The test of reasonableness

In UCTA the person relying on an exclusion clause has to prove that it is reasonable.Whilst the reasonableness test gives the courts the flexibility necessary to adapt to the huge variety of exemption clauses, it means that the uncertainty faced by contractors prior to 1977 still remains. The inherent subjectivity of a reasonableness test was recognised by the House of Lords in Mitchell v Finney [1983] 2 All ER 737, in which they said that there will be, "room for a legitimate difference of judicial opinion as to what the answer will be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right." The inevitable result of this is that uncertainty will continue to persist, and the sentiments of the judiciary will continue to come through in judgements. UCTA is a complex piece of legislation. UCTA is structured in a way which, given its complexity, is economical but which is not easy to grasp. The UCTA has had an effect where an exclusion clause prevents a right that would otherwise be available. One case is Gill (Stewart) Ltd v Horatio Myer & Co Ltd where a clause restricting a counter claim was not binding under the Act.

The test of reasonableness is widely used throughout the Act. In deciding whether or not a particular clause is reasonable, the courts have regard to a range of factors. Judges have a considerable degree of discretion in the application of the reasonableness test to the facts of individual cases. The balancing of the different factors is left largely to the decision of the trail judge. The appellate courts have been extremely reluctant to view the finding of trail judge on the issue of whether a particular clause is reasonable or not. Exemption clauses are generally only valid against a consumer if they are reasonable and, as against business parties, they must be reasonable to be valid. As a result, business parties may invoke the 1977 Act and attack the validity of a contractual exemption clause on three grounds of reasonableness if it is a case of defective goods in a contract of sale or hire-purchase if the clause excludes liability for negligence or if the clause is contained in the other party’s written standard contract.

After a relatively slow start in the years immediately following the UCTA, decisions of the courts on the reasonableness of exemption clauses have been coming thick and fast. Such is the nature of the test, they have been based largely on the facts and circumstances of each particular case and in accordance with the direction given by Lord Bridge of Harwich in George Mitchell, the appellate courts have refrained from interfering unless the original decision was plainly and obviously wrong or it was preceded on some erroneous principle. The important question in this context is whether or not the Act has actually had any practical impact in facilitating the needs of consumers in a commercial transaction.

George Mitchell has played a leading part in producing a situation where parties to commercial transaction cannot be certain when their exemption clauses will be effective, and when they will not be. It can be argued that there are a number of reasons why this situation has developed, and why the guidance provided by the case law is unsatisfactory. The root of the problem is that the two leading House of Lords cases, Photo Production Ltd. v Securicor and George Mitchell, are based on conflicting underlying approaches.

In Photo Production the House, reversing the Court of Appeal, followed the trial judge in ruling that Securicor could rely on their protective clauses notwithstanding that their employee's actions had led to the destruction of Photo Production's factory. By contrast, in George Mitchell, the House upheld the ruling of the courts to the effect that the appellant seed merchants, having delivered to the respondent farmers not only the wrong type of cabbage seeds but also seeds which in any event were not merchantable, could not rely on their protective clauses. In neither case was the provisions of UCTA directly relevant, but this does not diminish the importance of these two precedents. For, as said, on both occasions the House was clearly minded to make a general statement of policy with regard to UCTA. Accordingly, it can be seen by considering the guidance offered by the Law Lords in these two cases.

The principal importance of Photo Production lies not in Lord Diplock's speech, but in the following extract from Lord Wilberforce's speech:

“After this Act, in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament's intention, for leaving the parties free to apportion the risks as they think fit and for respecting their decisions. At the stage of negotiation as to the consequences of a breach, there is everything to be said for allowing the parties to estimate their respective claims according to the contractual provisions they have themselves made, rather than for facing them with a legal complex so uncertain as the doctrine of fundamental breach must be At the judicial stage there is still more to be said for leaving cases to be decided straightforwardly on what the parties have bargained for rather than on analysis, which becomes progressively more refined, of decisions in other cases leading to inevitable appeals. The learned judge was able to decide this case on normal principles of contractual law with minimal citation of authority. I am sure that most commercial judges have wished to be able to do the same … In my opinion they can and should."

There are two important points to be made about this passage. First, Lord Wilberforce asserts a non-interventionist judicial approach to exemption clauses in commercial contracts. The intention underlying UCTA, he suggests, is to leave commercial parties free to set their own terms against the supposedly standard background of roughly equal bargaining strength and insurance cover. This implies that the judges should only rarely strike down commercial exemptions as unreasonable under UCTA. Secondly, there is a hint in Lord Wilberforce's observations that trial judges should not only be free to decide UCTA cases on their own particular facts and with “minimum citation of authority," but also that appeals under UCTA should not be encouraged. In line with these indications, as we noted earlier, the House in Photo Production upheld the decision of the trial judge in favour of Securicor.

