8 Exclusion Clauses/Unfair Terms

7. Exclusion Clauses

The Unfair Contract Terms Act 1977

Office of Fair Trading v Foxtons Ltd [2009] EWCA Civ 288; [2009] WLR (D) 128
CA: Waller, Arden and Moore-Bick LJJ: 2 April 2009

CONTRACT — Consumer contract — Unfair terms — Office of Fair Trading seeking injunction against estate agents in relation to fairness of its standard terms — Estate agent applying to strike out parts of relief sought — Judge striking out words which otherwise would prevent estate agent enforcing terms in current contracts — Whether court having power to grant injunction and/or declaration— Whether injunction capable of extending to use of unfair terms in existing contract — Unfair Terms in Consumer Contracts Regulations 1999, reg 12(1)(4) — Council Directive 93/13/ECC, art 7

See also: Insite Law Sale of Goods exclusion clauses

The Unfair Contract Terms Act 1977 has had a major impact on the use of exclusion clauses. Before examining the detail of UCTA 1977 it is worth setting the context with some extracts from George Mitchell v Finney Lock Seeds [1983]

George Mitchell v Finney Lock Seeds [1983] 2 AC 803
Finney Lock Seeds agreed to supply George Mitchell (Chesterhall) ltd with 30 lbs of Dutch winter cabbage seed for £192. An invoice sent with the delivery was considered part of the contract and limited liability to replacing ‘any seeds or plants sold’ if it were defective (clause 1), and excluding all liability for loss or damage or consequential loss or damage from use of the seed (clause 2). 63 acres of crops failed, and £61,513 was claimed for loss of production.

The issues:
– whether the limitation clause should be interpreted to cover the seeds actually sold, given that the seeds were wholly defective and did not do a seed’s job at all;
– whether under the Unfair Contract Terms Act 1977 , s 2(2) the limitation was reasonable (s 11).

Court of Appeal: Lord Denning MR argued the clause did apply to limit liability for the seeds sold, even if the seeds were defective. Oliver LJ and Kerr LJ held the limitation clause did not apply because, like Parker J, they held that what was sold was not seed. All agreed that the clause was invalid under the Supply of Goods (Implied Terms) Act 1973 (see now s 55 SGA 1979 and UCTA 1977 ) because it was unreasonable.

In a memorable passage, and his last ever judgment, Lord Denning MR outlined the problem of the case in this way.

“ The heyday of freedom of contractNone of you nowadays will remember the trouble we had – when I was called to the Bar – with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of “freedom of contract.” But the freedom was all on the side of the big concern which had the use of the printing press. No freedom for the little man who took the ticket or order form or invoice. The big concern said, “Take it or leave it.” The little man had no option but to take it. The big concern could and did exempt itself from liability in its own interest without regard to the little man. It got away with it time after time. When the courts said to the big concern, “You must put it in clear words,” the big concern had no hesitation in doing so. It knew well that the little man would never read the exemption clauses or understand them.

It was a bleak winter for our law of contract. It is illustrated by two cases, Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41 (in which there was exemption from liability, not on the ticket, but only in small print at the back of the timetable, and the company were held not liable) and L’Estrange v F Graucob Ltd [1934] 2 KB 394 (in which there was complete exemption in small print at the bottom of the order form, and the company were held not liable).

The secret weapon

Faced with this abuse of power – by the strong against the weak – by the use of the small print of the conditions – the judges did what they could to put a curb upon it. They still had before them the idol, “freedom of contract.” They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called “the true construction of the contract.” They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put upon them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability; or that in the circumstances the big concern was not entitled to rely on the exemption clause. If a ship deviated from the contractual voyage, the owner could not rely on the exemption clause. If a warehouseman stored the goods in the wrong warehouse, he could not pray in aid the limitation clause. If the seller supplied goods different in kind from those contracted for, he could not rely on any exemption from liability. If a shipowner delivered goods to a person without production of the bill of lading, he could not escape responsibility by reference to an exemption clause. In short, whenever the wide words – in their natural meaning – would give rise to an unreasonable result, the judges either rejected them as repugnant to the main purpose of the contract, or else cut them down to size in order to produce a reasonable result. This is illustrated by these cases in the House of Lords: Glynn v Margetson & Co [1893] AC 351 ; London and North Western Railway Co v Neilson [1922] 2 AC 263; Cunard Steamship Co. Ltd. v Buerger [1927] AC 1 ; and by Canada Steamship Lines Ltd v The King [1952] AC 192 and Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 in the Privy Council; and innumerable cases in the Court of Appeal, culminating in Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69. But when the clause was itself reasonable and gave rise to a reasonable result, the judges upheld it; at any rate, when the clause did not exclude liability entirely but only limited it to a reasonable amount. So where goods were deposited in a cloakroom or sent to a laundry for cleaning, it was quite reasonable for the company to limit their liability to a reasonable amount, having regard to the small charge made for the service. These are illustrated by Gibaud v Great Eastern Railway Co [1921] 2 KB 426; Alderslade v Hendon Laundry Ltd. [1945] KB 189 and Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400.

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House of Lords

Lord Bridge gave the leading judgment. He agreed with Lord Denning MR that clause 2 applied to the seeds in question, and that it was a “strained construction” (following Lord Diplock’s dicta in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827) to say otherwise. At 810 he said,

“ the passing of… the Unfair Contract Terms Act 1977 , had removed from judges the temptation to resort to the device of ascribing to words appearing in exemption clauses a tortured meaning so as to avoid giving effect to an exclusion or limitation of liability when the judge thought that in the circumstances to do so would be unfair. ”

On the question of the term’s fairness, Lord Bridge held,

“ the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.

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7.1 Introduction

A clause which seeks to exclude or restrict liability for breach of contract, breach of implied terms or misrepresentation.

7.1.1 Three hurdles

A contracting party who wishes to include an exclusion clause in a contract and rely upon it must overcome three hurdles before he can do so.

He must show:

(i) that it is incorporated in the contract

(ii) That, as a matter of construction, it applies to cover the events which have arisen

(iii) That it is valid under the Unfair Contract Terms Act 1977.

All these are considered in detail below.

7.1.1 The nature of an exclusion clause

On one view an exclusion clause simply defines the obligations of the parties (see Coote Exception Clauses; and Yates Exclusion Clauses and Unfair Contract Terms).

The traditional view is that an exclusion clause functions as a defence to an action for breach of contract. This view can only be justified by ignoring the exclusion clause when defining the obligations of the parties. But what justification is there for such an analysis of exclusion clause? We shall see that this view of exclusion clauses creates considerable difficulties when applying the law.

7.2 Exclusion Clauses: The Common Law

7.2.1 The incorporation of exclusion clauses

As with other contractual terms the first stage which must be overcome is to show that the exclusion clause has been incorporated into the contract. The rules are the same as those which apply to incorporation of all express terms.

No statements, oral or written, including exclusion clauses, may become a term of the contract unless made before the contract was concluded. Any statement made after the conclusion of a valid contract will not be a part of it, will not be supported by valid consideration and will not be binding or enforceable.

Roscorla v Thomas (1842) 3 QB 234

Olley v Marlborough Court Hotel [1949] 1 KB 532
A notice on the back of the room door disclaiming liability was not enforceable. The disclaimer or exclusion clause should have been drawn to the attention of the husband and wife when they checked in and before the contract for the hire of the room had thereby been concluded.

The only other point in the case is whether the hotel company are protected by the notice which they put in the bedrooms, “The proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the manageress for safe custody.” The first question is whether that notice formed part of the contract. Now people who rely on a contract to exempt themselves from their common law liability must prove that contract strictly. Not only must the terms of the contract be clearly proved, but also the intention to create legal relations – the intention to be legally bound – must also be clearly proved. The best way of proving it is by a written document signed by the party to be bound. Another way is by handing him before or at the time of the contract a written notice specifying its terms and making it clear to him that the contract is on those terms. A prominent public notice which is plain for him to see when he makes the contract or an express oral stipulation would, no doubt, have the same effect. But nothing short of one of these three ways will suffice. It has been held that mere notices put on receipts for money do not make a contract. (See Chapelton v. Barry Urban District Council ) So, also, in my opinion, notices put up in bedrooms do not of themselves make a contract. As a rule, the guest does not see them until after he has been accepted as a guest. The hotel company no doubt hope that the guest will be held bound by them, but the hope is vain unless they clearly show that he agreed to be bound by them, which is rarely the case.

Assuming, however, that Mrs. Olley did agree to be bound by the terms of this notice, there remains the question whether on its true interpretation it exempted the hotel company from liability for their own negligence. It is said, and, indeed, with some support from the authorities, that this depends on whether the hotel was a common inn with the liability at common law of an insurer, or a private hotel with liability only for negligence. I confess that I do not think it should depend on that question. It should depend on the words of the contract. In order to exempt a person from liability for negligence, the exemption should be clear on the face of the contract. It should not depend on what view the courts may ultimately take on the question of whether the house is a common inn or a private hotel. In cases where it is clearly a common inn or, indeed, where it is uncertain whether it is a common inn or a private hotel, I am of opinion that a notice in these terms would not exempt the hotel company from liability for negligence but only from any liability as insurers. Indeed, even if it were clearly not a common inn but only a private hotel, I should be of the same opinion. Ample content can be given to the notice by construing it as a warning that the hotel company is not liable, in the absence of negligence. As such it serves a useful purpose. It is a warning to the guest that he must do his part to take care of his things himself, and, if need be, insure them. It is unnecessary to go further and to construe the notice as a contractual exemption of the hotel company from their common law liability for negligence. I agree that the appeal should be dismissed.

7.2.2 There are three ways in which an exclusion (or other contractual term) may be incorporated

1. By signature to a written contractual document

2. By notice

3. By course of dealing.

1. Incorporation by signature to a written contractual document

The easiest way to incorporate an exclusion clause is to ensure that the other party signs the contract containing the exclusion clause

L’Estrange v F Graucob [1934] 2 KB 394
The contracting party had signed an instalment payment contract for a vending machine. The contract contained an exclusion clause. She was bound by the clause having signed the agreement.

