Simon Cuddle, a multi-millionaire property developer, decides to refurbish three of his properties. He enters into three separate contracts with the following companies; Best Builders Ltd (‘BBL’), Ravishing Rooms Ltd (‘RRL’) and Perfect Print Ltd (‘PPL’).
In the first contract BBL agree to build a new concert hall in the grounds of a large property called ‘Taylor Caldwell Mansions’ that Simon has recently purchased. Simon informs BBL that the work must be completed by 1st May 2010 as he has hired a pop group called the ‘Dip-Sticks’ for the grand opening on that day. Unfortunately, due to the cement mixing machines not working properly, the grand opening has to be put back until 1st June. As a result, Simon loses £20,000 on advertising, £10,000 on advanced ticket bookings and £30,000 profit from expected sales on t-shirts and CD’s from the group’s latest recording. Simon did make a telephone call to another builder in order to hire other cement mixers – sadly, they did not have any to spare.
In the second contract RRL agree to make built-in wardrobes for the bedrooms in one of Simon’s hotels, called ‘The Olly Marlborough’. RRL have, on six separate occasions in the past three years supplied and fitted carpets in other hotels belonging to Simon. In this instance, due to the negligence of one of the workmen the wardrobe is not fitted correctly and crashes down onto the floor, ruining a Persian rug valued at £15,000. On hearing the noise, Simon rushes into the room and falls over a piece of computer wire that the electricians who had been working in the room the previous day had forgotten to take away. As a consequence, he breaks both legs and is in hospital for six days. He becomes quite depressed about the whole incident. RRL refuse to accept any liability and point to a clause in the contract which states that ‘RRL do not accept responsibility in any circumstances for any damage or injuries whatsoever’.
For Simon Cuddle to be successful, he must establish that the exclusion clauses are not valid. In part (a) the key point is that transaction is a valid contract.
Does the fact that the workmen negligence for not fitting the wardrobe is not fitted properly correctly and crashes down onto the floor?-
The Unfair Contract Terms Act 1977 is commonly refer to as ‘UCTA’.
In order for an exclusion clause to be valid at common law it must satisfy three tests:
It must be a term of the contract (that is , the clause must be incoported in the contract)
It must cover the damage that was caused
It must be reasonable
Incorporation of exclusion clauses-
Incorporation by previous course of dealings this is an expectation to the general rule that there must be sufficient notice of the existence of an exclusion clause arises where there has been a previous course of dealing between the parties.
J.Spurling Ltd v. Bradshaw  the legal principle
Another method of incorporation of contract terms is by course of dealing. This only applies where the parties have had previous dealings with one another. However, the course of dealing needs to have been for a long enough period and to have been reasonably frequent. It must also be consistent. Both of these tests, frequency and consistency, must be passed for the term to be incorporated by course of dealing. In such a case the term may be incorporated even though neither of the parties specifically mentioned it in this particular transaction. Dealing must be sufficiently often and over a long enough period of time. The indicative judgments we have are the following: In Hollier v Rambler Motors Ltd four transactions in five years were not sufficient to establish course of dealing. In Hardwick Game Farm v Suffolk Agricultural, etc. Association  2AC 31 it was held that three contracts per month for three years was sufficient to establish course of dealing. The contract terms which had consistently been used over this period but had not been specified in the latest contract were held to have been incorporated by course of dealing.
In this case, Simon had six separate occasions in past 3years with the same provided RRL. The clause is therefore valid.
Construction of exclusion clauses
1) Contra proferentem rule.
The above rule states that where the meaning of the clause is ambiguous, the courts will adopt the meaning most unfavourable to the person seeking to rely on the term (the proferens).
For example, in Beck & Co v Szymanowski & Co  AC43 the exemption clause stated that the goods delivered were deemed to be of satisfactory quality if no complaint was made within 14 days. However, the problem was that the goods delivered were ‘short’ i.e. each reel of cotton contained on average of 188 yards of cotton instead of the stipulated 200 yards. It took the plaintiffs 18 months to discover this and to complain. This was held not to be covered by the clause and liability for short delivery could not be excluded even though the complaint was made more than 14 days after delivery. The problem was quantity not quality, the amount of cotton not the quality of the cotton.