The critical argument against the limitation clause in George Mitchell hinged on the fact that the seed suppliers, in line with usual practice, had attempted an informal compromise of the farmers' claim, by offering a sum of money in excess of that set as the ceiling of liability by their limitation clause. This gave rise to what we may term the “estoppel" factor. So far as UCTA is concerned, the estoppel argument in George Mitchell suffers from a further complication. Quite simply, the material question in George Mitchell was whether it was fair and reasonable to allow reliance on the clause in all the circumstances of the case. On the face of it, the UCTA framework, strictly applied, would treat the parties' post-breach conduct as irrelevant. Therefore, quite apart from its other weaknesses, the UCTA framework would seem anyway to disallow such reasoning.

Without the estoppel element to settle the argument, the House in George Mitchell evidently saw the case as finely balanced. In favour of the protective clauses it could be argued that the farmers knew about, and must have consented to, the relevant terms. Against this, however, it could be argued that the seedsmen should be made to answer for their carelessness, and that, being in a position to cover the farmers' claim by insurance, they must take the risk. George Mitchell looks altogether less eccentric, and the question is how closely it can be brought into line with Photo Production.

One view is that George Mitchell is indeed pretty much in line with Photo Production . According to this interpretation, the House in both cases took into account a similar range of considerations, particularly concerning knowledge, consent, proportionality, fault, and insurance. There is no fundamental difference of approach between these two cases, merely a different outcome which hinges contingently on the particular facts, especially the facts relating to insurance.

As was said earlier, UCTA comprises a very general framework, leaving it largely to the judges to work out the direction and detail of the reasonableness requirement. In the first place, UCTA does not constrain judges at the level of initial presumptions. Of course, where UCTA provides that certain types of exemption clause are void, judicial presumptions and predilections are irrelevant. However, where the reasonableness requirement is appropriate, judges are left to employ whatever presumptions they wish. If judges were channelled by the statute towards a particular outcome, then again their initial presumptions and predilections would not matter very much. On the contrary, the UCTA arena itself is characterised by a high degree of flexibility. Judges have leeway at a number of points. First, they must select the relevant reasonableness factors. Secondly, they must specify the requirements of any particular reasonableness factor. Thirdly, the directional pull of any particular reasonableness factor must be identified. By this it simply means that judges must determine in whose favour a particular factor lies. That such a determination is not mechanical is evident in both Photo Production and George Mitchell. Finally, the reasonableness factors must be weighed, individually and in aggregate.

Since Photo Production and George Mitchell, three cases are of particular interest, namely Stag Line Ltd. v Tyne Shiprepair Group Ltd. (The Zinnia), Rees-Hough Ltd. v Redland Reinforced Plastics Ltd. and Phillips Products Ltd. v T. Hyland and Hamstead Plant Hire Co. Ltd. In all three cases, commercial exemptions were subjected to the reasonableness requirement, but it was only in The Zinnia that an exemption was upheld.

The first case that will be dealt with is The Zinnia. The plaintiff owners of the vessel sent it for repair to Wallsend Dry Docks Ltd. which was a wholly owned subsidiary of the first defendants. The stern of the vessel was relined with materials which did not accord with the plaintiffs' specifications, and some three months after the vessel left the yard she suffered major casualties in the engine room. The question was whether the owners could recover their losses against the defendants. Staughton J. held that the owners' contract was with Wallsend, that Wallsend were in breach, but that the breach had not actually caused the casualty. This rendered somewhat academic Wallsend's standard form exemptions. Nevertheless, Staughton J. took a hard look at the construction of the standard form, and expressed his view as to the reasonableness of Clause 8(9), which excluded liability for economic loss, and Clause 8(4), which provided that the owner may have no remedy unless the vessel was returned to the yard. The Zinnia clearly follows the Photo Production approach. The presumption which guided Staughton J.'s thinking was that ordinarily the Courts should be slow to interfere with commercial exemptions. Accordingly, he was not prepared to pursue his critical comments concerning the tortuous drafting and the tiny print Even though Clause 8(4) was held to be unreasonable, The Zinnia is not a very important case. However, the same cannot be said about the case of Rees-Hough or Phillips

In Rees-Hough, the plaintiff tunnelling contractors bought pipes from the defendant pipe manufacturers in order to carry out a pipe-jacking contract with the Thames Water Authority. During the pipe-jacking many of the pipes supplied failed to withstand the pressure and cracked. The plaintiffs, who bought nearly all their supplies of jacking pipes from the defendants and who were one of the latter's principal customers, sued the defendants for breach of contract. The Official Referee, Judge John Newey Q.C., held that the contract was on the defendants' standard terms which included protective provisions relating to the failure of the pipes. Accepting that these provisions were clear and unequivocal, Judge Newey turned to consider whether they satisfied the reasonableness requirement under UCTA. For these purposes, George Mitchell was treated as the ruling authority.