“In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or I will add, misrepresentation, the party signing it is bound, and it wholly immaterial if he has read the document or not.”

Per Scrutton LJ.

Maugham LJ concurred, though expressing his regret at the result. He held he was bound to do so.

“ There can be no dispute as to the soundness in law of the statement of Mellish LJ in Parker v South Eastern Ry Co , which has been read by my learned brother, to the effect that where a party has signed a written agreement it is immaterial to the question of his liability under it that he has not read it and does not know its contents. That is true in any case in which the agreement is held to be an agreement in writing.

Not bound in certain cases:

Scrutton LJ observed that a party will not be so bound if the contract was induced by misrepresentation.

Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805
An exemption clause in a signed contract could not be relied upon because the effect of the exemption clause was misrepresented.

Fraud, a plea of non est factum and independent oral undertakings, (for example in the form of a collateral contract) would undermine the ability of a party to rely on an exclusion clause.

The document must be contractual

To be bound by signature to a document under the principle enunciated in L’Estrange v Graucob the document must be contractual.

See (Infra):

Parker v SE Railway (1877) 2 CPD

Chapleton v Barry UDC [1940] 1 KB 532

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2. Incorporation by notice

An exclusion clause can be incorporated into the contract by the giving of reasonable notice.

The notice must be given at or before the time of concluding the contract, the terms must be contained or referred to in a document which was intended to have contractual effect and reasonable steps must be taken to bring the terms to the attention of the other party.

A party who seeks to incorporate into a contract a term which is particularly onerous or unusual must prove that the term has been fairly and reasonably drawn to the attention of the other party.

Interfoto Picture Library Ltd v Stiletto Visual Programmes [1989] QB 433; [1988] 2 WLR 615
The defendants ordered photographic transparencies from the plaintiffs, not having dealt with them before. The plaintiffs duly sent them 47 transparencies, together with a delivery note which contained a number of conditions. Condition 2 stated that a holding fee of £5 per day was payable for every day that the transparencies were kept in excess of 14 days. The defendants failed to return them on time and were sent an invoice for £3,783.50, which they refused to pay. In an action by the plaintiffs to recover the £3,783.50 the Court of Appeal held that condition 2 was not incorporated into the contract because, on the basis of the test outlined above, insufficient notice had been given to the defendants of its terms.

Bingham LJ argued that cases on sufficiency of notice are concerned with the question “whether it would in all the circumstances be fair (or reasonable) to hold a party bound by any conditions . . . of an unusual and stringent nature.”

But were the defendants not capable of reading the conditions of the delivery note? And could the objection that condition 2 was particularly onerous not have been met by holding that condition 2 was invalid on the ground that it was a penalty clause (an argument which Bingham LJ suggested could have succeeded, and see also Ariston SRL v Charly Records Ltd (1990) The Independent April 13th).

See also:

“ The Duty to Give Notice of Unusual Contract Terms ” [1988] Journal of Business Law 375.

Spurling v Bradshaw [1956] 2 ALL ER 121 and Thornton v Shoe Lane Parking [1971] 2 QB 163

 

Notice given in a document

Where notice is given in a document rather than by a notice care must be taken to ensure that the document is a contractual document.

A document containing an exclusion clause given to a party after the contract had been concluded will not be incorporated into the contract and will not therefore by binding or enforceable.

Even where a document is proffered before a contract is concluded it must be a ‘contractual’ document in the sense that it is a type of document which a reasonable man would expect to contain ‘terms and conditions’.

Chapleton v Barry UDC [1940] 1 KB 532
A notice board beside a stack of deck chairs required users of the deck chairs to obtain a ticket and retain the ticket for inspection. The receipt contained an exclusion clause. HELD: the exclusion clause in the receipt could not be relied on for it could not reasonably be expected that such a receipt was anything other than a receipt and would contain exclusion clauses and, as important, because the contract had already been concluded, the taking of the deck chair being an acceptance of the unilateral offer in the notice. The giving of a notice containing an exclusion clause after a contract has been concluded is too late for it to be incorporated in the contract.

Slesser LJ:

As I read the learned county court judge’s judgment (and we have had the advantage of a note taken by Mr. Carey Evans in addition to the summary reasons which the learned county court judge gives for his decision), he said that the plaintiff had sufficient notice of the special contract printed on the ticket and was, accordingly, bound thereby – that is to say, as I understand it, that the learned county court judge has treated this case as a case similar to the many cases which have been tried in reference to conditions printed on tickets, and more particularly, on railway tickets – and he came to the conclusion that the local authority made an offer to hire out this chair to Mr. Chapelton only on certain conditions, which appear on the ticket, namely, that they, the council, would not be responsible for any accident which arose from the use of the chair, and they say that Mr. Chapelton hired the chair on the basis that that was one of the terms of the contract between him and themselves, the local authority.

Questions of this sort are always questions of difficulty and are very often largely questions of fact. In the class of case where it is said that there is a term in the contract freeing railway companies, or other providers of facilities, from liabilities which they would otherwise incur at common law, it is a question as to how far that condition has been made a term of the contract and whether it has been sufficiently brought to the notice of the person entering into the contract with the railway company, or other body, and there is a large number of authorities on that point. In my view, however, the present case does not come within that category at all. I think that the contract here, as appears from a consideration of all the circumstances, was this: The local authority offered to hire chairs to persons to sit upon on the beach, and there was a pile of chairs there standing ready for use by any one who wished to use them, and the conditions on which they offered persons the use of those chairs were stated in the notice which was put up by the pile of chairs, namely, that the sum charged for the hire of a chair was 2d. per session of three hours. I think that was the whole of the offer which the local authority made in this case. They said, in effect: “We offer to provide you with a chair, and if you accept that offer and sit in the chair, you will have to pay for that privilege 2d. per session of three hours.”

I think that Mr. Chapelton, in common with other persons who used these chairs, when he took the chair from the pile (which happened to be handed to him by an attendant, but which, I suppose, he might have taken from the pile of chairs himself if the attendant had been going on his rounds collecting money, or was otherwise away) simply thought that he was liable to pay 2d. for the use of the chair. No suggestion of any restriction of the council’s liability appeared in the notice which was near the pile of chairs. That, I think, is the proper view to take of the nature of the contract in this case. Then the notice contained these further words: “The public are respectfully requested to obtain tickets properly issued from the automatic punch in their presence from the Chair Attendants.” The very language of that “respectful request” shows clearly, to my mind, that for the convenience of the local authority the public were asked to obtain from the chair attendants tickets, which were mere vouchers or receipts showing how long a person hiring a chair is entitled to use that chair. It is wrong, I think, to look at the circumstance that the plaintiff obtained his receipt at the same time as he took his chair as being in any way a modification of the contract which I have indicated. This was a general offer to the general public, and I think it is right to say that one must take into account here that there was no reason why anybody taking one of these chairs should necessarily obtain a receipt at the moment he took his chair – and, indeed, the notice is inconsistent with that, because it “respectfully requests” the public to obtain receipts for their money. It may be that somebody might sit in one of these chairs for one hour, or two hours, or, if the holiday resort was a very popular one, for a longer time, before the attendant came round for his money, or it may be that the attendant would not come to him at all for payment for the chair, in which case I take it there would be an obligation upon the person who used the chair to search out the attendant, like a debtor searching for his creditor, in order to pay him the sum of 2d. for the use of the chair and to obtain a receipt for the 2d. paid.

I think the learned county court judge has misunderstood the nature of this agreement. I do not think that the notice excluding liability was a term of the contract at all, and I find it unnecessary to refer to the different authorities which were cited to us, save that I would mention a passage in the judgment of Mellish L.J. in Parker v. South Eastern Ry. Co. , [ 1 ] where he points out that it may be that a receipt or ticket may not contain terms of the contract at all, but may be a mere voucher, where he says: “For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll, he might reasonably assume that the object of the ticket was that by producing it he might be free from paying toll at some other turnpike-gate, and might put it in his pocket unread.” I think the object of the giving and the taking of this ticket was that the person taking it might have evidence at hand by which he could show that the obligation he was under to pay 2d. for the use of the chair for three hours had been duly discharged, and I think it is altogether inconsistent, in the absence of any qualification of liability in the notice put up near the pile of chairs, to attempt to read into it the qualification contended for. In my opinion, this ticket is no more than a receipt, and is quite different from a railway ticket which contains upon it the terms upon which a railway company agrees to carry the passenger. This, therefore, is not, I think, as Mr. Ryder Richardson has argued, a question of fact for the learned county court judge. I think the learned county court judge as a matter of law has misconstrued this contract, and looking at all the circumstances of the case, has assumed that this condition on the ticket, or the terms upon which the ticket was issued, has disentitled the plaintiff to recover. The class of case which Sankey L.J. dealt with in Thompson v. London, Midland and Scottish Ry. Co. , [ 2 ] which seems to have influenced the learned county court judge in his decision, is entirely different from that which we have to consider in the present appeal.

This appeal should be allowed.

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3. Incorporation by a course of dealing

An exclusion may be incorporated into a contract by a course of dealing.

It is always extremely risky to place reliance upon this method of incorporation. A course of dealing must be both regular and consistent. It may be particularly difficult to establish a course of dealing as against a consumer ( Hollier v Ramble Motors (AMC) Ltd [1972] 2 QB 71 where three to four dealings over a period of five years could not be held to amount to a course of dealing), but the position is likely to be different where the contracting parties are commercial parties of equal bargaining power.

British Crane Hire Corporations v Ipswich Plant Hire [1975] QB 303
There was a common understanding in this case – the parties were in the same line of business, they were both familiar with the industry standard terms and therefore assumed that any contract would be on the industry standard terms of business.