The courts have been very ready to find ambiguity in order to be able to apply this rule. For example in Houghton v Trafalgar Insurance Co Ltd  1 QB 247 an insurance policy excluded insurance protection to any damage occurring when the car was carrying “any load in excess of that for which it was constructed.” The car was designed to carry five people and an accident occurred when six people were travelling in the car. The Court of Appeal held that the word “load” was ambiguous and referred to excess weight rather than excess passengers and did not allow the insurance company to escape liability by relying on the clause.
Contra proferentem judgments differentiate between exclusion clauses and limitation clauses. Limitation clauses are not to be construed as narrowly as clauses which totally exclude liability and indemnity clauses. The idea behind this is that the contracting party is more likely to agree to some limitation of the other party’s liability than they are to agree to the total exclusion of that liability. Again we see the courts trying to ascertain the true intention of the parties.
2) Exclusion of negligence liability
Courts do not like attempts to exclude negligence liability. They feel that it is inherently improbable that the innocent party would have agreed to the exclusion of the contract-breaker’s negligence. Therefore, very clear words are needed in order to exclude negligence liability although the word negligence does not have to be used.
A further issue with attempted exclusion of negligence liability is whether an employer can exclude the liability of their employees. This was clarified in the following case which also introduced the idea that an exclusion clause would only cover negligence liability where that was the only possible liability covered by the wording of the clause.
Canada Steamship Lines v The King  AC192
i. If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens’) from the consequences of the negligence of his own servants, effect must be given to that provision.
ii. If there is no express reference to negligence, the court must consider whether the words are wide enough, in their ordinary meaning to cover negligence on the part of the servants of the proferens.
iii. If the words used are wide enough for the above purpose the court must then consider whether ‘the head of damage may be based on some ground other than that of negligence’ – the existence of a possible head of damages other than that of negligence is fatal to the proferens even if the words are prima facie wide enough to cover negligence on the part of his servants.
This Canadian case has since been applied by the House of Lords in this country.(e.g. Smith v South Wales Switchgear Ltd  1 WLR 165
An example of the second rule in Canada Steamship Lines can be found in Rutter v Palmer  2 KB 87 This is an example where the exclusion clause was held on the ordinary clear meaning of the words to exclude negligence liability. Rutter left his car at Palmer’s garage to be sold. The contract contained a clause customer cars are driven by your [Palmer] servants at customer’s sole risk. The car was taken for a trial run by one of Palmer’s drivers and there was a collision. The car was damaged. Clear words do not mean that the word negligence has to be used. It simply means that the clause is worded so that its ordinary meaning would exclude negligence liability to anyone who thought about what the words actually meant under the circumstances.
Looking at the clause in Rutter v Palmer Scrutten LJ tried to explain it in a chain of logic. He remarked that the driver’s negligence was the most likely cause of damage to a car. The garage would only be liable for accidental damage to the car if it were caused by one of their driver’s fault. Therefore any sensible man would assume that the words of this clause meant that the garage would not be liable for the negligence of their own drivers. This is a typical case where the meaning for which the defendant was arguing was the obvious meaning of the clause. The clause was effective in placing the risk of negligence on Rutter so his claim failed.
Hollier v Rambler Motors Ltd  2 QB 71 (CA) is an example of a clause construed narrowly so that it did not cover negligence. Hollier arranged over the phone to have his car repaired by Rambler Motors Ltd and subsequently sent his car to their premises. On at least two previous occasions when Rambler had carried out repairs for him he had signed a form with the words ‘The company is not responsible for damage caused by fire to customers’ cars on the premises’. On this occasion, while on the premises, the car was damaged by fire due to Rambler’s negligence.
As we saw previously, the Court of Appeal held that there was not sufficient previous course of dealing to incorporate the exemption clause into the contract (four times in five years). However, in addition, they held that the language of the clause did not unequivocally cover negligence. The clause was construed narrowly to cover damage caused by fire, but not where the fire was caused by negligence. The words were not clear enough. Examples of clauses which have been recognised by the courts to exclude liability for negligence are: will not be liable for any damage howsoever caused, will not in any circumstances be responsible, arising from any cause whatsoever.
d) Fundamental breach.