The last remaining case and most important is the case of Phillips Products Ltd. V T. Hyland and Hamstead Plant Hire Co. Ltd., where the plaintiff steel stockholders hired JCB excavators from the defendant plant hire company on a number of occasions. On the occasion which gave rise to the litigation, the JCB operator drove the excavator into collision with part of Phillips' buildings, causing considerable damage. Both defendants conceded that the JCB had been driven carelessly, and the argument at the trial before Jones J. centred on whether Hamstead could rely on their standard terms of hire by way of a defence. In particular, Hamstead relied on Clause 8 of the old Contractors Plant Hire Association Conditions of Hire under which drivers, such as Hyland:

“… shall for all purposes in connection with their employment in the working of the plant be regarded as the servants or agents of the hirer who alone shall be responsible for all claims arising in connection with the operation of the plant by the said drivers and operators."

In ruling that Condition 8 failed the test of reasonableness, the trial judge had picked out four facts as important. First, unlike the defendants, the plaintiffs, who were steel stockholders, did not ordinarily hire construction plant and operators. Secondly, the hire was for a very short period and it was arranged at very short notice. Thirdly, there was little, if any, opportunity for the hirer to arrange insurance cover for the particular risk which arose from the operator's negligence. Finally, the plaintiffs had no choice of operator, and no actual control over the way in which the JCB operator did his job. In the circumstances, the trial judge felt that this was a “take it or leave it" situation for the plaintiffs, thus rendering Condition 8 an unreasonable term to include in the contract.

Returning to Phillips, however, there are two ways of interpreting the Court of Appeal's decision. On one view, the Court really preferred the Photo Production framework and would have liked to have seen a non-interventionist approach below. Support for this reading of the decision could be found in the Court's express reservations about some aspects of the trial court reasoning. Seen from this perspective, the Court's killing of the precedent value of the case was an exercise in damage limitation. An alternative interpretation of the decision is that the Court was following the George Mitchell approach, and simply highlighting, in line with the George Mitchell philosophy, that each case is a one-off decision which must be restricted to its own special facts.

There are, as been discussed, indications that George Mitchell may establish itself as the ruling UCTA framework for commercial contracts. This will surprise many commentators who rather expected the law to develop around, on the one hand a presumption against the reasonableness of exemptions in consumer contracts, and on the other hand, a presumption in favour of exemptions in commercial contracts. Instead, if George Mitchell prevails, the fate of commercial exemptions will hinge on ad hoc, and essentially unreviewable, rulings of trial court judges.

It can be concluded by speculating a little about the reaction of commercial people to the rise of the George Mitchell approach. If the prospect of ad hoc dispute settlement in the trial courts surprises and disturbs some academics, it surely will horrify commercial contractors. George Mitchell, threatens commercial calculability and security. It undermines one of the law of contract's supposedly primary functions, namely the facilitation of the planning of transactions and business relationships. This is not to say that commercial parties expect to be left alone to stand on the most unreasonable of terms. Quite likely, for example, many commercial people would endorse Staughton J.'s ruling in The Zinnia, not simply in upholding Clause 8(9), but also in rejecting the capricious Clause 8(4). However, at two levels, the George Mitchell approach and the decisions in Rees-Hough and Phillips must cause real commercial concern.

Commercial people will not be happy about the way in which these decisions seem to be out of touch with the facts of commercial life. For example, they cannot be sanguine about judges striking out exemptions on the basis of possibly inaccurate information about the insurance background, or on the basis of arguments, like the estoppel argument, that simply do not take full account of the commercial context. If the George Mitchell approach persists, UCTA will surely get a bad name in commercial circles, and it is perfectly conceivable that a commercial lobby will organise itself and rally round the traditional “market-individualist" values of freedom and sanctity of contract In this event, it would not be altogether surprising if the judges rescued the Photo Production approach from oblivion, and re-established the case as the landmark decision that commercial contractors would surely like it to be, and that many commentators supposed it to be.