The effect of an exclusion clause with breach of contract

pharmacy

In the last edition, Pharmacist Adebayo lost his contract to provide drugs and supplies to the Benue State University for their Sports Festival. The products he ordered from Freddy Pharmaceuticals arrived late, and he received no compensation, because he had signed a receipt issued to him, which contained an exclusion clause.

Subsequently, the Benue State University Hospital decides to do business with Freddy Pharmaceuticals and contacts the distributor for their requirements. Three cartons of Emzoron® (a blood tonic) are ordered and paid for. A driver is sent by the hospital to collect the products and he is made to sign the receipt, which has certain terms written on it.

On arrival at the hospital, it is discovered that the drugs delivered are not the blood tonic required but rather Emzolyn®, a cough syrup produced by the same company. The hospital pharmacist immediately calls Freddy Pharmaceuticals and demands a refund of payments made.

The distributor, however, contends with him, claiming protection under an exclusion clause contained in the receipt.   According to Mr Freddy, the document expressly stated that “goods sold in good condition are not returnable and the supplier will not be liable for refunds.” In his contention, this document was signed by the driver, on collection of the goods, and so the hospital is bound by the terms. In this transaction, what is the legal position of the parties?

It has been established that parties to a contract are free to limit or exclude obligations arising from their transaction. These exclusion clauses or limiting terms are often written in a receipt, ticket, form or notice, which the buyer may or may not have read. There are various rules regarding issues of the transaction and they usually favour the seller, when the exclusion clause is written in a document, which is signed by the buyer.

The situation above involves the following legal issues:

1. The validity of an exclusion clause in the case of a breach of contract.
2. The effect of an exclusion clause when there is a fundamental breach.

From the case of Parker v. South Eastern Railway Company, it is understood that if the person receiving a document knew that there was a writing on it, and realised that the writing contained conditions, then he is bound by those conditions.

In this situation, the goods were received by the driver on behalf of the hospital. Apparently, the distributor, Freddy Pharmaceuticals, ensured that the receipt was signed by the driver, to avert any liability arising from the transaction. Interestingly, the previous delivery involving Pharmacist Adebayo arrived too late for the purpose of the products, but the distributor was covered by the excluding terms because Adebayo had signed the receipt (containing the terms) even though he had not realised that there was anything written on it.

It thereby follows that, even in the case of a breach, a party to a contract may protect himself, with the insertion of an exclusion clause, to limit any liability.   However, the weight of the term that is breached must be considered. There is a difference between a condition, in a contract, and a fundamental term. In the words of Justice Delvin, “a fundamental term is something which underlies the whole contract so that, if not complied with, the performance becomes totally different from that which the contract contemplates.”

In view of this, where there is a breach by one party to the degree that what is delivered is essentially different from the requirement of the transaction, the party in breach cannot claim to have performed the contract. As Lord Abinger stated in the case of Chanter v. Hopkins: “If a man offers to buy peas of another, and he sends him beans, he does not perform his contract; the contract is to sell peas and if he sends him anything else in their stead, it is a non-performance of it.”

In this case, even though a document with an exclusion clause was signed, it is unarguable that the product delivered was not Emzoron®, the blood tonic required by the hospital, but Emzolyn®, a cough syrup.

The case of Adel Boshalli v. Allied Commercial Exporters Ltd., a contract for the supply of cloth from London to Lagos, throws more light on this. In that transaction, the shipping sample was found very much inferior, in quality, to the sample which formed the basis of the agreement. In their defence, the suppliers tried to rely on an exemption clause in the following terms: “For goods not of United Kingdom origin, we cannot undertake any guarantee or admit any claims beyond such as are admitted by and recovered by the Manufacturers.”

Reversing the decision of the Nigerian Federal Supreme Court, the Privy Council held that the clause did not avail the respondents any protection: “An exemption clause can only avail a party if he is carrying out the contract in its essential respects. A breach which goes to the root of contract disentitles a party from relying on an exemption clause”.

From the foregoing, it is generally held that, though parties have the use of excluding terms in defining their transactions, a party guilty of a fundamental breach of contract cannot avoid liability by relying on such terms. The consequences of such a breach result in the right of the injured party to repudiate the contract and claim damages.

Considering that the products supplied were clearly different from those that were ordered, Benue State University Hospital is entitled to cancel the contract and receive a refund. Freddy Pharmaceuticals cannot be protected by exclusion clauses. In the words of Lord Denning, the distributor “is not allowed to use them as a cover for misconduct or indifference or to enable him to turn a blind eye to his obligations.”

Principles and cases are from Sagay: Nigerian Law of Contract