Another rule of construction used by the courts for some time was that an exclusion clause could not be used to exempt the party in fundamental breach of a contract from their liability.
I think there is a rule of construction that normally an exception or exclusive clause or similar provision in a contract should be construed as not applying to a situation created by a fundamental breach of contract. Pearson LJ, UGS Finance Ltd v National Mortgage Bank of Greece SA  1 Lloyds rep 453
In other words, an exemption clause cannot be used to exclude or limit liability for any breach of contract which is so fundamental that it defeats the purpose of the contract. A line of cases in the Court of Appeal used this doctrine fairly extensively until the House of Lords withdrew from it. In Photo Production Ltd v Securicor Transport Ltd  WLR 856 the House of Lords rejected the doctrine of fundamental breach. They stressed the need to look at the contract as a whole when assessing a limitation clause. They looked at the price which was modest, the limited nature of the task in the contract security of a factory site, and the fact that Photo Production could easily and economically have insured against the damage “ fire damage to the premises. The clause limiting Securicor’s liability to exercising due diligence in their capacity as employers was effective. They were therefore not liable for the damage caused by their employee when he set fire to the premises.
The Lords rejected the fundamental breach doctrine as being unnecessary in commercial contracts where the parties will usually be of roughly equal bargaining power. They should therefore be allowed to apportion the risk by reference to contract terms and to the opportunity to insure. Risk allocation is usually part of the negotiations and influences the price of a commercial contract. Consumers no longer needed the protection of the doctrine as they were now protected by UCTA 1977
The Unfair Contract Terms Act 1977
We have already looked at the common law means of dealing with exemption clauses in contracts: incorporation and construction. Both of these are still valid and have to be dealt with in any legal problem dealing with exemption clauses. Once incorporation and construction have been dealt with, then the statutory provisions of the and the Unfair Terms in Consumer Contracts Regulations 1999 become relevant. A table illustrating the relationship between the common law and UCTA is in your handbook.
Once incorporation and construction have been dealt with, it is necessary to identify the type of liability involved in order to find the section of UCTA which applies. UCTA only deals with liabilities incurred by businesses: see UCTA s1(3) “in the course of a business”
Common Law liabilities
UCTA deals with the validity of exemption clauses regarding the following liabilities at common law:
Negligence s2 UCTA
Breach of contract s3 UCTA
Indemnity clauses s4 UCTA
Manufacturers’ liability s5 UCTA
READ THESE SECTIONS OF THE ACT BEFORE THE LECTURE
Negligence is a liability created by the common law of torts. For the purposes of this module you only need to know that some one who is reckless or careless can be guilty of negligence. Usually it will be made clear that negligence is the issue.
s2 UCTA negligence
Under section 2 subsection 1 negligence liability for death or personal injury cannot be excluded by anyone under any circumstances. This applies to negligence liability in contract and in tort. The relevant wording in the Act refers to a contact term or notice. Where negligence liability is tortious and does not depend on a contractual relationship, the tortfeasor (the person liable) might try to exclude their liability by using a notice. Typical would be a notice at a jetty or pier saying that the owners would not be liable for any injuries caused to people using the pier. Under s2 UCTA they would still be liable if the injuries were caused by their negligence, they cannot exclude that liability by means of a notice.
Section 2, subsection 2 states that negligence liability for any other loss or damage e.g. broken gold watch, can be excluded if it is reasonable. The criteria for reasonableness under UCTA can be found in s11 and Schedule 2 (see UCTA reasonableness, these notes). Schedules can be found at the end of any Act of Parliament or statutory instrument.
Section 2, subsection 3 says that you cannot accept such a risk voluntarily e.g. by signing something or simply by being made aware of it.
Breach of contract deals with breach of an express term. You should be able to identify this from your knowledge of Law of Contract 1
s3 UCTA breach of contract
The first important thing to check is whether the possible claimant is a consumer or was dealing on the other’s standard terms. This includes businesses dealing on another’s standard terms.
