Will Unfair Contract Terms Bill improve law

This essay critically discusses the law relating to exemption clauses with particular reference to the Unfair Contract Terms Act 1977 (UCTA). It then examines the Law Commissions’ Report on Unfair Terms in Consumer Contracts (February 2005) and discusses whether implimentation of the Law Commissions’ proposed Unfair Contract Terms Bill will improve the law or merely make it more complex.

Introduction to exemption clauses

Yates defined an exemption clause as, "a clause in a contract or a term in a notice which appears to exclude or restrict a liability or a legal duty which would otherwise arise" [1] .

Exemption clauses often seek to limit or exclude liability for a breach of contract or a tort.

The courts have developed certain rules to deal with exemption clauses to limit or reduce their effectiveness. This is due in part to injustices that have resulted, particularly from clauses which unreasonably or unfairly exclude liability.

So as not to interfere with the ‘freedom of contract’ doctrine, courts generally view exemption clauses separately to the clauses which set out parties’ contractual obligations. All contractual terms except the exclusion clause are examined first to see whether a breach has occurred before looking to see whether the exclusion clause covers the breach.

This policy allows the courts to devise specific restrictions for exemption clauses without encroaching on laissez-faire principles that allow parties to be left to choose their own contractual terms. This approach can be distinguished from the alternative method of treating the exclusion clauses as part of the other contractual obligations.

Common-law rules

At common law, exemption clauses can only be relied upon in certain circumstances. For example, to be effective, notice of an exemption clause must be communicated either before or contemporaneous to entering into the contract [2] . Thornton v Shoe Lane Parking [1971] [3] is a case in point wherein notice of an exemption clause came after the claimant had paid for his ticket and entered the contract and was therefore held to be ineffective.

The exclusion clause must cover the loss suffered and must also be unambiguous [4] . In Houghton v Trafalgar Insurance Co Ltd [5] the word ‘load’ was considered to be too wide and could not be construed so as to include ‘people’ within its definition [6] . Clauses are also construed contra proferentem. This means that any ambiguity will be interpreted against the person seeking to rely on it.

Generally, if a contract is signed, the party is bound by it [7] unless it was obtained fraudulently or by misrepresentation [8] . However, the document containing the exemption clause must be contractual in nature, otherwise the clause will not be included into the contract [9] . However, whether the exemption clause is contained in a contractual document will be subject to the reasonable man test. In Chapelton v Barry UDC [1940], [10] the claimant hired a deckchair and received a ticket containing an exemption clause. The ticket was held to be a mere receipt – not a contractual document and the exemption clause was therefore invalid.

However, a court may be satisfied that sufficient notice has been communicated, if a course of dealing has existed between the parties [11] . It is generally speaking impossible for a party to seek to rely on an exemption clause which covers liability for a breach of an obligation which is a condition, even if the exemption clause is unequivocal [12] . However, Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 provided that if the clause is sufficiently clear, liability can be excluded [13] .

The legislator has also intervened because of injustices that have arisen from the use of exclusion clauses. Consequently, various statutes have been enacted to invalidate certain clauses which seek to exclude liability. These include s.29 of the Public Passenger Vehicles Act 1981; s.3 of the Liability for Misrepresentation Act 1967, and s.6 of the Defective Premises Act 1972.

UCTA 1977

The Unfair Contract Terms Act 1977 introduced much more far-reaching mechanisms than previously existed, dealing specifically with exemption clauses.

When the UCTA came into force it was deemed ‘modern interventionist legislation’ [14] . However, not all commentators favoured the Unfair Contract Terms Bill. For example, when it was passing through Parliament, Lord Hailsham termed it a ‘wretched little misery’ [15] .

The UCTA deals with contractual provisions that aim to exclude or limit liability for negligence, breach of contract (express terms and those implied by statute), or claims to be entitled to ‘render a contractual performance substantially different from that which was reasonably expected’ [16] .

