JUMP TO: UNFAIR CONTRACT TERMS ACT 1977 | CONSUMER RIGHTS ACT 2015 | REVISE | TEST
EXEMPTION CLAUSES – STATUTE
Despite laws permitting the courts to invalidate certain exemption clauses they historically lacked a statutory framework which allowed them to interfere with individual contract terms. The Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015 now cover this area.
UNFAIR CONTRACT TERMS ACT 1977
This dearth of statutory framework is the context within which the Unfair Contracts Terms Act 1977 was enacted. UCTA regulates such clauses as exclusion or restriction of business liability for breach of contract or negligence, and other common law duties of care.
It excludes certain clauses completely and can limit others to what is reasonable.
- Death and personal injury caused by negligence
- Section 12 SGA 1979, implied term as to title
EXCLUDE IF REASONABLE
- Other forms of loss or damage, not death or personal injury
- Sections 13, 14, 15 SGA 1979, implied terms as to sale by description, quality and sale sample.
BUSINESS LIABILITY – SECTION 1
UCTA deals with business-to-business contracts only, described as ‘business liability’ in the act. Consumer contracts are dealt with by the Consumer Rights Act 2015 (see below).
Business Liability is defined in s.1(3) as arising;
(a) from things done or to be done by a person in the course of a business (whether his own business or another’s);
(b) or from the occupation of premises used for business purposes of the occupier.
The phrase ‘in the course of business’ was explained in R and B Custom Brokers v United Dominions Trust (1988) (CoA). A finance company sold a vehicle to a private company. The vehicle was for both personal and work use. The Court of Appeal ruled that the contract had not been made in the course of business. ‘In the course of business’ applied to transactions that were integral to, or played a regular part of, the buyer’s company.
DEATH OR PERSONAL INJURY – SECTION 2
Section 2(1) states that liability for death or personal injury caused by negligence can never be excluded or restricted by any contract term or notice. Any such contractual provision will be void and unenforceable.
Negligence is defined in s.1(1), it includes;
(a) Any obligation arising from the express or implied terms of a contract to take reasonable care or exercise reasonable skill in the performance of a contract i.e. implied term to carry out service with reasonable care and skill (s.13 SGSA 1982),
(b) Any common law duty to take reasonable care or exercise reasonable skill, i.e. tort of negligence
(c) The common duty of care imposed by the Occupiers’ Liability Act 1957.
Section 2(2) states that liability for other loss or damage, i.e. not death or personal injury, can be excluded but only if reasonable.
CONTRACTS FOR SALE – SECTION 6
Section 6 states that parties cannot exclude, even if reasonable, their liability for breach of the implied term of title as set out in s.12 SGA 1979.
Other implied terms as to quality, description, etc (s.13, 14, 15 SGA 1979) can only be excluded if reasonable to do so.
WHAT IS REASONABLE?
UCTA imposes a test of reasonableness on certain clauses, if they are reasonable then the clause can remain in the contract and will be effective. The burden to prove reasonableness is on the proferens (i.e. the party seeking to rely on the limitation of their liability) (s.11(5)).
Section 11(1) sets out the test; a term must have been a fair and reasonable one to include in the contract considering all the circumstances which were, or ought to have been known or in the contemplation of the parties when making the contract.
Section 11(1) is very broad, and this grants the trial judge significant discretion and flexibility to deliberate the matter of whether a term is reasonable or not. UCTA provides a schedule of indicators, or judicial guidelines, for how the court should approach the enquiry of reasonableness, but makes it clear that these are just factors to assist the court, not mandatory requirements.
The factors set out in Schedule 2 are;
(a) The strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met,
(b) Whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term.
(c) Whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties),
(d) Where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable,
(e) Whether the goods were manufactured, processed or adapted to the special order of the customer.
It is clear from these provisions that the purpose of UCTA is to protect the more vulnerable party. It suggests that the court should be quicker to fail an exclusion clause for unreasonableness where they have negotiated from a position of power, superiority, or greater bargaining strength, because it is assumed the other party was more pressured to make concessions and agree to the term.
