelles, 1974) 105-121. These will be cited hereafter by the name of the author. References to (as yet) unpublished national reports are perforce to their mimeographed copies distributed at the Congress.

1. Fleming, 106.

2. This, however, is true only in part. Apart from exceptions in the field of specific contracts -- many examples are given by Kitagawa and other national reporters -- the circumstances of the case and teleological thinking might influence the judge in deciding whether or not the party acted fraudulently. But once fraud is established, the judge is no longer free to validate the exculpatory clause on the grounds of the circumstances of the case or having regard to other terms of the contract.

3. Cass. 25 Sept. 1959, Pas. 1960. I.113, with the important comments of the Avocat général Mahaux, see Renard, 95-96.

4. Id. 96.

5. The roof of a house was not fitted with a grill to prevent the snow from falling down in masses. As a result parked cars were damaged by the snow. Although the state enterprise in charge of the house excluded liability,the Supreme Court found that this omission created a constant danger to life and property and therefore was grossly negligent. The enterprise was held liable on this ground ("Birósagi Határozatok" -- Court Decisions -- 1972. 11.7363). In other countries courts might find that this was not gross negligence.

6. Renard, 98-99.

7. Bessone, citing critical remarks, 145-146.

8. Code of Obligations § 102 II. The rule does not however apply where the damage was caused to a fellow employee.

9. Stoll, 12, in respect of BGB § 278. But in cases involving standard contracts the courts have barred exclusion or limitation of liability for one's own gross negligence and for intentional or grossly negligent acts of high-ranking employees (Stoll, 19, citing BGH 28 April 1954, BGHZ 13; 198 at 203; BGH 19 February 1971, VersR. 1971,623 at 625 and others).

10. Italy: Bessone, 141 (in general, based on ordre public) , 155-156 (in carriage cases on a statutory basis) ; France: national report 1.§II.B; Poland: national report No. 8.

11. Federal Republic of Germany: Stoll, 13-14; England: national report, A. 2. a, b, e.

12. Fleming, 116-117.

13. Harmathy, No. 5.

14. Id. No. 11, for other devices see Nos. 12-13.

15. Fleming, 117.

16. Id. Similarly Bernitz, 30: "covert control motivated by legal policy," quoting a similar statement by Corbin.

17. Fleming, 120, 117.

18. The official comment of UCC 2-203 declares that the principle of unconscionability "is one of the prevention of repression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power," Stoll, 15, referring to BGH 9 June 1959, LM No. 2 ad § 138 BGB, says that the exploitation of a monopolistic situation violates Treu und Glauben only where selfish motives and indifference in respect of the justified interests of the other party played their role in stipulating one-sided arid objectively unjustified contract terms. Caemmerer states that it is not commendable to grant a "subjective right" not to be cheated,blackmailed, damaged contra bonos mores or to expect fair conduct in economic competition. (Wandlungen des Delikisrechts, 2 Hundert Jahre deutsches Rechtsleben 49-136, at 55. Caemmerer-Friesenhahn-Lange, eds. 1960). See also Swiss national report; VII.

19. Fleming, 117.

20. For Belgium, see Renard, 92.

21. Fleming, 119; French national report I.

22. Fleming, 118-19; Swiss national report (Ungewohnlichkeitsregel).

23. Fleming, 119.

24. National report, II. A.(3)(d) ii.

25. Bessone, 149-50. This rule seems to be ineffective from the consumer-protection point of view, as stated by Bemitz, "Consumer Protection and Standard Contracts," 17 Scand. St. L. 11, at 26 (1973).

26. Council of Europe, Paris, 17 December 1962. See also: Report on the Hotelkeepers' Contract, UNIDROIT Study XII -- Dec. 9, 1974.

27. Critically: Lando, "Standard Contracts. A Proposal and a Perspective," 10 Scand. St. L. 127-148, at 138 (1962).

28. Stoll, 17.

29. Fleming, 112.

30. See Bernitz, supra n. 25 at 34. His example is taken from the Swedish decision 1941 N.J.A. 150 where a printed clause in a promissory note was construed not as a surety but only as a solvency affidavit. Another example: the text printed on a ticket was construed as a receipt and not as a contractual term (English national report. A.1.b(a)).

31. Fleming, 118.

32. See for instance: French Civ. C. art. 1162; Italian Civ. C. art. 1370. The rule is widely used by courts in England (national report A.I. c.), the USA (Fleming, 117) and Switzerland (national report VIII). The Swedish case Mimona (1954 N.J.A. 573) is mentioned by Bernitz, 33.