Whereas it can be argued that a person should generally be bound by individually negotiated contractual terms, it is arguable whether this priciple should also extend to standard form contracts/non-negotiated contractual terms which have been prepared in advance by one of the parties to the contract.

This is particularly the case where one party is in a weaker bargaining position than the other, who has drafted the standard form contract.

The UCTA’s purpose was to overcome such inequalities. Consequently, curtailment to laissez-faire principles resulted [17] .

Certain clauses are automatically void or have limited effectiveness, whereas others may be valid if they satisfy the test for reasonableness under s.11, UCTA.

Tiplady noticed the marked effect of the UCTA on the ability to limit ones liability. He believed that it should be posible for a seller of goods to limit their liability, but that the Act made this virtually impossible [18] .

In consumer contracts, it is impossible to exclude liability in respect of goods' correspondence with description or sample, or quality or fitness for any particular purpose in pursuance of a contract not governed by the law of sale of goods or hire-purchase such as those which fall under the Supply of Goods and Services Act 1982 [19] .

The UCTA lists exemption clauses which are void if they exclude liability for certain breaches, viz. death or personal injury caused by negligence [20] ; loss or damage caused by negligence in a manufacturer’s guarantee [21] ; seller's implied undertakings as to title for the sale of goods or hire-purchase [22] ; breach of the obligations in consumer contracts arising from seller's implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose or the corresponding things in relation to hire-purchase agreements [23] .

The UCTA also lists exemption clauses which are only valid if they satisfy the reasonableness test, viz. those which exclude or restrict liability for loss or damage to property caused by negligence [24] ; or for a breach of contract between contracting parties where one of them deals as consumer or on the other's written standard terms of business [25] ; exclusion of terms implied by statute must also satisfy the reasonableness test (except the seller's implied undertakings as to title) [26] ; including those relating to contracts for the supply of goods (except terms which are implied by Supply of Goods and Services Act 1982) [27] . Finally, the reasonableness test also extends to clauses excluding liability for misrepresentation [28] .

It is important to note that section 6 only applies if the person ‘deals as consumer’. Under section 12, ‘A party to a contract “deals as consumer" if he does not make the contract in the course of a business nor holds himself out as doing so, and the other party does [29] .

R & B Customs Brokers v UDT [1988] 1 All ER 847 (CA) extended the definition of ‘dealing as a consumer’. It was held that as the contract was incidental to the usual course of business, the company was regarded as a consumer [30] . This enabled the company to rely on s.6(2)(a) UCTA which rendered the exclusion clause void and therefore ineffective.

It was held in Stevenson v Rogers [1999] Q.B. 1029 that R & B’s construction of s.12 UCTA should not extend to s.14 of the Sale of Goods Act 1979 (when ‘selling in the course of a business’) as any sale by a business is done in the course of business [31] .

In Feldaroll Foundry Plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747, (Stevenson case considered), it was argued that a company could never deal as a consumer. However, as R & B had not been overruled, the decision was still binding on the court. [32] Consequently, the definition of ‘dealing as a consumer’ extends to companies in certain circumstances under the UCTA.

When applying the test for reasonableness, the courts refer to s.11 of the 1977 Act and schedule 2 and Reg.5 of Unfair Terms in Consumer Contracts Regulations 1999 (SI 1994, No. 3159). They can also draw on considerations established in cases such as Smith v Eric S Bush (A Firm) [1990] e.g. the difficulty of the task and the practical consequences of a finding of reasonableness [33] , and in Stewart Gill v Horatio Myer & Co. Ltd [1992] where it was considered that the whole clause and nothing but the clause should be considered. [34] 

The UTCCR 1999

The UTCCR works alongside the UCTA. This subordinate legislation implemented the Unfair Consumer Contract Terms Directive 93/13/EC into domestic law and was enacted to deal with unfair terms in consumer contracts.