The Schedule 2 guidelines are also concerned with ignorance. If one party is assumed to know more about the market they are negotiating in, or has a larger legal team with greater knowledge of the intricacies of contract law, then the presumed ignorance of the other party will be a factor which should influence the judge in finding an onerous exclusion clause unreasonable.
In addition to the factors in Schedule 2, case law has thrown up some other suggestions, which should guide the court when applying this test.
- The availability of insurance against excluded liability,
- If the clauses are clearly and precisely worded
- If the terms are ‘standard and usual’ terms within a specific market or industry
- Whether liability, in the absence of that clause, would be totally disproportionate
The fact that what is reasonable will depend on the facts of the case and there is wide judicial discretion was emphasised in George Mitchell (Chester Hall) Ltd v Finney Lock Seeds Ltd (1983) (HoL). The court can also take into consideration factors that arose after the breach such as the nature and extent of the breach.
A group of seed merchants agreed to supply farmers with winter cabbage seeds valued at £200 but the seeds were the wrong type and led to a loss of over £60,000. The contract included a clause which limited liability for damages caused by negligence or breach of contract ‘to the price of the seed’. The House of Lords held that ‘on balance’ this clause was unreasonable despite some of the statutory factors and guidelines, in fact, pointing to reasonableness.
The court took into consideration the seriousness and extent of the breach and the subsequent loss suffered by the farmers, the fact that the sellers could have been insured against such eventualities without much cost to themselves, that these types of exemption clauses were near on universal meaning that buyers had almost no choice but to agree to the term and often seed sellers settled out of court with buyers in these situations demonstrating that there was an understanding within the industry that these types of clauses were unreasonable.
A straightforward application of the reasonableness test can be understood by reading the case of Smith v Eric S Bush (1989) (HoL). A surveyor, who was instructed by a mortgage company, to value a residential property, tried to exclude liability for their breach of the common law duty of care. They did this by insertion of a disclaimer into the contract. The House of Lords ruled that this was unreasonable. They took into account the fact that the property was a small, residential purchase and not an expensive development property (i.e. the parties were not of equal knowledge, etc) and that buyer’s commonly and heavily rely upon mortgage valuation reports when deciding whether to purchase a property.
In Monarch Airlines v London Luton Airport (1998) (HC), there was an exclusion clause inserted into a contract between Monarch Airlines and Luton Airport, by the airport. The clause excluded liability for all damages caused to aircrafts while taking off down the runway. The court ruled that this exclusion clause was reasonable and the reasoning given was that Monarch Airlines were aware of the existence of this clause, and their lawyers had earlier accepted without any complaint the particular wording.
The courts generally avoid interfering in contracts between parties of equal bargaining power. In Granville Oil and Chemicals Ltd v Davis Turner (2003) (CoA), Tuckley LJ commented that: ‘UCTA obviously plays a very important role in protecting vulnerable consumers from the effects of draconian contract terms. But I am less enthusiastic about its intrusion into contracts between commercial parties of equal bargaining strength, who should generally be considered capable of being able to make contracts of their choosing and expect to be bound by their terms.’
CONSUMER RIGHTS ACT 2015
The CRA 2015 covers business-to-consumer contracts.
A ‘consumer’ is defined in s.2(3) as: ‘An individual acting for the purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’.
A ‘trader’ is defined, in s.2(2) as: ‘A person acting for purposes relating to that person’s trade, business, craft, or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf’.
EXCLUDING NEGLIGENCE – SECTION 65
Section 65 automatically renders void any clause which excludes liability for negligently inflicted death or personal injury.
Negligence is the breach of ‘any obligation to take reasonable care or exercise reasonable skill in the performance of a contract where the obligation arises from an express or implied term of the contract’ (s.65(4)(a)).
UNFAIR CONTRACT TERMS – SECTION 62
Section 62 renders any ‘unfair’ term unenforceable by the trader, though the consumer may still rely on it (s.62(1)-(3)).
A term is unfair if: ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.’ (s.62(4)).
The court will look to the subject matter of the contract, the circumstances existing when the term was agreed and the other terms of the contract (s.62(5)). Schedule 2 contains a list of example terms often found to be unfair.