Lord Denning MR

In support of the course of dealing, the Plaintiffs relied on two previous transactions in which the Defendants had hired cranes from the Plaintiffs. One was 20th February, 1969; and the other 6th October, 1969. Each was on a printed form which set out the hiring of a crane, the price, the site, and so forth; and also setting out the conditions the same as those here. There were thus only two transactions many months before and they were not known to the Defendants’ manager who ordered this crane. In the circumstances I doubt whether those two would be sufficient to show a course of dealing.

In Hollier v. Rambler Motors .(1972) 2 Q.B., page 76, Lord Justice Salmon said he knew of no case “in which it has been decided or even argued that a term could be implied into an oral contract on the strength of a course of dealing (if it can be so called) which consisted at the most of three or four transactions over a period of five years”. That was a case of a private individual who had had his car repaired by the defendants and had signed forms with conditions on three or four occasions. The plaintiff there was not of equal bargaining power with the garage company which repaired the car. The conditions were not incorporated.

But here the parties were both in the trade and were of equal bargaining power. Each was a firm of plant hirers who hired out plant. The Defendants themselves knew that firms in the plant-hiring trade always imposed conditions in regard to the hiring of plant: and that their conditions were on much the same lines. The Defendants’ manager, Mr Turner (who knew the crane), was asked about it. He agreed that he had seen these conditions or similar ones in regard to the hiring of plant. He said that most of them were, to one extent or another, variations of a form which he called “the Contractors’ Plant Association form”. The Defendants themselves (when they let out cranes) used the conditions of that form. The conditions on the Plaintiffs’ form were in rather different words, but nevertheless to much the same effect. He was asked one or two further questions which I would like to read:-

“(Q) If it was a matter of urgency, you would hire that machine out, and the conditions of hire would no doubt follow? (A) They would. (Q) Is it right that, by the very nature of your business, this is not something that happens just once a year, nor does it happen every day either, but it happens fairly regularly? (A) It does. (Q) You are well aware of the condition that it is the hirer’s responsibility to make sure that soft ground is suitable for a vehicle or machine? (A) It is; it is also the owner’s responsibility to see that the machine is operated competently”.

Then the Judge asked:

“But it is the hirer’s job to see what in relation to the ground? (A) That suitable timber was supplied for the machine to operate on in relation to soft ground”.

Then Counsel asked:

“And in fact it is the hirer’s job to recover the crane from the soft ground, if it should go into it? (A) If the crane sank overnight of its own accord, I dare say it would be”.

From that evidence it is clear that both parties knew quite well that conditions were habitually imposed by the supplier of these machines: and both parties knew the substance of those conditions. In particular that, if the crane sank in soft ground, it was the hirer’s job to recover it: and that there was an indemnity clause. In these circumstances, I think the conditions on the form should be regarded as Incorporated into the contract. I would not put it so much on the course of dealing, but rather on the common understanding which is to be derived from the conduct of the parties, namely, that the hiring was to be on the terms of the Plaintiffs’ usual conditions.

As Lord Reid said in McCutcheon’s case, in 1964 1 Weekly Law Reports, page 128, quoting from the Scottish textbook Gloag on Contract:-

“The judicial task is not to discover the actual intentions of each party; it is to decide what each was reasonably entitled to conclude from the attitude of the other”.

It seems to me that, in view of the relationship of the parties, when the Defendants requested this crane urgently and it was supplied at once – before the usual form was received – the Plaintiffs were entitled to conclude that the Defendants were accepting it on the terms of the Plaintiffs’ own printed conditions – which would follow in a day or two. It is just as if the Plaintiffs had said:

“We will supply it on our usual conditions”,

and the Defendants said

“Of course, that is quite understood”.

Applying the conditions, it is quite clear that Nos. 6 and 8 cover the second mishap. The Defendants are liable for the cost of recovering the crane from the soft ground.

But, so far as the first mishap is concerned, neither Condition 6 nor Condition 8 (the indemnity clause) is wide enough to cover it: because that mishap was due to the negligence of their own driver. It requires very clear words to exempt a person from responsibility for his own negligence: see Gillespie’s case, (1973) 1 Q.B., at page 415. There are no such words here.

Even though the Judge did not find that the conditions were incorporated, he held that there was an implied term that the hirer should return the chattel to the owner at the end of the hiring. Mr McCowan pointed out that that implied term was not distinctly pleaded or relied upon. But, nevertheless, there is much to be said for it. When a machine is let out on hire for use on marshy land, and both parties know that it may sink into a marsh, then it seems to me that, if it sinks into the marsh, it is the hirer’s job to recover it, so as to restore it to the owner at the end of the hiring. Take a motor-car which is let out on hire, and by reason of a gale, or an icy road, it goes off the road into a ditch. It is the hirer’s job to get it back on to the road and restore it at the end of the hiring. Just as when he takes it on a long journey and falls ill a long distance away. It still is his duty to get it back and restore it to the owner at the end of the hiring. Of course, if it is lost or damaged and he can prove that it was not due to any fault on his part, he would not be liable. A bailee is not liable for loss or damage which he can prove occurred without any default on his part: but the return of the vehicle is different. It is the duty of the hirer to return the vehicle at the end of the hiring to the owner, and to pay the cost of doing so. Although he is not liable for loss or damage occurring without his fault, nevertheless he is liable to do what is reasonable to restore the property to the owner.

So, apart from the express conditions, it may well be, if it had been pleaded, that the Plaintiffs could have recovered for the second mishap on an implied term. But, as it was not distinctly pleaded, I prefer to decide the case on the ground that Conditions 6 and 8 formed part of the contract of hiring: and under them the Plaintiffs are entitled to succeed in regard to mishap No. 2. I would affirm the decision of the Judge, but on a different ground.

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7.3 The Rules of Construction of Exclusion Clauses

7.3.1 The contra proferentem rule

The general rule which the courts apply to the interpretation of exclusion clauses is the contra proferentem rule.

For this purpose it would appear that the “proferens” is simply the person relying upon the exclusion clause; it does not imply that the person seeking to rely on the exclusion clause has “imposed” it upon the other party to the contract.

Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957.

7.3.2 Important to draft precisely

It is therefore extremely important to draft an exclusion clause in clear and precise terms; the slightest ambiguity may be seized upon by a court to hold the exclusion clause inapplicable.

Suisse Atlantique Societe d’Armament Maritime v Rotterdamsche Kolen Centrale [1967] 1 AC 361 HL

There is, however, some evidence of a more relaxed and realistic approach to the interpretation of exclusion clauses.

In Photo Production Ltd v Securicor Ltd [1980] AC 827 Lord Diplock said that “the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses”. He noted that many of these cases involved consumer contracts and continued “any need for this kind of judicial distortion of the English language has been banished by Parliament’s having made these kinds of contract subject to the Unfair Contract Terms Act 1977 ”.

7.3.3 Construe according to the natural meaning

This process of construing exclusion clauses according to their ‘natural and ordinary meaning’ has been taken further by the High Court of Australia in Darlington Futures Ltd v Delco Australia Pty Ltd (1987) 61 ALJR 76.

The principles in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 will apply to construing exclusion clauses.

7.3.4 A more relaxed approach being taken with limitation clauses

Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR
The House of Lords held that the contra proferentem rule did not operate with the same rigour in the case of limitation clauses, as in exclusion clauses.

There may be little intellectual justification for such a distinction (see Palmer ‘Limiting Liability for Negligence’ (1982) 45 Modern Law Review 322) but it does suggest that a limitation clause may be more effective than an exclusion clause (see too UCTA).

7.3.5 Particular care must be taken when excluding liability for negligence

Particular care must be taken if it is sought to exclude liability for negligence.

The courts have evolved three specific rules of construction which find their origin in the speech of Lord Morton of Henryton in:

Canada Steamship Lines v The King [1952] AC 192.

The first rule is that, if a clause contains language which expressly exempts the party relying on the exclusion clause from the consequences of his own negligence, then effect must be given to the clause.

Secondly, if the first test is not satisfied, the court must consider whether the words are wide enough in their ordinary meaning to cover negligence on the part of the party relying on the exclusion clause.

Once the second test has been satisfied the court must consider whether the exclusion clause may cover some kind of damage other than negligence (The Raphael [1982] 2 Lloyd’s Rep 42, If that other head of liability is fanciful or remote then the exclusion clause may still cover negligence, but where the alternative source of liability is not remote then it may be the case that the clause will generally be interpreted as not excluding liability for negligence. The safest course is always to use the word negligence expressly.

But there appear to be certain cases where a party can exclude liability for negligence without actually using the word negligence and the court will not invoke the Canada Steamship rules.

A good example of this process is the decision of the House of Lords in Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957. The defenders were employed by the pursuers to modernise houses which were owned by the pursuers. While carrying out the work the houses were badly damaged by fire caused by the alleged negligence of the defenders.

The pursuers sought to recover damages in respect of the loss occasioned by the fire. The defenders relied upon the terms of the contract as a defence to the pursuers’ action. Clause 18(2) of the contract between the parties (Standard Form of Building Contract, Local Authorities Edition with Quantities, 1963 end (July 1977 revision with Scottish Supplement)) stated that the defenders were liable for any damage to the property caused by their negligence “except for such loss or damage as is at the risk of the employer under Clause 20(C)” of the contract. Clause 20(C) stated that the existing structures together with all contents thereof … shall be at the sole risk of the Employer as regards loss or damage by fire … and the Employer shall maintain adequate insurance against these risks”.

The House of Lords held that the risk of damage to the property by fire (including fire caused by the negligence of the defenders) had been allocated to the pursuers and that therefore the defenders were not liable for the damage caused. The effect of this clause was to enable the defenders to exclude liability for their own negligence, but the House of Lords did not discuss the Canada Steamship rules, nor did they discuss the application of the Unfair Contract Terms Act 1977 to this clause. Instead the clause was simply subjected to the ordinary processes of interpretation.

Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957 was applied by the Court of Appeal in Norwich City Council v Harvey [1989] 1 All ER 1180, where it was held that Clause 20(C) could be invoked as a defence by a sub-contractor who negligently damaged the property of the building owner, even though the sub-contractor was not party to the contract with the building owner (clause 20(C) being in the contract between the building owner and the main contractor). Clause 20(C) enabled the Court of Appeal to conclude that the building owner’s negligence action must fail because it was not just and reasonable to impose a duty of care upon the defendant.

BIFFA WASTE SERVICES LTD V MASCHINENFABRIK ERNST HESE GmBH [2008] EWHC 6 TCC
High Court
Mr Justice Ramsay summarised the law relating to exclusion or limitation of liability in negligence

 

     
 

Questions

1. How can Norwich City Council be reconciled with the doctrine of privity, in particular the line of decisions represented by Midland Silicones v Scrutton [1962] AC 446 and The Eurymedon [1975] AC 154?

2. How, if at all, does the Unfair Contract Terms Act 1977 apply to exclusion clauses of the type recognised to exist in Norwich City Council (i.e. between two parties not in a contractual relationship)?

  
     

 

Looked at practically, the courts are likely to uphold a clause excluding liability for negligence if the purpose of that clause seems to be to decide which party should bear the cost of buying insurance. The insurance context was important in construing the relevant clause in, for example, Co-Operative Retail Services Limited v Taylor Young Partnership [2002] UKHL 17.

7.3.6 Fundamental breach of contract

Great care must be taken if it is sought to exclude liability for a serious breach of contract. However the doctrine of fundamental breach simply exists as a rule of construction under which the more serious the breach, or the consequences of the breach, the less likely it is that the court will interpret the exclusion clause as applying to the breach Photo Production Ltd v Securicor Ltd [1980] AC 827.

Suisse Atlantique Societe d’Armament Maritime v Rotterdamsche Kolen Centrale [1967] 1 AC 361 HL

7.3.7 Excluding liability for fraudulent misrepresentation: the film insurance litigation

HIH Casualty and General v Chase Manhattan Bank [2003] UKHL 6.

During the 1990s an entrepreneurial insurance broker offered insurance to help companies making movies. If the film was a box office failure, the bank who .lent money to the film company to finance the film could recover its losses from the insurer. The broker who sold this insurance to the banks persuaded the insurance companies to sign contracts saying that the contract would remain valid even if they had been given insufficient disclosure, or false information, by the broker.

Many of the movies did flop. In litigation in London and New York the insurers tried to escape covering the banks’ losses. A key argument was that the clause excluding liability for misrepresentation was void or unenforceable if the misrepresentation was fraudulent – so that if the insurers had been told outright lies (as was alleged) the contract was void or voidable.

The House of Lords (but not the New York courts) HELD that a clause excluding liability for the insured’s misrepresentation could never exclude liability for fraudulent representation, as a matter of public policy.

In this case it was alleged that the lies were told by the broker, and that the insured banks who sought to benefit from the exclusion were themselves innocent. The House of Lords further HELD that that an exclusion clause could only exclude liability for fraudulent misrepresentation by the insured’s agent (the broker) by very clear words.

7.3.8 Lord Denning’s last judgment

George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803 Court of Appeal

“Faced with this abuse of power, by the strong against the weak, by the use o the small print of the conditions, the judges did what they could to put a curb on it. They still had before them the idol, “freedom of contract”. They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called ‘the true construction of the contract’. They used it with great skill and ingenuity. They used it to depart from the natural meaning of the words of the exemption clause and to put on them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability, so that in the circumstances the big concern was not entitled to rely on the exemption clause……….But when the clause was itself reasonable and gave rise to a reasonable result, the judges upheld it.”

 

***

7.4 Legislative control on exclusion clauses

The most important controls upon exclusion clauses are now contained in the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). Although there are certain common law controls, such as misrepresentation ( Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805) and the exclusion clause may be overridden by an express inconsistent undertaking given at or before the time of contracting ( Couchman v Hill [1947] KB 554), these controls are likely to become practically insignificant.

The overlap between these two sets of provisions makes this area of law complex and untidy. The Law Commission and Scottish Law Commission in February 2005 produced a report and draft bill designed to consolidate, clarify, and improve this area of law. For detailed coverage of the law as it stands, see the Law Commissions Consultation paper [2002] EWLC 166.

That paper summarises the difference between UCTA and UCCR as follows:

2.18 UCTA:

(1) applies to both consumer and business-to-business contracts, and also to terms and notices excluding certain liabilities in tort or delict;

(2) applies only to exclusion and limitation of liability clauses (and indemnity clauses in consumer contracts);

(3) makes certain exclusions or restrictions of no effect at all;

(4) subjects others to a reasonableness test;

(5) contains guidelines for the application of the reasonableness test;

(6) puts the burden of proving that a term within its scope is reasonable on the party seeking to rely on the clause;

(7) applies for the most part whether the terms were negotiated or were in a “standard form”;

(8) does not apply to certain types of contract, even when they are consumer contracts;

(9) has effect only between the immediate parties; and

(10) has separate provisions for Scotland.

2.19 In contrast, UTCCR: (1) apply only to consumer contracts;

(2) apply to any kind of term other than the definition of the main subject matter of the contract and the price;

(3) do not make any particular type of term of no effect at all;

(4) subject the terms to a “fairness” test;

(5) do not contain detailed guidelines as to how that test should be applied, but contain a so-called “grey” list of terms which “may be regarded” as unfair;

(6) leave the burden of proof that the clause is unfair on the consumer;

(7) apply only to “non-negotiated” terms;

(8) apply to consumer contracts of all kinds;

(9) are not only effective between the parties but empower various bodies to take action to prevent the use of unfair terms; and

(10) apply to the UK as a whole.

7.4.1 The Unfair Contract Terms Act 1977

The Unfair Contract Terms Act covers notices and contract terms which purport to exclude or restrict liability in contract and tort. The liability arising must be a business liability (s.1(3) UCTA 1977).

As noted in the above quotation from the Law Commission paper, the Act does not apply to certain types of contract. In particular it does not apply to:

(i) the liability of people not acting within the course of business (save for s.6)

(ii) certain parts of land contracts

(iii) insurance contracts

(iv) International supply contracts

(v) save for s 2(1)(2) to marine salvage towage, charter parties in relation to ships or hover craft and contracts for the carriage of goods by ships or hover craft.

7.4.1.1 Section 2 and Negligence Claims

Section 2 provides:

(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.

(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfied the requirement of reasonableness.

(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.

The first point to note is whether s.2 of the Act applies to contract terms or notices which seek to define the obligations of the parties. In answering this question it is necessary to have regard to two particular provisions of the Act and the interpretation which has been placed upon them by the courts.

The first provision is the definition of negligence in s.1(1) as “the breach:

(a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract;

(b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty);

(c) of the common duty of care imposed by the Occupiers’ Liability Act 1957 or the Occupiers’ Liability Act (Northern Ireland) 1957.”

The second provision is s.13(1) which states that:

“To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents –

(a) making the liability or its enforcement subject to restrictive or onerous conditions;

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;

(c) excluding or restricting rules of evidence or procedure;

and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty” (emphasis added).

The proper interpretation of these provisions was considered by the court of appeal in the cases of Phillips Products Ltd v Hyland and Hamstead Plant Hire Co Ltd [1987] 2 All ER 620 and Thompson v T Lohan (Plant Hire) Ltd [1987] 2 All ER 631. The clause which was at issue in both cases was essentially the same. The condition read:

“When a Driver or Operator is supplied by the Owner to work the Plant, he shall be under the direction and control of the Hirer. Such Drivers or Operators 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 or operators. The Hirer shall not allow any other person to operate such Plant without the Owner’s previous consent to be confirmed in writing”.

In Phillips the Court of Appeal rejected the argument that condition 8 fell outside the scope of the Act because the clause simply defined the obligations of the parties. Slade LJ asserted that, in considering whether there has been a breach of duty under s.1(1), the court must leave out of account the clause which is relied upon by the defendants to defeat the plaintiffs’ claim. Slade LJ claimed to find support for his interpretation in the words of s.13(1).

This subsection is extremely difficult to interpret. It is clear that s.13(1) does apply to some duty-defining clauses; the difficulty lies in ascertaining the extent to which UCTA applies to duty-defining clauses.

The House of Lords failed to come to grips with this issue in Smith v Eric S Bush [1989] 2 WLR 790. Lord Templeman stated that the Act subjected to regulation “all exclusion notices which would in common law provide a defence to an action for negligence”. Lord Griffiths interpreted s13 as “introducing a ‘but-for’ test in relation to the notice excluding liability”; that is to say, a court must decide whether a duty of care would exist “but for” the exclusion clause. Lord Jauncey of Tullichettle stated that the wording of s13 was “entirely appropriate to cover a disclaimer which prevents a duty coming into existence”.

But surely the Act does not catch all duty-defining clauses? Ridiculous conclusions would be reached if the Act did apply to all duty-defining clauses (for some examples see Palmer and Yates “ The Future of the Unfair Contract Terms Act 1977 ” [1981] Cambridge Law Journal 108 and Palmer “ Clarifying the Unfair Contract Terms Act 1977 ” (1986) Business Law Review 57). One example will suffice to illustrate the point: “an overworked accountant says to a potential investor ‘this is all I can say about Company X, but I may be wrong so don’t rely on me’”. Is such a statement caught by UCTA?

Returning to the distinction between Phillips and Thompson, in the latter case it was held that s2 was inapplicable because condition 8 did not exclude a liability, it simply transferred it from one party to another. The vital issue which divides these two cases is whether or not it is sought to exclude liability towards the victim of the negligent act.

 

     
 

Questions

1. What would have been the position in Phillips if the driver had damaged property belonging to someone other than the plaintiffs?

2. What is the relevance of s.4 of the Act to these claims (see further Adams and Brownsword “Double Indemnity – Contractual Indemnity Clauses Revisited” [1988] Journal of Business Law 146)?