Smith submitted that neither the 1999 Regulations nor the 1977 Act are as far-reaching as the previously established common law rules because, ‘(i) some very important classes of contracts are outside the scope of both; and (ii) where an enactment provides that an exclusion clause is valid if reasonable the claimant may argue (a) that it is not part of the contract at all or (b) that, on its true construction, it does not apply to the situation which has arisen – in which case it is ineffective even if it is a reasonable clause.’ [35] 

Comparing the UCTA with the UTCCR

It is clear that the UCTA does have limited scope. Schedule 1 of the UCTA lists certain types of exemption clauses which Sections 2 to 4 and 7 of the UCTA do not apply. This includes contracts for people not acting in the course of business (not including section 6 of the 1977 Act); insurance contracts; creation or transfer of land; intellectual property [36] .

Conversely, the UTCCR is much wider in scope. Whereas the UCTA deals only with exclusion clauses, the UTCCR covers all contract terms. However, it only applies to consumer contracts. Consequently, companies cannot be included in the protective ambit of UTCCR.

Distinct from the UCTA’s requirement of reasonableness, under the UTCCR, any term in a contract between consumer and seller is not binding if it is ‘unfair’ [37] . Regulation 5(1) defines unfairness: ‘If a contractual term has not been individually negotiated and the term causes significant imbalance in the parties rights and obligations, then the term is contrary to the requirement of good faith.’ [38] 

Whether a term is deemed unfair will be determined by ‘taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time the contract was concluded, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract [39] .

Schedule 2 of the UTCCR provides a list of seventeen ‘indicative and non-exhaustive’ terms which may be regarded as unfair. However, even if a term is deemed unfair, under Reg. 8(2), only the exclusion clause is void leaving the rest of the contract intact.

The UTCCR’s definition of “natural persons" has not been stretched to include companies, as has the term ‘consumer’ under the UCTA. This is unlikely to change, as it is well established law that corporations are fictitious persons.

A major difference between the UCTA and the UTCCA is the burden of proof. The burden of proving that an exemption clause is reasonable lies with those ‘claiming that a contract term or notice satisfies the requirement of reasonableness’ [40] . However, under the UTCCR, the burden of proving that the term is unfair, lies with the consumer [41] .

Adding to these inconsistent provisions, further differences can be found between the two enactments. The UCTA lists certain terms which are automatically void, whereas under the UTCCR they must be unfair to be void; the UCTA applies to both individually negotiated terms in contracts and standard form contracts, whereas the UTCCR only applies to standard form contracts; and the UCTA applies to exclusions of tortious and contractual liability, whereas the UTCCR only applies to contracts.

Law Commissions’ recommendations

The Law Commission submitted that the two sets of laws provided by the UCTA 1977 and the UTCCR 1999 ‘contain inconsistent and overlapping provisions, using different language and concepts to produce similar but not identical effects’ and that ‘A law that affects ordinary people in their everyday lives had been made unnecessarily complicated and difficult’ [42] (Unfair Terms in Contracts LC No. 298; SLC No. 1999, Summary 2005, p.1).

The Law Commission agreed with criticisms that the current regime fails to benefit consumers or their suppliers; that the language of the current legislation is ‘formulaic and legalistic’; and that it is confusing for consumers to have to search multiple sources to find the law.

To provide greater clarity for consumers, businesses and enforcement authorities and to reduce uncertainty and confusion caused by the overlap and inconsistency of rules relating to exemptions clauses, the Law Commission recommended that the UTCCR and the UCTA should be replaced by a more unified and coherent regime which should apply to the whole of the UK [43] .

The proposed Unfair Contract Terms Bill which applies to all contract terms covered by the UTCCR, stated that its purpose is to ‘limit the exclusion or restriction of civil liability by contract terms or notices; to limit the effect of unfair terms in consumer and small business contracts; to make provision about the protection of the collective interests of consumers; and for connected purposes.’