S3(2)(a) covers liability for breach of contract.
s3(2)(b) deals with liability for part performance or for performance which was very different from what the claimant expected. For example, where a cruise ship called at different ports from those mentioned in the brochure. In order to be ‘substantially different’ the ports would have to be of a different character from what the customer had expected e.g. a busy town or city instead of a quiet seaside resort. In both cases the standard is the requirement of reasonableness. Liability for breach of contract, part performance or inadequate performance can only be excluded where it is reasonable to do so.
Reasonableness for the purposes of UCTA is described in s11 and Schedule 2. In Anglo-Continental Holidays Ltd v Typaldos Lines (London) Ltd  2 Lloyds Rep 61 Typaldos could not rely on a clause stating “subject to change without notice” when they altered the travel arrangements unilaterally. They could not escape liability for breach of contract.
s4 UCTA – indemnity clauses
A consumer cannot be made to indemnify another party for negligence or breach of contract unless it is reasonable. Indemnity means to pay them back what they owe to another e.g. if an electrician causes damage through his negligence while doing an installation in your house, an indemnity clause would allow him to claim back any damages he might owe you or any one else in negligence. You would have indemnified his losses. The case of British Crane Hire involved an indemnity clause (see Incorporation in the Lecture on UCTA incorporation and construction). Ipswich Plant Hire were liable to indemnify British Crane Hire for all costs arising out of the use of the crane during the hire period – even when those costs were caused by the negligence of their own driver.
This clause of UCTA only protects consumers, therefore it would not help Ipswich Plant Hire, and is subject to the reasonableness test.
s5 UCTA Manufacturers’ liability.
Careful, this is not contractual liability. It is the Donaghue v Stevenson situation: the manufacturer’s liability to an end consumer. A manufacturer cannot escape liability for his goods when used by a consumer by using clauses in the guarantee. This is not subject to the reasonableness test, the liability cannot be excluded at all. The vital clue, which makes it clear that this section of UCTA applies to manufacturers and not to retailers, is subsection 3, which says that this section (i.e. s5) is not intended for use between parties to a contract.
A pattern emerges. Three questions are important when dealing with UCTA:
What liability is being dealt with? negligence, breach, manufacturers liability
Who is being protected? consumer, person dealing on the other’s standard terms or all the world.
How much protection does UCTA offer in this particular case? absolute protection i.e. the liability cannot be excluded at all, or protection subject to the reasonableness test.
The reasonableness test is referred to and incorporated into the Act by s11, which then refers to Schedule 2.
s11 (1) The terms should be a fair and reasonable one in all the circumstances which were, or ought reasonably to have been known to the parties at the time of entering into the contract.
Although very general, this clause does instruct the courts to only refer to what was known, or should have been known at the time of entering into the contract and not to use hindsight.
Subsection (2) refers to Schedule 2 but only applies Schedule 2 to ss6 and 7 of UCTA. However, case law already applies this to other sections of the Act. Schedule 2 can therefore be used generally for applications of UCTA reasonableness. Stewart Gill Ltd v Horatio Myer & Co Ltd  2 All ER 257
Although Schedule 2 does not apply in the present case, the considerations there set out are usually regarded as being of general application to the question of reasonableness. Stuart-Smith LJ
The guidelines for the reasonableness test in Schedule 2 refer to the relative bargaining strength of the parties, whether there was an inducement to the customer to agree to that particular term, whether the customer was aware of the term and its extent, whether the term was conditional upon performance by the customer of a condition which may itself have been unreasonable and whether the goods were made or adapted to the customer’s special order.
Several modern cases have concentrated on the relative bargaining power of the parties. Where the parties are of roughly equal bargaining power, the courts are more likely to find that exemption clauses are reasonable (Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317. Where one party is in a much weaker position to bargain, the courts are more likely to find exemption clauses to be unreasonable (Monarch Airlines Ltd v London Luton Airport Ltd  CLC 698)
S11(4) refers purely to limitation clauses and stipulates that availability of insurance and relative resources of the parties should be taken into account when deciding on the reasonableness of limitation clauses. In George Mitchell v Finney Lock Seeds Ltd  1AllER 108 both the Court of Appeal and the House of Lords provided useful guidance as to the application of s11(4). Lord Denning in the Court of Appeal in holding that the limitation clause was not reasonable looked at:
The normal practice in the trade
The availability of insurance to the sellers
The negligence of the sellers.
