The law relating to exemption clauses

Critically Discuss Whether The Law Relating To Exemption Clauses And Unfair Terms Is In Need Of Reform.

A clause may be inserted into a contract which aims to exclude or limit one party's liability for breach of contract or negligence. However, the party may only rely on such a clause if; (a) it has been incorporated into the contract, and if; (b) as a matter of interpretation, it extends to the loss in question.

Its validity is then tested under; (c) the Unfair Contract Terms Act 1977 and

(d) the Unfair Terms in Consumer Contracts Regulations 1999.

A clause is of no effect unless it is incorporated as a term in the contract. It must be incorporated when the contract is made. Any attempt to incorporate it after the contract is made will be unsuccessful.

A clause can not subsequently be incorporated. This rule was applied in Olley v Marlborough Court.

If however, the exclusion clause is found in an unsigned document, it will only form part of the contract if reasonable steps are taken to bring the clause to the attention of the other party before the contract is made.

If the plaintiff signs a document having contractual effect containing an exclusion clause, it will automatically form part of the contract, and will be bound by its terms. This was demonstrated in L'Estrange v Graucob, in an action for breach of warranty the defendants were held to be protected by the clause.

An exclusion clause may be contained in an unsigned document such as a ticket or a notice. In such a case, reasonable and sufficient notice of the existence of the exclusion clause should be given. For this requirement to be satisfied:

(i) The clause must be contained in a contractual document, i.e. one which the reasonable person would assume to contain contractual terms, and not in a document which merely acknowledges payment such as a receipt.

(ii) The existence of the exclusion clause must be brought to the notice of the other party before or at the time the contract is entered into.

(iii) Reasonably sufficient notice of the clause must be given. It should be noted that reasonable, not actual notice is required.

The courts have repeatedly held that attention should be drawn to the existence of exclusion clauses by clear words on the front of the document delivered to the plaintiff.

Two main cases outlined this. Thornton v Shoe Lane Parking where Lord Denning said that the clause was so wide and destructive of rights that "In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it - or something equally startling". The second case Interfoto Picture Library v Stiletto Ltd contained a condition and it was held by The Court of Appeal that the condition had not been incorporated into the contract.

Even where there has been insufficient notice, an exclusion clause may nevertheless be incorporated where there has been a previous consistent course of dealing between the parties on the same terms.

In Hollier v Rambler Motors the first of these requirements was not satisfied. The Court of Appeal held that three or four transactions in the course of five years were not sufficient to establish a course of dealing.

As a result of the doctrine of privity of contract, the courts held that a person who is not a party to the contract (a third party) was not protected by an exclusion clause in that contract, even if the clause purported to extend to him.

If the exclusion clause is incorporated into a contract, it will only be effective if it covers the breach that actually occurs. The basic approach is that liability can only be excluded by clear words. The main rules of construction are;

If there is any ambiguity or uncertainty as to the meaning of an exclusion clause the court will construe it contra proferentem, i.e. against the party who inserted it in the contract.

Prior to 1964, the common law considered that a fundamental breach could not be excluded or restricted in any circumstances as this would amount to giving with one hand and taking with the other. This became elevated to a rule of law. However, the rule of law approach was rejected in UGS Finance v National Mortgage Bank of Greece, on the basis that it conflicted with freedom of contract and the intention of the parties.

The present law on unfair contract terms is unacceptably confusing and is a very complex act to follow. It is covered by two pieces of legislation, containing inconsistent and overlapping provisions. This legislation is the Unfair Contract Terms Act 1977 (“UCTA”) and the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”).

The basic purpose of UCTA 1977 is to restrict the extent to which liability in a contract can be excluded for breach of contract and negligence, largely by reference to a reasonableness requirement, but in some cases by a specific prohibition.

Most of the provisions of the Act apply only to what is termed "business liability". This is defined by Section 1(3) as liability arising from things done by a person in the course of a business or from the occupation of business premises. The exceptions are Sections 6 and 7 where the Act also applies to private contracts.

Section 6 of the Unfair Contract Terms Act 1977 applies to any clause claiming to exempt the seller from any of the terms implied by ss.12-15 of the Sale of Goods Act, i.e. the terms as to title, description satisfactory quality, fitness for purpose and sample. The effect of s.6 depends upon whether the buyer was ‘dealing as a customer'. Under Section 12(1) of the Unfair Contract Terms Act 1977 a person "deals as a consumer" if he does not contract in the course of a business while the other party does contract in the course of a business; and if it is a contract for the supply of goods, they are of a type ordinarily supplied for private use or consumption.

The Sale and Supply of Goods to Consumers Regulations 2002 have recently amended the wording of this section by inserting s.12(1A) and a new subs.(2).

Under s.12 as originally enacted a buyer could never be regarded as dealing as a consumer at an auction.

Where the buyer is not ‘dealing as consumer' the effect of s.6 of the Unfair Contract Terms Act 1977 is as follows. It is impossible for the seller to exempt himself from liability under s.12 of the Sale of Goods Act. It is, however, possible for the seller to be exempted from liability under ss.13-15 of the Sale of Goods Act, but only in so far as the seller can show that the exemption clause satisfies the requirement of reasonableness.

The reasonableness test is a flexible and open ended test. If UCTA had simply introduced a requirement that particular clauses must comply with the requirement of reasonableness, without any guidance it would have created a highly uncertain test. The broad reasonableness requirement is limited by a list of relevant factors, which the courts will take into account when assessing whether a term meets that requirement. The application of the reasonableness test is a useful example of how the courts approach a broad flexible standard in the interests of fairness.