33. Stoll, 17.

34. Swiss national report, VIII.

35. For Scandinavian countries see Bernitz, 32; for Denmark in particular Lando, 134; for Belgium see Renard, 92; and for the Federal Republic of Germany, see Stoll, 16.

36. Swiss national report, IX

37. Bessone, 58.

38. The American version of this, the due process requirement, is mentioned by Fleming at 117 with respect to the formal requirements and not in connection with substantive doctrines.

39. Bessone, 149.

40. Israel, national report, II.c.2 and II.c.3(a).

41. Stoll, 17-18.

42. National report, VI.

43. See Bernitz, 38; Lando, 137. The number of cases, however, is too small to enable the courts to give a solid definition of these expressions.

43a. Supra at n. 36.

44. The origin of this device can be found in Henningsen v. Bloomfield Motors, 32 N.J. 358, 161 A.2d 69 (1960) ; see Fleming, 114.

45. See Zim v. Maziar (1963) 17 P.D. 1319; national report II. C(2).

46. See the English national report, g, h, and the problems involved in Suisse Atlantique Société d' Armament Maritime S.S. v. Rotterdasche Kolen Centrale [1967] 1 A.C. 361; the same rules cannot apply to contracts concluded between parties of equal bargaining power, says the national report.

47. A parallel under West German law: in case of newly manufactured goods a standardized contract may not contain a valid exculpatory clause in respect of hidden defects; at least the right to claim repair must be granted (Stoll, 20),

48. Renard, 94.

49. Stoll, 18, 20.

50. BGH 30 April 1969, BGHZ 52, 86, 92; Stoll, 18.

51. Kitagawa, 5.4.

52. Standard Contract Act, 5724-1964, (18 Laws of Israel 51). [The English text is reproduced in Lando, supra n. 27, at 144-48. For additional references see Bolgár, "The Contract of Adhesion," 20 Am. J. Comp. L. 63-4. Ed.] The Act enumerates "restrictive terms" frequently used in standard contracts. Those who draft such clauses may seek approval in advance and if this is granted they may be sure that the clause will prevail (for greater detail see the Israeli national report).

53. National report II.A. (2).

54. [See Sheldon, "Consumer Protection and Standard Contracts: The Swedish Experiment in Administrative Control," 22 Am. J. Comp. L. 17 (1974). The Act of 30 April 1971 (No. 112) Prohibiting Improper Contract Terms is translated into English in Appendix A. Ed.]

55. Supra n. 4. This prohibition is, however, subject to certain exceptions under art. 2 of the Convention. Exculpatory clauses in standard contracts of professionals whose job is to give opinion or advice (beratende Berufe) are not tolerated by West German courts (Stoll, 11).

56. Stoll, 13-14.

57. Fleming, 108-111.

58. See the Polish national report, No. 9.

59. Id. Nos. 9-10.

60. Bessone 138, citing Benatti.

61. National report, 1, § II.

62. National report, A. I first b, B. 2.

63. Olley v. Marlborough Court [1949] I K.B. 352, Thornton v. Shoe Lane Parking [1971] 2 Q.B. 163.

64. Stoll, Das Handeln auf eigene Gefahr 270-275 (1961). Stoll, 22.

65. The Hungarian Supreme Court ruled that a notice or warning in a barber shop has no effect on liability (Harmathy, s. 10).

66. E.g. Bennett v. Tugwell [1971] 2 Q.B. 267, where the plaintiff accepted a lift in a car with a notice stating that passengers traveled at their own risk. The notice was held valid. In West Germany such notices are valid if they are commonly used (verkehrsublich) : Stoll, 21-22. That is, validity depends on the existence of a unilateral usage. But is it not another unilateral usage to exploit superior bargaining power? The expression verkehrsublich conceals a policy decision. Following another policy, it could be argued that the more frequently such notices appear on walls, the more defenseless customers become and therefore deserve an increased protection against the fiction of their consent.

67. Perrin believes that such notices should not be valid in contractual cases either (national report I). For Belgium, see Renard, 92.

68. Stoll, 2.

69. S.C. 17 October, 1969, 576 Hanrei Jiho 71-/m/ -- a tortious act of a stevedore, a "performance assistant" of a carrier, caused damage to a consignor, see Kitagawa, 4.4.

70. Adler v. Dickinson [1955] 1 Q.B. 155: even if the exculpatory clause had also excluded the liability of the servants, they would not have been able to rely on such a clause as they were not parties to the contract.

71. The extension to third parties should be explicit. On the other hand, Restatement 2nd, Agency, 347, para. 2 provides that a servant owes no greater duty of care than the master: Fleming, 121 and his n. 56.

72. Fleming, 120; Stoll, 3.

73. See Starck, French national report, I.


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