  
     

 

7.4.1.2 Section 3 claims – breach of contract

Section 3 provides as follows:

“(1) This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business.

(2) As against that party, the other cannot be reference to any contract term –

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled –

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfied the requirement of reasonableness.”

It should be noted that section 3 only applies to two types of contract. The first is where one party deals as a consumer (defined in section 12). The second is where one party “deals . . . on the other’s written standard terms of business”. Note the requirements are (i) deals (ii) other’s (iii) written and (iv) standard. All these requirements must be satisfied if the section is to come into play.

The meaning of the phrase “written standard forms of business”, particularly the word “standard”, was considered for the first time by Judge Stannard in Chester Grosvenor Hotel Co Ltd v Alfred McAlpine Management Ltd (1991) Unreported, 14 October.

Judge Stannard state:

“I accept that where a party invariably contracts in the same written terms without material variation, those terms will become its ‘standard form contract’ or ‘written standard terms of business’. However, it does not follow that because terms are not employed invariably, or without material variation, they cannot be standard terms.

“If this were not so the statute would be emasculated, since it could be excluded by showing that, although the same terms had been employed without modification on a multitude of occasions, and were employed on the occasion in question, previously one or more isolated occasions they had been modified or not employed at all. In my judgement the question is one of fact and degree. What are alleged to be standard terms may be used so infrequently in comparison with other terms that they cannot realistically be regarded as standard, or on any particular occasion may be so added to or mutilated that they must be regarded as having lost their essential identity. What is required for terms to be standard is that they should be regarded by the party which advances them as its standard terms and that it should habitually contract in those terms. If it contracts also in other terms, it must be determined in any given case, and as a matter of fact, whether this has occurred so frequently that the terms in question cannot be regarded as standard, and if on any occasion a party has substantially modified its prepared terms, it is a question of fact whether those terms have been so altered that they must be regarded as not having been employed on that occasion.”

Once over this hurdle we come to the substance of the section. Section 3(2)(a) is relatively straightforward, but what does section 3(2)(b) mean? In particular, how is the standard of performance which “was reasonably expected of him” to be assessed?

7.4.1.3 Section 4 and indemnity clauses

Section 4(1) states that any person dealing as a consumer cannot be required, as a term of the contract, to indemnify another in respect of liability that may be incurred by that other for negligence or breach of contract, except to the extent that the term satisfies the requirement of reasonableness. This section only applies where the party required to give the indemnity deals as a consumer, hence the attempt in cases such as Phillips Products Ltd v Hyland and Hamstead Plant Hire Co Ltd [1987] 2 All ER 620 and Thompson v T Lohan (Plant Hire) Ltd [1987] 2 All ER 631 to bring what may be called “commercial indemnity clauses” within the scope of s.2.

7.4.1.4 Section 5 – guarantees

Notices in manufacturer’s guarantees excluding or restricting liability is controlled in this section.

(1) In the case of goods of a type ordinarily supplied for private use or consumption, where loss or damage:

(a) arises from the goods proving defective while in consumer use, and

(b) results from the negligence of a person concerned in the manufacture or distribution of the goods

liability for the loss or damage cannot be excluded or restricted by reference to any contract term or notice contained in or operating by reference to a guarantee of the goods.

7.4.1.5 Section 6 – exclusion of implied terms

(1) Liability for breach of the obligations arising from

(a) s.12 of the Sale of Goods Act 1979

(b) s.8 of the Supply of Goods (Implied Terms) Act 1973

cannot be excluded or restricted by reference to any contract term

(2) As against a person dealing as consumer, liability for breach of the obligations arising from:

(a) ss 13,14 or 15 of the SOGA 1979

(b) ss 9,10 or 11 SG(IT)A 1973

cannot be excluded or restricted by reference to any contract term

(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness

7.4.1.6 Section 8 – exclusion of misrepresentation

Imports the test of reasonableness in UCTA into the Misrepresentation Act 1967 .

CA: Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd; [2009] WLR (D) 124
International supply contracts excluding liability for misrepresentation and the right to rescind were not subject to the requirement of reasonableness.
The Court of Appeal so stated when dismissing the appeal of First Flight Couriers Ltd against a decision of Aikens J [2008] EWHC 1686(Comm) on 17 July 2008 in the Commercial Court to give summary judgment for Trident Turboprop (Dublin) Ltd in its claim to terminate two aircraft operating leases and to recover arrears of rent, damages for breach of contract and to recover possession of both aircraft. First Flight returned the aircraft but contended that it had rescinded the leases for misrepresentation or retained the right to do so.

 

7.4.1.7 Dealing as a ‘consumer’ – s. 12 UCTA 1977

“(1) A party to a contract “deals as consumer” in relation to another party if:

(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and

(b) the other party does make the contract in the course of a business; and ………..”

The section goes on to provide, in the case of sale of goods and certain other contracts that the goods must be of a type ordinarily supplied for private use or consumption.

Dealing in the course of business

R and B Customs Brokers Ltd v UDT Finance Ltd [1988] 1 All ER 847
The purchase of a car by a husband and wife team for their shipping broking business was not held to be an acquisition in the course of business for the purchase was not an integral part of their part nor was their a degree of regularity about the purchase.

A one off purchase for the purpose of resale would be ‘in the course of business’?

Case study on dealing as a consumer

Feldarol Foundry PLC v Hermes Leasing (London) Ltd [2004] EWCA 747

The first question is whether in this transaction the respondent was a person dealing as consumer. If he was, the term implied by Section 10 of the 1973 Act could not be excluded. Section 12 of the 1977 Act states that –

(1) A party to a contract ‘deals as consumer’ in relation to another party if – (a) he neither makes the contract in the course of a business nor holds himself out as doing so; and (b) the other party does make a contract in the course of a business; and (c) in the case of a contract governed by the law of ….. hire purchase ….. the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.” In this case it is common ground that conditions (b) and (c) are met: the appellant made the contract in the course of its business and the goods were of a type ordinarily supplied for private use.

In dealing with this question the judge said:

“On first considering this question, it seemed to me that [the respondent] must have been acting in the course of its business. It is a company, which was purchasing a motor car for the purpose of providing the motor car to its managing director as a part of the rewards of his employment. It also seemed to me that [the respondent] had held itself out as acting in the course of its business by the terms of the agreement which provide a statement of the nature of the business and the number of years it has been established, which was signed by Mr Beresford in his capacity as director, and which includes a declaration under which Mr Beresford signed ‘I confirm that I/we have selected the goods and that they will be used for the purposes of my/our business.” However, he went on to hold that he was bound to conclude that the respondent had dealt as consumer by the decision of this court in R & B Customs Brokers Co Ltd v United Dominion Trust Ltd [1988] 1 WLR 321 . The facts in that case could not be realistically distinguished from those of the present case.

In R & B a company had bought a car for use by one of its directors from a finance company under a credit sale agreement. The company was a freight forwarder and shipping agency. The car was defective and the company claimed damages against the finance company for breach of the fitness for purpose term implied by Section 14 (3) of the Sale of Goods Act 1979. The finance company sought to rely on exclusion clauses in its agreement, to which Section 6 of the 1977 Act applied, if the company bought the car as consumer. In reserved judgments Dillon and Neil LJJ held that it could not do so because the company had dealt as consumer within the meaning of Section 12 of the 1977 Act. At page 328 H Dillon LJ said:

“In the present case there was no holding out beyond the mere facts that the contract and the finance application were made in the company’s corporate name, and in the finance application the section headed ‘Business Details’ was filled in to the extent of giving the nature of the company’s business as that of shipping brokers, giving the number of years trading and the number of employees, and giving the names and addresses of the directors. What is important is whether the contract was made in the course of a business. In a certain sense, however, from the very nature of a corporate entity, where a company which carries on business makes a contract, it makes that contract in the course of its business; otherwise the contract would be ultra vires and illegal. Thus, where a company which runs a grocer’s shop buys a new delivery van, it buys it in the course of its business. Where a merchant bank buys a car as a ‘company car’ as a perquisite for a senior executive, it buys it in the course of its business. Where a farming company buys a landrover for the personal and company use of a farm manager, it again does so in the course of its business. Possible variations are numerous. In each case it would not be legal for the purchasing company to buy the vehicle in question otherwise than in the course of its business.” Dillon LJ went on to refer to the decision of the House of Lords in Davies v Sumner [1984] 1 WLR 1031, a case which was decided under the provisions of the Trade Descriptions Act 1968, where the House of Lords held that a self-employed courier who sold his car and falsely represented its mileage had not supplied a false trade description “in the course of a trade or business”, so it had not been guilty of an offence under the Act. Lord Keith had delivered the only speech in that case. He relied on the fact that the car had not been sold as an integral part of the defendant’s business and that a degree of regularity was required before it could be shown that something had been done in the course of a trade or business. Dillon LJ continued at page 330 G:

“I find pointers to a similar need for regularity under the Act of 1977, where matters merely incidental to the carrying on of a business are concerned, both in the words which I would emphasise ‘in the course of’ in the phrase ‘in the course of a business’ and in the concept, or legislative purpose, which must underlie the dichotomy under the Act of 1977 between those who deal as consumers and those who deal otherwise than as consumers. This reasoning leads to the conclusion that, in the Act of 1977 also, the words ‘in the course of business’ are not used in what Lord Keith called ‘the broadest sense’. I also find helpful the phrase used by Lord Parker CJ and quoted by Lord Keith, ‘an integral part of the business carried on’. The reconciliation between that phrase and the need for some degree of regularity is, as I see it, as follows: there are some transactions which are clearly integral parts of the businesses concerned, and these should be held to have been carried out in the course of those businesses; this would cover, apart from much else, the instance of a one-off adventure in the nature of trade, where the transaction itself would constitute a trade or business. There are other transactions, however, such as the purchase of the car in the present case, which are at highest only incidental to the carrying on of the relevant business; here a degree of regularity is required before it can be said that they are an integral part of the business carried on, and so entered into in the course of that business. Applying the test thus indicated to the facts of the present case, I have no doubt that the requisite degree of regularity is not made out on the facts.” Neill LJ agreed. In his judgment, at page 336D, he said:

“It is of course true that section 1 of the Trade Descriptions Act 1968 creates a criminal offence whereas the other sections to which I have referred create no more than obligations in the civil law. Nevertheless, it would be unsatisfactory in my view if, when dealing with broadly similar legislation, the courts were not to adopt consistent construction of the same or similar phrases.” Mr Richard Maurey QC, for the appellant, makes a number of submissions on this part of the case. In ascending order of ambition they are:

(1) that the judge should have distinguished R & B on the facts; (2) R & B was the decision of a two-man court which conflicts with the more recent decision of this court in Stevenson v Rogers [1999] QB 1029, and so should not be followed;

(3) that R & B was wrongly decided; and

(4) this court should hold that a company can never deal as consumer for the purposes of this legislation.