Two early House of Lords decisions, are significant for the different attitudes taken in applying the test if reasonableness.

In Photo Production Ltd v Securicor Transport Ltd a security guard was responsible for the destruction in a fire of Photo Productions premises. The Lords upheld a clause excluding Securicor's liability.

By contrast, in George Mitchell (Chesterhall) v Finney Lock Seeds the supplier of defective seeds could not rely on a clause limiting their liability to the costs of the seeds provided.

The schedule 2 guidelines are only relevant to terms, which seek to exclude, or limit liability for a breach of terms implied into contracts for the sale of supply of goods.

Lord Griffiths suggested that some matters should always be considered when applying the test:

  1. Were the parties of equal bargaining power?

  2. Would it have been reasonably practicable to obtain advice from an alternative source, taking into account considerations of costs and time?

  3. What are the practical requirements of the decision on the question of reasonableness?

Criteria 1 and 2 resemble factors (a) and (b) in schedule 2 and criterion 4 emphasises the importance of insurance. According to s.11 UCTA, insurance is a relevant factor in determining whether a clause limiting liability is reasonable.

Under the Unfair Contract Terms Act 1977 a person acting in the course of his business cannot by the use of an exclusion clause in the contract exclude his liability for death or personal injury resulting from negligence.

A clause in the contract restricting liability for other loss or damage resulting from negligence is only enforceable if it is reasonable. Similarly a clause in the contract requiring a consumer to indemnify a trader against any loss incurred through negligence or breach of contract must satisfy the same test of reasonableness.

Section 8 of the Unfair Contract Terms Act 1977 amended s.3 of the Misrepresentation Act 1967.

A party to a contract may try to disguise an exclusion clause, even though the effect of such a clause is to exclude liability.

Such clauses are void or must be reasonable if they exclude or restrict liability respectively. Section s13, for example, will apply to terms: (a) imposing a time limit for making claims; (b) limiting a buyer's right to reject defective goods; and (c) stating that acceptance of goods shall be regarded as proof of their conformity with the contract.

The Unfair Terms in Consumer Contracts Regulations 1999 have a considerably broader ambit than the Unfair Contract Terms Act which is primarily concerned with exclusion clauses and may apply to any contractual term. These Regulations revoke and replace the Unfair Terms in Consumer Contracts Regulations 1994.

The Regulations apply, with certain exceptions, to unfair terms in contracts concluded between a consumer and a seller or supplier and provide that an unfair term is one which has not been individually negotiated and which, contrary to the requirement of good faith, causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer.

Regulation 6 is important in regards to the fairness of a term and states that it shall be assessed with reference to the nature of the goods and services for which the contract was concluded and to all the circumstances attending to the conclusion of the contract.

The leading case on UTCCR was Director General of Fair Trading v First National Bank Plc. It was an action to test the fairness of clauses in loan agreements which secured a banks commercial interest rates after a debtor that had defaulted and they had been to court to determine their repayment scheme. The House of Lords held that although the clause fell within the Regulations it was fair and valid.

Under Regulation 8 if a term is found to be unfair it is not binding on the consumer. The rest of the contract remains valid.

The Law Commission and the Scottish Law Commission released a Consultation Paper in 2005 into the feasibility and desirability of unifying the provisions of UCTA and the UTCCR.

Both of this legislation provides important protection with particular application to consumers, against unfair terms in contracts. They both contain many overlapping provisions and use different language and concepts to produce similar although not identical results.

The recommendations relating to consumer contracts focus upon the central aim of increasing clarity and accessibility to the law of unfair contract terms whilst retaining the level of protection currently offered to consumers the draft Bill also prevents businesses from using non-UK law if the consumer was living in the UK when the contract was made and took all the steps necessary to conclude the contract there.

The law commission also recommended improved protection for small businesses. The draft bill that was produced includes special protection for the smallest and most vulnerable businesses, commonly referred to as micro-businesses. In creating a unified Bill, combining UCTA and the UTCCR, one of the key issues was the reconciliation between the ‘reasonableness' under the Unfair Contract Terms Act and ‘unfair' under the Unfair Terms in Consumer Contracts Regulations.

The main section of law relating to exclusion clauses and unfair terms needs to be easier to understand and follow as a law that affects ordinary people in their everyday lives has been made unnecessarily complicated and difficult.

Many of these recommendations have been put in place and have been accepted in principle although an assessment of the impact of these recommendations or the draft bill has not been released, and until it is it can not be decided ultimately if the law relating to exclusion clauses and unfair terms is in need of reform any more.

Bibliography

Case Law

As footnoted.

Articles And Journals

Adams and Brownsword, ‘The Unfair Contract Terms Act: a decade of discretion' (1988) 104 LQR.

Beatson ‘European Law and Unfair terms in Consumer Contracts' [ 1995] CLJ 235.

Peel ‘Reasonable Exemption Clauses' (2000) 117 LQR 545.

Reynolds ‘Unfair Contract Terms' (1994) 110 LQR 1.

‘The Unfair Terms in Consumer Contracts Regulations 1999' SLR Autumn 1999 (vol 28) 8 (Student Law Review).

Reports

Law Commission No 166: Unfair Terms in Contract.

Law Commission No 299: Annual Report 2005/06.

Law Commission Report No 292 (2005).

Books

Dobson P and Stokes R. Commercial Law, (2008) Sweet & Maxwell.

Taylor R and Taylor D. Contract Law (2007) Oxford University Press.