The sellers themselves admitted that, in similar cases, they had not insisted on the limitation of their liability to the value of the seed sold, but had negotiated individual settlements with farmers. Insurance for crop failure was more readily available to seed merchants and such insurance would not have materially raised the price of seeds on the market. There was no way the farmers could have told that the seed was not the correct cabbage seed, whereas it was the negligence of the seed merchants which had led to the wrong seed being supplied. Lord Bridge in the House of Lords agreed with the importance of the three issues raised in George Mitchell v Finney Lock Seeds and also said:
There will sometimes be room for a legitimate difference of opinion as to what [is reasonable]. It must follow that the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong.
However, where the appellate court feels that the judge at first instance has applied the law incorrectly in making a decision on reasonableness then it will overturn a decision. Watford Electronics is a case where the appeal court did just that.
Phillips Products Ltd. v Hyland  1 WLR 659 states that UCTA reasonableness will turn on the facts of each individual case and that previous cases should not be used strictly as precedent. It is important that our conclusion on the particular facts of this case should not be treated as a binding precedent in other cases [with] similar clauses. per Slade LJ
Most reported cases on reasonableness are commercial cases. Consumers may be seen as more in need of protection and judges may therefore be more ready to find exemption clauses being used against consumers as unreasonable (Smith v Eric S. Bush  1AC 831)
Statutory implied terms
Certain Acts of Parliament imply terms into certain types of contracts. The Sale of Goods Act 1979 (‘SGA’) implies terms into contracts for sale and for hire purchase.
The main terms are:
s12 the seller has the right to sell the goods.
s12(1) implies a term into sales contracts that the seller has the right to sell the goods. According to s12(5A) that term is a condition. All other implied terms under s12 relating to enjoying quiet possession of the goods and freedom from encumbrances are warranties.
s 13 implies a term into sales contracts that where goods are sold by description e.g. in a catalogue or by display in a showroom the goods will correspond with the description e.g. if you buy an oak wood cupboard then you will not have to accept one made of mahogany. s13(1A) states that this implied term is a condition.
The term implied by s 14 is that the goods will be of satisfactory quality and fit for the purpose they are sold for. This is classified by the statute as a condition. Satisfactory quality is described under subsection 2 as what a reasonable person would regard as satisfactory. The courts are instructed to take into account ‘all other relevant circumstances’. This includes price. For example a reasonable person would not expect a cheap dress from a market stall to be of the same quality as an expensive dress from an exclusive fashion house. Please examine ss (2), (2A), (2B) and (2C) in detail in your statute book
The Sales of Goods Act 1979 was amended by the Sale and Supply of Goods Act 1994 to replace the term ‘merchantable quality’ with the more flexible term ‘satisfactory quality.’ Therefore cases, which predate the 1994 Act, may still use the term merchantable quality.
s14(3) states that, where the buyer asks for the goods for a particular purpose, the goods as sold must be fit for that purpose even if it is not one for which the goods are normally used.
The Supply of Goods and Services Act 1982 implies similar terms into mixed contracts for goods and services e.g. building contracts where goods are supplied but also labour and also into contracts for hire. Mixed contracts are referred to in SGSA as “Contract[s] for the transfer of goods”. The old common law term for them was contract for works and materials. Note that works are mentioned first i.e. the main purpose of the contract should be the work with goods only supplied incidentally. For example a contract to build a conservatory is a contract mainly for building works under which some goods pass: bricks, mortar, windows, doors etc.
UCTA refers to such contracts and to hire contracts collectively as “Miscelleneous contracts under which goods pass”.
s2 (1) SGSA covers the sellers right to sell the goods
s3 SGSA deals with correspondence with description
s4 deals with satisfactory quality and fitness for purpose These are all conditions.
The Act also implies similar terms into contracts for hire.
s7 SGSA deals with the right to hire out the goods
s8 covers description
s9 satisfactory quality and fitness for purpose
However, the SGSA contains one more important section on an implied contract term which is exclusive to the service element of a contract. s13 SGSA contains an implied term that the supplier of a service will carry it out with “reasonable care and skill.” e.g. an electrician will take reasonable care and skill when installing electrical goods. Breach of this term is usually described as statutory negligence or contractual negligence.