I think Stevenson v Rogers provides the answer to a number of these submissions. In that case a fisherman had sold one of his fishing boats to the plaintiffs who claimed damages for breach of the implied term as to merchantable quality in Section 14 (2) of the Sale of Goods Act 1979 in its unamended form. The question was whether the sale had been made by the defendant “in the course of a business”. In allowing the appeal, this court held that it had. The judge had relied on R & B . After an exhaustive analysis of the legislative history of Section 14 (2), including a Pepper v Hart excursion, Potter LJ concluded that free of the restraints of precedent the words were intended to have their wide face value meaning. At page 1040 E he said:

“The question thus becomes, in my view, whether the decision in R & B ….. albeit relating to a separate section of the Act of 1979, is effectively binding upon us on the basis that the term ‘in the course of a business’ must be interpreted so as to bear the same meaning as between the different sections of the codifying Act in which it appears. While I recognise the force of that argument, I do not think it should prevail. The Act of 1979 forms a single code: however that is upon the basis simply that it consolidates and enacts within one statute and without material amendment a number of disparate statutes previously governing the field of sale of goods. While, in the first instance, a consolidating Act is to be construed in the same way as any other, if real doubt as to its legal meaning arises, its words are to be construed as if they remained in the earlier Act. Thus, in terms of the proper construction of its provisions, the Act of 1979 is not to be regarded as more than the sum of its parts. That being so, I would observe as follows in respect of the R & B ….. case. First, the ratio of the decision is limited to its context, namely the application of section 12 of the Act of 1977. Second, save for passing reference in the obiter dicta of Neill LJ to which I have referred, the meaning of the phrase ‘in the course of business’ in that section was not treated as coupled with, or dependent upon, the meaning of the phrase in section 14 (2). Thus the court gave no consideration to whether or not the legislative history of section 14 (2) might require it to be distinguished from section 12 of the Act of 1977 or, alternatively, if a common interpretation was called for, whether the construction of Section 12 should not be subordinated to that of section 14 (2). Third, the obiter dicta of Neill LJ which might suggest that the observations of Lord Keith should be applied generally in the case of a seller of goods lacked the benefit of contrary argument in relation to section 14 (2) and, not least (at a date well preceding Pepper v Hart ….. ) any reference to Hansard or the First Report of the Law Commission, of which this court has had the advantage. It is of course desirable that, when identical phrases occur in associated sections of a statute, they should be construed to similar effect. I have little doubt that such was the original intention of the Law Commission and of Parliament in relation both to the modification of section 14 (2) made by section 3 of the Act of 1973 and the amendment to section 55 of the Act of 1893 made by section 4 of the Act of 1973, which referred to a ‘seller in course of a business’ when defining a ‘consumer sale.’ However, the latter provision did not survive for long. It was repealed and replaced by section 12 of the Act of 1977, which put in place a different formula in respect of exemption clauses, based upon either party ‘dealing as consumer,’ rather than upon a ‘consumer sale’ defined principally by reference to the seller. In my view, had the court in R & B ….. been concerned not with the Act of 1977, but with the definition of a consumer sale under the Act of 1973, it might well have concluded that the phrase ‘in the course of a business’ in section 55 of the Act of 1893, as amended, required to be construed in harmony with, and subject to, the proper construction of section 14 (2). As to the proper construction of section 14 (2), given the clear view which I have formed, I do not consider it right to displace that construction simply to achieve harmony with a decision upon the meaning of section 12 of the Act of 1977. Section 14 (2) as amended by the Act of 1973 was itself a piece of consumer protection intended to afford wider protection to a buyer than that provided in the Act of 1893. Indeed, there is a sense in which the decision in the R & B case can be said to be in harmony with that intention. It dealt with the position of consumer buyers and the effect of adopting the construction propounded in Davies v Sumner ….. in relation to section 12 (1) (a) of the Act of 1977 was to further such buyers’ protection. In the context of its statutory history, section 14 (2), as amended by the Act of 1973 and re-enacted in the Act of 1979, is the primary provision in the overall scheme of increased protection for buyers which the Act of 1973 initiated. To apply the reasoning in the R & B case ….. in the interests only of consistency, thereby undermining the wide protection for buyers which section 14 (2) was intended to introduce, would in my view be an unacceptable example of the tail wagging the dog. Accordingly, I would hold that there was an implied term ….. in the contract [in that case].” Butler Sloss LJ and Sir Patrick Russell agreed with Potter LJ.

It is clear from this decision that the court felt bound by R & B . The fact that it was a decision of a two-man court is not to the point. It was and is a decision which is binding on this court. Secondly, the decision is not inconsistent with R & B . Lord Justice Potter explains in the passage I have cited at length how the two decisions can be reconciled. An interpretation of the words “deals as consumer” in the 1997 Act, which gave increased protection for consumer buyers, was consistent with the wide meaning which the court gave the words “seller in the course of a business” in the 1979 Act.

This disposes of Mr Maurey’s second, third and fourth submissions. In argument this morning he subjected R & B to sustained criticism: no reason is given as to why the meaning of words in the Trade Descriptions Act should be the same as in the 1977 Act; “integral part of the business” and “regularity” do not appear in the statute: application of such tests will produce anomalous results. Far better, he said, to go for a root and branch solution which was simply to say that a company can never be a consumer for the purpose of this legislation. This was consistent with other consumer protection legislation and regulations where consumers are defined as natural rather than legal persons.

But none of this answers the point that R & B is binding on us. It is a reported decision that has stood unchallenged for more than 15 years, during which time the relevant provisions in the 1977 Act have stood unamended. If harmonisation of the various provisions dealing with consumer protection is required, that is Parliament’s job. If R & B is to be challenged, that cannot be done in this court.

It is only therefore Mr Maurey’s first submission which survives in this part of the case. Here he relies on a number of points which he says distinguish this case from the facts in R & B . R & B was a one-man private company. The respondent is a public company. The car must have been put through the company’s books and treated as part of its assets. But I do not think that these factors enable us to distinguish this case from R & B which was not decided on a one-off basis or related specifically to the size of the company. The car in that case must also have been put through the company’s books.

Mr Maurey however does have a further point of distinction. He says that by its declaration in the agreement signed by Mr Beresford that “I/we confirm that I/we have selected the goods and they will be used for the purposes of my/our business” and the acknowledgment by the hirer in the terms themselves that “the goods will be used for his own business purposes”, the respondent had held itself out as making the contract in the course of a business within the meaning of Section 12 (1) (a) of the 1977 Act.

I do not accept this submsision. Neither the declaration or the acknowledgment are directed to the capacity in which the respondent is dealing. They deal with the use to which the car is intended to be put. They say nothing about whether the buying of cars is an integral part of the company’s business or the regularity of such transactions.

It follows from what I have said that I think the appellant’s first and main ground of appeal fails. This makes it unnecessary to consider whether the judge was right to conclude that clause 4 of the terms and conditions failed to satisfy the requirement of reasonableness. Suffice it to say that I think there is much in the appellant’s argument that it was reasonable for much the same reasons as Dillon LJ gave for reaching the same conclusion in R & B .

This therefore brings me to the arguments about breach, rejection and affirmation. The appellant first says that the judge should not have held that there was a breach of Section 10 (2) of the 1973 Act. In reaching his conclusion that the defects in the car were sufficiently serious as to amount to a breach, the judge attached too much weight to Mr Beresford’s view of the car when it was the respondent company which was the hirer. Applying the objective standard demanded by Section 10 (2) (2A) and (2B), there was no breach as demonstrated by the relatively small cost of repairing the defects.

I disagree. There was ample evidence to justify the judge’s conclusion. Whether the car is a company car or individually owned, if it is potentially unsafe to drive because of defects in its steering and brakes it cannot be described as being of satisfactory quality. As the implied term was a condition of the contract – Section 10 (7) of the 1973 Act – its breach entitled the respondent to reject the car.

The appellant however says that the respondent did not reject the car or attempt to do so, at least until after he had affirmed the contract by accepting it. This he did by his arrangement to substitute the car, by his correspondence with TCA and the appellant and by paying the first instalment under the agreement after he knew of the defects.

The judge found that the respondent rejected the car on the ground that it was not of satisfactory quality when the appellant received the respondent’s solicitor’s letter of 23 August, to which I have referred. The appellant says this was too late. In reaching his conclusion that there had been rejection, the judge should have ignored the respondent’s dealings with the dealer since the agreement made it clear that the dealer was not the appellant’s agent.

Whether a buyer or a hirer has rejected or accepted goods under contracts of sale or supply of this kind is a broad issue of fact which does not depend upon technicalities or legal niceties. What the court must determine objectively from what the buyer or hirer has said or done is whether he has accepted or rejected the goods tendered in performance of the seller’s or owner’s contractual obligation to deliver goods of the contract quality.

