Using exemption clauses in web sales (Hong Kong law)
This guide is based on the law of Hong Kong. It was last
updated March 2005. AUK
versionis also available.
Overview
Suppliers of goods or services planning to do business on the
web will need to comply with numerous regulations, old and new.
Among the regulations which largely pre-date the internet-age are
those relating to exemption clauses (clauses commonly found in
contracts or sets of terms and conditions). Such clauses must be
prepared with care to avoid problems.
Exemption clauses fall into two categories:
- those which seek to exclude liability for specified breaches of
contract; and
- those which seek to limit liability to a set sum or to
particular types of loss.
When dealing with a consumer it's hard to exclude liability.
When dealing with a business, it is possible, but there are a
number of issues involved which are looked at below.
Consider a supplier who sells monitors via its web site,
operating on tight margins in a competitive market. The supplier
can generally achieve delivery within 7 days, but is reliant on
steady demand, its own supplier and a third party delivery service.
The supplier may want to use a contract clause to limit damages
payable for late delivery to consumers to $100 per day. In a
business to business transaction, it may want to exclude altogether
liability for lost profits caused by late delivery. The law
regulates how far objectives like these may be achieved.
How to make an exemption clause
Recognising an exemption clause is not always straightforward.
Returning to the example of the monitor supplier, its terms and
conditions may say that it will not be liable for any loss
resulting from delivery up to 7 days after the date specified in
the contract. Alternatively, the supplier's terms may say that
delivery is guaranteed to within 7 days of the delivery date.
Whilst the effect of both is broadly the same, each may have
different consequences.
Vitally significant is incorporation of the exemption clause as
a contractual term - i.e. the clause must form part of the
contract. See our guide, On-line Contract Formation. A clause which
appears only in a supplier's e-mail confirming an order is unlikely
to be incorporated and therefore it is not effective.
Is the clause visible?
Closely linked with the issue of incorporation is the question
of whether a supplier has done enough to draw attention to an
exemption clause. Depending on the nature of the terms and
conditions, a link to a separate page which displays them might be
insufficient. The best practice is to display them as part of an
ordering process so that the site user must click to indicate
acceptance of them.
Advice should be taken on the precise wording of an exemption
clause since, if there is any doubt about the meaning and scope of
the clause, the ambiguity will be resolved by a court against the
party who has inserted it and who is now relying on it.
Unfair terms
The Control of Exemption Clauses Ordinance (Cap 71) ("CECO")
restricts the ability of businesses, including those trading on the
internet, to exclude or limit liability.
Liability for negligence
A business cannot exclude or limit liability for death or
personal injury caused by negligence. For other types of loss,
liability can only be restricted if it is reasonable for the
business to do so.
Terms implied by law
Certain terms are implied into contracts for the sale of goods
or supply of services, for example that a seller actually owns the
goods he purports to sell. When dealing with a consumer, liability
for breach of such terms cannot be excluded by the seller, whereas
when dealing with businesses, liability may only be excluded if it
is reasonable to do so. It should be remembered that CECO does not
apply to the international sale of goods.
Other breaches
If, in the standard terms and conditions of a business, a clause
seeks to exclude liability for a breach of contract by that
business, the clause shall have no effect, unless the exclusion is
reasonable.
The reasonableness test
Where the reasonableness test applies, it is for the party
wishing to rely on the exemption to prove that it is reasonable.
The following considerations apply in Hong Kong law:
- Whether the two parties were of equal bargaining power and
whether the customer could have obtained the goods or services
elsewhere.
- Whether the customer received an inducement to accept the term
such as reduction in price.
- Whether the goods were manufactured or processed to the
customer's special order.
- Whether the customer knew or should have known of the
term.
- For limitation clauses, the resources available to the supplier
and whether he could have insured himself against the type of loss
to which the limitation applies.
Is the test tougher for e-commerce suppliers?
The answer should be 'no', but in practice, such businesses may
find that it is because of the way they do business. Courts may be
suspicious of new methods of selling, especially because internet
sales are generally on a 'take it or leave it' basis. In most cases
there will be no human interaction or negotiation between supplier
and customer. This means that the supplier immediately risks
falling foul of the first three considerations above: one
transaction is much like another and there is no scope for
discussion as to the price or to the customer's specific
requirements.
In sales involving consumers, the first and last above
considerations are likely to be decided against the supplier. The
supplier's bargaining power far outweighs that of the consumer, so
much so that the supplier need not bargain at all; and the supplier
is far better placed to insure and pass on that cost when compared
to a consumer arranging a one-off policy.
Negotiated contracts
Some of these legal restraints can be avoided if the supplier
can show that the contract did not use its written standard terms.
If the parties negotiated the terms before signing up, there is
less room for one party to argue that it did not appreciate the
terms on which it was contracting, although recent cases in England
have shown the courts' willingness to use similar local legislation
to overturn even negotiated contracts.
In practice, suppliers trading with other businesses on the web
will generally be doing so on the basis of written standard terms.
In a business to business context, therefore, internet trading may
place higher burdens on suppliers than more traditional methods of
contracting.
Misrepresentation
Broadly speaking, a misrepresentation is an untrue statement
that causes a party to enter into a contract. It is not uncommon
for a contract to state that it forms the entire agreement and that
any statements made previously, leading up to the contract, will
have no effect. To protect a customer from misrepresentations, CECO
states that any attempt to exclude previous misrepresentations will
only have effect if it is reasonable to do so.
Statements made before a contract is entered into may or may not
amount to representations. For example, a cosmetics supplier with a
home page bearing the slogan, "Making you look 25 years younger",
would not attract liability - this is just an advertising 'puff'.
Consider, however, a compact disc seller with the banner, "The
lowest prices on the net - guaranteed". This may amount to a
representation. As well as keeping a careful watch on its
homepages, a supplier will need to ensure that its advertisements
on other sites are kept up to date.
Consequential loss
Many limitation clauses seek to exclude what is known as
'consequential loss.' A party may normally recover damages for
breach of contract if the loss in question:
- arises automatically, i.e. in the usual course of events;
or
- was in the contemplation of both parties at the time the
contract was made.
An English court has said that consequential loss is a type of
loss falling within the second category, i.e. it is not loss that
arose in the ordinary course of events. To exclude consequential
loss would not usually cover loss of profit, which flows naturally
from the breach of contract. In putting terms and conditions
together, great care must be taken in defining the types of loss
limited or excluded.
Please contact peter.bullock@pinsentmasons.com
/ +852 2521 5621 or one of our other contacts.