UCTA and the statutory liabilities
All these statutory implied terms are important in the context of the Unfair Contract Terms Act 1977 Breach of a statutory implied term incurs a statutory liability. The first question to ask is what type of contract is involved therefore which statute does the implied term come from? Contracts for sale are dealt with by the Sale of Goods Act 1979. Hire purchase contracts by the Supply of Goods (Implied Terms) Act 1973
An exemption clause purporting to limit or exclude liability for breach of any of the statutory implied terms under SGA are governed by s6 of UCTA.
s6 UCTA deals with implied terms concerning seller’s right to sell, conformity with any description, fitness for purpose and satisfactory quality in sales or hire purchase contracts.
s6(1) states that liability under the statutory implied term regarding right to sell cannot be excluded or restricted as against any other party to a contract.
The other statutory implied terms from SGA: conformity with description, satisfactory quality and fitness for purpose, are dealt with separately.
s6(2) UCTA gives consumers absolute protection. This means that liability under the other statutory implied terms i.e. conformity with description, fitness for purpose and satisfactory quality as against a consumer cannot be excluded or limited by any contract term.
s6(3) UCTA gives non consumers (“other than consumers” in the Act) protection for those same liabilities under the reasonableness principle i.e. liability for conformity with description, fitness for purpose and satisfactory quality can be excluded in sales to non consumers if it is reasonable to do so. Here s11 and Schedule 2 need to be discussed to establish whether it is reasonable to exclude this liability in any given situation.
Contracts for mixed goods and services (works and materials) and hire contracts come under the Supply of Goods and Services Act 1982. s7 UCTA covers the same liabilities as s6, right to sell, fitness for purpose and satisfactory quality, in these types of contracts.
s7(2) UCTA gives consumer absolute protection against any limitation or exclusion of the liabilities regarding conformity with description, fitness for purpose and satisfactory quality.
s7(3) UCTA applies the reasonableness test where these liabilities are towards customers who are not consumers.
Again, right to sell is dealt with separately, but this time hire contracts and mixed goods and services contracts receive different treatment.
A new s7(3A) prohibits the use of exemption clauses to escape or limit liability under the statutory implied term regarding good title for goods which pass under mixed goods and services contracts.
As regards hire contracts, s7(4) applies the reasonableness test to any attempt to limit or exclude liability in respect of the right to transfer ownership of goods and the right of the party hiring to quiet enjoyment of the goods.
A further statutory liability which is covered by UCTA originates from s13 Supply of Goods and Services Act 1982. This section states that suppliers acting in the course of a business must provide a service with “reasonable care and skill.” UCTA defines any breach of this statutory implied term as negligence. (see definition of negligence in s1(1)(a) of UCTA. Any attempt to exclude or limit this liability is therefore governed by s2 UCTA on negligence. (see lecture on UCTA and common law liabilities)
Simon wishes to get leaflets printed publicising the opening of his new estate agency business called ‘Houses R Us’. Prior to entering into the contract with PPL, Peter, a director informs Simon during negotiations that PPL have been ‘the leading specialists for years’ for this type of printing and that they only use the ‘latest and up-to-date printing machines on the market’. Peter also informs Simon that ‘we are the cheapest and that if you do not accept our claims we insist that you check out what we say is true’. Simon decides not to have their claims checked out and enters into a contract with PPL for the printing and delivery of 10,000 leaflets. When the leaflets arrive Simon discovers that 3000 of them are mostly blurred and that the paper that was used was very flimsy and had been manufactured over ten years ago. He immediately terminates the contract and refuses to pay PPL anything. Three months later Simon discovers that PPL are not the leading specialists; their printing machines are over seven years old and that their prices are one of the most expensive on the market.
Advise all the parties involved.
Have a little read: … Paper 1, Nov. 97, Question 7 Describe the doctrine of frustration and explain how the rules relating to frustrated contracts have been developed to ensure the parties are fairly treated. (25m) The term “frustration of a contract” defines the unforeseen termination of a contract as a result of an event that either renders the performance impossible or illegal, or prevents its main purpose from being achieved. For a contract to be frustrated, there must first be a contract betwe
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