Judged in this way, I think there was only one answer in this case. As the appellant was told within a very short time of delivery, the respondent had expressed his dissatisfaction with the Lamborghini and within days had returned it to the dealer. In his letter to the appellant of 12 August Mr Beresford made it clear that he had rejected the car and payment had been made under the agreement to keep it alive so that it could be rolled over for use with the substitute car which he was still expecting to be provided. In these circumstances, I fail to see how the appellant or anyone else could possibly have thought that the respondent had accepted the Lamborghini or, to put it another way, affirmed the agreement under which that car was to be hire-purchased by the respondent. The Lamborghini had self-evidently been rejected. The fact that the reasons for doing so emerged later is not to the point.

For these reasons I reject Mr Maurey’s arguments about rejection and affirmation.

 

See also Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd’s Rep 645

7.4.1.8 Reasonableness – s.11 UCTA 1977

(1) In relation to a contract term, the requirement of reasonableness is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been , known to or in the contemplation of the parties when the contract was made. Section 8 of the Act amends s.3 Misrepresentation Act 1967 , which had required that terms excluding liability for misrepresentation should be reasonable.

(2) In determining for the purposes of ss 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or any arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any liability is not a term of the contract.

(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.

(4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but not without prejudice to subsection (2) above in the case of contract terms) to:

(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and

(b) how far it was open to him to cover himself by insurance.

(5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.

7.4.1.9 The Schedule 2 guidelines

The matters to which regard is to be had in particular for the purposes of ss.6(3), 7(3) and (4), 20 and 21 are any of the following which appear to be relevant:

(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 to accept a similar term;

(c) whether the customer knew or ought reasonably to have known of the existence and 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 is 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.

7.4.1.9 Analysis of reasonableness

This is the most difficult issue of all because so much depends upon the discretion of the court (see Adams and Brownsword “ The Unfair Contract Terms Act: A Decade of Discretion ” (1988) 104 LQR 94).

Appellate courts have refused to interfere with the finding of the trial judge unless satisfied that the judge proceeded upon some “erroneous principle or was plainly and obviously wrong” ( George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803).

The courts have taken into account a number of factors in deciding whether an exclusion clause is reasonable: the respective bargaining power of the parties, whether the exclusion clause was freely negotiated, the extent to which the parties were legally advised, the availability of insurance, the availability of an alternative source of supply to the innocent party and the extent to which the party seeking to rely on the exclusion clause sought to explain its effects to the other party. In many cases a limitation clause may be more likely to pass the reasonableness test.

Regus (UK) Ltd v EPCOT Solutions Ltd (2008) EWCA Civ 361
The Court of Appeal held that exemption and limitation clauses in a contract for the supply of serviced office accommodation were reasonable under the Unfair Contract Terms Act 1977.

 

 

7.4.2 Unfair Terms in Consumer Contracts Regulations 1999

Office of Fair Trading v Foxtons Ltd [2009] EWCA Civ 288; [2009] WLR (D) 128
CA: Waller, Arden and Moore-Bick LJJ: 2 April 2009

CONTRACT — Consumer contract — Unfair terms — Office of Fair Trading seeking injunction against estate agents in relation to fairness of its standard terms — Estate agent applying to strike out parts of relief sought — Judge striking out words which otherwise would prevent estate agent enforcing terms in current contracts — Whether court having power to grant injunction and/or declaration— Whether injunction capable of extending to use of unfair terms in existing contract — Unfair Terms in Consumer Contracts Regulations 1999, reg 12(1)(4) — Council Directive 93/13/ECC, art 7

This appeal raises an important point relating to the scope of the relief that the court can grant in proceedings brought by the Office of Fair Trading (“the OFT”), under the Unfair Terms in Consumers Contracts Regulations 1999 (“the UTCCRs”). The UTCCRs implemented Directive 93/13/EEC on Unfair Terms in Consumer Contracts. The Judgment is worth reading for a fairly definitive and up to date assessment of the law on this matter.

 

UTCCR s.4 (read with the definitions in s.3) states that applies only to contracts between a “seller or supplier” acting in his trade business or profession, and a “consumer”. The consumer can only be a natural person, not a corporation.

UTCCR s.5 specifies that the regulations apply only to terms which have not been individually negotiated.

7.4.2.1 UCCTR: what is unfair?

Section 5 describes unfair terms, and s.6 gives guidance on assessment of unfair terms. Treitel analyses the effect of these provisions as creating four tests which may be applied to decide whether a term is unfair. The four tests are:

(a) Significant imbalance : “Section 5(1) (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” The key phrase is “significant imbalance”. It is clearly based on the idea, familiar in several European legal systems, that a court can interfere where one party does unreasonably well and the other party does unreasonably badly out of a transaction.

Section 6(1) makes it clear that what is fair must be assessed by looking at the contract as a whole, and at the circumstances in which it was made: “The unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.”

(b) Core provisions . However, freedom of contract is preserved by the regulations in respect of the basic subject matter, and price of the contract s.6(2) “In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate: (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.”

(c) Good Faith . This phrase, contained in s. 5(1) (quoted above) has been interpreted by the English Courts to require “fair and open dealing” Director General of Fair Trading v First National Bank plc [2001 UKHL 52; [2002] 1 AC 481.

(d) Examples of unfair terms : Schedule 2 of the Regulations gives a long but non-exhaustive list of examples of terms “which may be regarded as unfair”. These include terms designed to prevent the consumer from going to court; terms imposing excessively penalties for breach on the consumer (already void at common law); terms extending duration of a contract unless the consumer gives notice to terminate; terms allowing the supplier to leave the price open for later determination or increase; terms “irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract” (which appears to potentially over-ride the signature rule in L’Estrange v Graucob ); and several others.

7.4.2.2 Effect of unfair terms

“Section 8.- (1) An unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer.

(2) The contract shall continue to bind the parties if it is capable of continuing in existence without the unfair term.”

7.4.2.3 Enforcement

The rest of the regulations deal with mechanisms for public enforcement of the regulations. They give the Director General of Fair Trading (alternatively a number of other designated bodies) a duty to investigate complaints. S. 12 gives the designated bodies power to apply for an injunction to restrain the use of unfair terms.

 

Case Study

Office of Fair Trading v Foxtons Ltd [2009] EWCA Civ 288; [2009] WLR (D) 128

CA: Waller, Arden and Moore-Bick LJJ: 2 April 2009

An injunction granted in a general challenge by the Office of Fair Trading against the unfairness of certain clauses in an estate agent’s standard terms could extend to the continuing use of unfair terms in an existing contract.

The Court of Appeal so stated when allowing the appeal of the Office of Fair Trading (“OFT”) and dismissing the cross-appeal of the defendant, Foxtons Ltd, against a decision by Morgan J [2008] EWHC 1662(Ch) on 17 July 2008 to grant the defendant’s application to strike out from OFT’s prayer for an injunction against the defendant in respect of unfairness in its standard terms words which would otherwise injunct it from enforcing those terms in current contracts.

WALLER LJ said that the judge had distinguished between the general challenge which bodies like OFT could make, and the challenge which an individual could make if sued. He had held that the defendant should not be prevented from enforcing individual contracts already entered into since the circumstances of those individual contracts might establish that in that individual contract the term was fair even if, on the general challenge, the term had been held unfair. The appeal raised an important point relating to the scope of the relief a court could grant in proceedings brought by the OFT under the Unfair Terms in Consumers Contracts Regulations 1999 which implemented Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts. Art 7 of the Directive was intended to cover existing as well as future contracts. Thus an issue on a general challenge could be the fairness of a term in a current contract. It would be quite inadequate protection to consumers if a court on a general challenge, having found a term as used in current contracts to be unfair, had no power to prevent the supplier or seller from continuing to enforce that term in current contracts: see Director of Fair Trading v First National Bank plc [2002] 1 AC 481, at para 33 “the system of pre-emptive challenges is a more effective way of preventing the continuing use of unfair terms…than ex casu actions”. It was therefore most unlikely that the Directive intended that a general challenge should not relate to a standard term in current contracts and did not intend the courts of member states to have power to prevent continued reliance on that term by a supplier or service provider against a consumer. Prima facie, in a situation where on a general challenge a court had found a term or terms in a set of standard conditions in use in current contracts unfair, it must be a proper exercise of its power to grant an injunction to prevent enforcement of that term or terms in existing contracts. It followed that it had been wrong of the judge to strike out the words he had from the terms of the injunction sought. It was, however, important to add a rider so that there was no misunderstanding. What injunction was granted must await the decision of the trial judge. If all that the court had considered were the particular terms contained amongst the particular standard terms before it, consideration would have to be given as to whether the injunction granted should relate to those terms alone or to like terms or something different. Reg 12(4) of the 1999 Regulations gave the power to grant an injunction wide enough to include “like” terms. But all would depend on what the court had found. The judge struck had out OFT’s request for a declaration on the same basis as he had struck out the words of the injunction. The judge had been right in his view that declarations could be granted by the court and wrong to strike out the requested declaration.

ARDEN LJ agreed.

MOORE-BICK LJ, agreeing in the result, said that the judge had been right to recognise that it might not be appropriate to grant relief in unqualified terms and would not be right to do so if there were any possibility that the terms in question should be regarded as fair in the light of all circumstances surrounding an individual contract.

Summary from WLR Daily

 

 

 

Case Study

 

 

Article by Kristian Laingchild
Penningtons LLP

The Consumer Protection from Unfair Trading Regulations 2008 came into force on 26 May. They target rogue traders but also require all businesses – whether trading on-line, on the high street or via telephone – to treat consumers fairly.

The Regulations are divided into three parts – a general prohibition on unfair commercial practices, a specific prohibition on misleading actions or omissions and aggressive commercial practices, and an annex of 31 practices which are automatically deemed unfair.

General Prohibition

The Regulations have imposed a general prohibition on all business from treating consumers unfairly. They define an unfair commercial practice as ‘one that runs contrary to the requirements of professional diligence and which materially distorts the economic behaviour of a consumer or is likely to do so’. The practice may occur either before, after or during a transaction with a consumer.