Subject to two exceptions, the Law Commission recommended that consumer protection should be maintained. The first exception being that the definition of ‘consumer’ should, in line with the UTCCR, be limited to natural persons. ‘Where a party who is in business enters into a contract for purposes that are merely incidental to the core business but nevertheless related to it, that party should not be treated as acting as a

Consumer’ [44] .

If this proposal is given legislative form, corporations would not fall under the definition of consumer. Moreover, the decision in the R & B case and subsequent cases on all fours with this, would fall subject to challenge. This would be a marked improvement in the law as companies would not be able to rely on s.6(2) UCTA.

The second exception to this is the removal of Section 5 of the UCTA which prevents the exclusion of liability for loss or damage arising from defective goods while in consumer use which resulted from the negligence of a person concerned in the manufacture or distribution of the goods. Sections 9 and 28 of the UCTA would also be removed as they are, the Law Commission submitted, ‘of no practical effect.’

Whilst the Law Commission believe that the general effect of the 1977 Act on business contracts should be preserved without reducing consumer protection, it contends that some of the controls imposed over exclusion and limitation clauses for breach of terms implied by statute should be removed.

The draft Bill continues to apply the rule that in consumer contracts, businesses cannot rely on terms that exclude or limit liability for death or personal injury arising from negligence, or exclude undertakings implied by the Sale of Goods Act 1979 regarding quality of goods, description and fitness for the intended purpose.

Under their proposals, all other terms in consumer contracts (including individually negotiated terms) should be required to satisfy a “fair and reasonable" test [45] .

Furthermore, the burden of proof as to whether a term is fair and reasonable would lie with the business. This would therefore represent a departure from both s.11(5) UCTA provisions, and the UTCCR, placing the consumer in a much stronger position.

The OFT would be granted enforcement powers allowing them to prevent businesses from using unfair or misleading terms. This would include the ability to remove misleading and ineffective signs. It is submitted that this may improve the current law as it would lead to greater certainty for both consumers and businesses.

The draft Bill also proposes protection for small/micro businesses, giving them the ability to challenge any term of a standard contract, which is ancillary to the main subject matter of the contract or price.

However, this would exclude individually negotiated clauses, and contracts for financial services; contracts over £500,000; and situations where the small business is associated with other businesses, so that overall, the group exceeds nine employees.

The Law Commission also recommends that the UCTA exemptions should apply to micro business contracts. Therefore, contracts for the creation or transfer of a right or interest in any patent, trade mark, copyright, registered design, technical or commercial information or other intellectual property, or relating to the termination of any such right or interest, will fall outside the scope of the Bill.

The Law Commission has also proposed changes to the current UCTA rules relating to clauses which exclude or limit liability for terms implied by statute, viz. the requirement of goods to correspond with the description, be of satisfactory quality, and fit for the intended purpose.

On the basis that it is difficult to render a negotiated term unfair, proposals have been made to allow businesses to negotiate both negotiated and standard clauses, with the ‘fair and reasonable’ controls, only applying to non-negotiated terms.

In conclusion, the law on unfair contract terms is clearly in need of reform, due to inconsistent and overlapping provisions. It would seem that a unified statute dealing with unfair terms in contracts would provide consumers with more certainty, initially removing the need to search multiple sources to find the law.

It would prima facie increase protection for small businesses, and reduce the number of misleading and ineffective exclusion notices by granting the OFT greater powers.

The burden if proving whether an exclusion clause is fair and reasonable would favour consumers as under proposals, this would shift from the person seeking to rely on the exclusion clause, to the business.

The draft Bill is set out logically, in plain language, with separate sections for consumer contracts, business contracts, employment contracts and private contracts.

However, as is the case with even the most carefully drafted legislation, judicial interpretation will no doubt build upon the provisions of the Bill. For example, interpretation of ‘fair and reasonable’ will largely determine how much or little protection is offered to consumers.

With the proposed Consumer Rights Directive soon to be implemented which will repeal the UTCCR, in reality, it remains to be seen whether implementation of the Law Commissions’ proposals will improve the law or just make it more complex.

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