Specific Prohibition

The Regulations define misleading actions and omissions, as well as aggressive practices, as ‘unfair commercial practices’.

Misleading actions and omissions primarily refer to situations where false information is provided to a consumer, or information is deliberately concealed or provided in an ambiguous manner. It appears that use of ‘copycat’ packaging by a business could fall within this prohibition. The Regulations contain fairly detailed definitions of ‘misleading actions’ (Regulation 5) and ‘misleading omissions’ (Regulation 6).

An ‘aggressive commercial practice’ refers to a situation where a consumer is subjected to harassment, coercion or undue influence by a trader and the trader’s actions cause or are likely to cause the consumer to make a decision concerning a transaction which he may not otherwise have made. The Regulations contain a detailed test for an ‘aggressive commercial practice’ (Regulation 7).

Deemed Unfair Practices

The Regulations set out a blacklist of 31 commercial practices which are unfair in all circumstances. For example, describing a product as free or without charge, if the consumer has to pay anything other than unavoidable costs involved in responding to the trader and collection or delivery of the item. This prohibition is not intended to include ‘buy one get one free’ promotions but rather ‘bundling’ situations, where part of a package of goods or services is described as free, when in practice, there is an expense in acquiring the larger item. This sometimes occurs with communication services.

Other banned practices include making persistent and unwanted communications by telephone, fax or other remote media, visiting a consumer’s home and ignoring requests to leave or not to return, limited time offers which are later extended, bogus closing down sales, and displaying false testimonials on websites.

Enforcement And Penalties

The Regulations will be enforced by the Office of Fair Trading (OFT) as well as the local authority Trading Standards Services, which have wide powers of investigation, including making test purchases and entering premises and seizing goods or documents.

A breach of the Regulations is a criminal offence. The penalties on conviction are a fine not exceeding £5,000 and up to two years’ imprisonment. A business being investigated may also be subject to injunctions brought under Part 3 of the Enterprise Act 2002.

Due Diligence Defence

Providing a business can demonstrate that it took reasonable precautions and exercised due diligence to avoid committing an offence, this is a defence if it can prove that either the commission of the offence was due to a mistake, reliance on information supplied by another person, the act or default of another person, an accident, or another cause beyond its control (Regulation 17).

Conclusion

It has been suggested that the Regulations are beneficial to businesses since they will clamp down on those using unfair commercial practices to gain a competitive advantage. However, until there are some reported decisions, the question of whether a particular practice is unfair, and the level of proof required for a defence, remain uncertain.

While the OFT has commented that ‘businesses which already act honestly and fairly may not need to change the way they work at all’, UK businesses should be cautious and consider the following measures:

  • reviewing existing marketing and sales practices with consumers to consider their fairness;
  • ensuring that no existing practice falls within the 31 deemed unfair practices;
  • considering not only the actions of a business, but also its omissions when dealing with consumers;
  • providing education and training to staff concerning the Regulations, in particular covering sales strategies and techniques.

 

 

Demonstration Question – Exclusion Clauses

Norman, an electrician and editor of Loft Laggers Monthly, bought an electrical drill from Plus Grande Electricity Ltd, a firm owned by Monsieur Clouseau, a retired officer of the law. He was shown a document headed “Terms and Conditions” which stated, inter alia, “Plus Grande Electricity Ltd accept no responsibility for any loss or damage suffered as a result of the use of the equipment. All conditions and warranties, express or implied are hereby excluded.”

When he had arrived back at home, Norman put a plug on the drill and began work, putting up a shelf for his wife Norma. It was all very lamentable but owing to a defect in the manufacture of the drill, Norman was badly electrocuted, flung fifteen feet across the room, breaking his arm and a beautiful glass bowl and pulled down the heavy velvet curtains covering the French windows in a frantic attempt to steady himself and avoid crashing through the French windows onto the crazily paved patio where his wife Norma was gardening.

Advise Norman. How would your answer differ if Norman had been using the drill while working for a customer with similar unfortunate results.

Tutorial – Terms and Exclusion clauses

1. Read George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803 – in particular, the speech of Lord Bridge.

What matters did Lord Bridge consider relevant in determining whether the limitation clause was reasonable or not.

2. Slick Ltd purchased used engineering machinery, serviced it and leased it out to customers. A clause in the printed leasing contract said “ Neither the company nor its employees accept any liability for damage caused by defects in machines unless the customer makes an additional payment of 20% of the contract price.

Alf the owner of a small engineering firm, urgently needed a machine. Having dealt with Slick Ltd in the past, he rang the company and agreed over the telephone to lease a machine at a fixed price. a copy of the printed leasing contract was subsequently delivered with the machine.

When the machine was used for the first time it burst into flames and then exploded, totally destroying Alf’s premises. This was caused by faulty workmanship by Eric, an employee of Slick Ltd, and a defective component.

Slick Ltd denies any liability for the damage because Alf had not made the additional 20% payment.

 

Analyses in Contract & Sale of Goods
Exclusion clauses

Drafted 20th August 2009
Mike Semple Piggot

Aardvark purchases a new conservatory from Buildatory Ltd after visiting their website and seeing their extensive range of conservatories. He is impressed by the testimonials and the range and arranges for a salesman to call and measure up ‘without obligation’. A salesman from Buildatory measures up, talks the specification of the conservatory through with Aardvark. Aardvark and the salesman continue talking about the conservatory and the Buildatory Ltd salesman gives Aardvark a ‘Memorandum of Agreement’ confirming the specification, the price and delivery and installation date which Aardvark agreed and when the price of £15,000 was agreed Aardvark signed the memorandum to confirm the agreement. On the back of the memorandum is an exclusion clause, which Aardvark did not read, which reads:

(a) Buildatory Ltd accept no responsibility, whether through their contractors or by third parties, for personal injury occasioned by whatever means during the installation of the conservatory.

(b) All conditions and warranties in relation to the quality and fitness for purpose of the conservatory are hereby excluded

(c) Damage to property caused by contractors during the installation is limited to £250.

During the installation, due to negligent fitting on the part of Buildatory’s installation team, part of the structure falls down and injures Aardvark, breaking his arm and causing damage to the rear of the house is caused which will cost £1500 to fix. The conservatory installation is fitted and Aardvark is satisfied with the quality of that work.

You are asked to advise Aardvark on the validity of the exclusion clause.

1. This is a contract for the sale and installation of a conservatory governed by the Suppply of Goods and Services Act 1979. There are no goods liability issues arising and the only issue is the the incorporation, construction and validity of the exclusion clause at common law and under The Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).

2. The exclusion clause in the ‘Memorandum of Agreement’ is a contractual clause which seeks to exclude or restrict liability for breach of contract, negligence, breach of implied terms or misrepresentation. A contracting party who wishes to include an exclusion clause in a contract and rely upon it must overcome three hurdles before he can do so. He must show: (i) that it is incorporated in the contract (ii) That, as a matter of construction, it applies to cover the events which have arisen (iii) That it is valid under the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999

Incorporation

3. No statements, oral or written, including exclusion clauses, may become a term of the contract unless made before the contract was concluded. Any statement made after the conclusion of a valid contract will not be a part of it, will not be supported by valid consideration and will not be binding or enforceable. Roscorla v Thomas (1842) 3 QB 234 In Olley v Marlborough Court Hotel [1949] 1 KB 532 A notice on the back of the room door disclaiming liability was not enforceable. The disclaimer or exclusion clause should have been drawn to the attention of the husband and wife when they checked in and before the contract for the hire of the room had thereby been concluded.

4. The difficulty here is that while all the terms of the agreement were discussed and agreed to – and Aardvark signed the memorandum, he did not read the exclusion clause on the back of the document, nor was it drawn to his attention. While L’Estrange v F Graucob [1934] 2 KB 394 applied strictly would suggest that aardvark is bound by signature the court in the more recent case of Interfoto Picture Library Ltd v Stiletto Visual Programmes [1989] QB 433; [1988] 2 WLR 615 has emphasised where, as here, the exclusion is particularly harsh, exluding liability for everything that extra care must be given to drawing the attention of the other contracting party to it. This did not happen and it may be, on that ground alone, the court would refuse to uphold the clause by refusing to accept it as being incorporated into the contract.

Construction

5. As a matter of construction there are no significant issues. The clauses clearly cover the damage which has arisen (Canada Steamship Lines v The King [1952] AC 192 et al)

Validity: exclusion of liability for personal injury

6. The Unfair Contract Terms Act covers notices and contract terms which purport to exclude or restrict liability in contract and tort. The liability arising must be a business liability (s.1(3) UCTA 1977). Buildatory Ltd is acting in the course of business so the Unfair Contract terms Act 1977 applies.

7. Section 2 and Negligence Claims

Section 2 provides:

(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.

(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfied the requirement of reasonableness.

(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.

The first point to note is whether s.2 of the Act applies to contract terms or notices which seek to define the obligations of the parties. In answering this question it is necessary to have regard to two particular provisions of the Act and the interpretation which has been placed upon them by the courts.

The first provision is the definition of negligence in s.1(1) as “the breach:

(a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract;

(b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty);

(c) of the common duty of care imposed by the Occupiers’ Liability Act 1957 or the Occupiers’ Liability Act (Northern Ireland) 1957.”

The second provision is s.13(1) which states that:

“To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents –

(a) making the liability or its enforcement subject to restrictive or onerous conditions;

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;

(c) excluding or restricting rules of evidence or procedure;

8. Buildatory Ltd will not be able to rely on the exclusion clause in relation to their negligence which caused Aardvark’s injury. This is invalidated by s. 2 Unfair Contract terms Act 1977

9. Other loss or damage

The exclusion clause in relation to toher loss or damage – here the damage caused to the rear of the property – will be subject to the ‘Reasonableness test in s.11 UCTA 1977 and the guielines set out in Schedule 2.

Reasonableness – s.11 UCTA 1977

(1) In relation to a contract term, the requirement of reasonableness is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been , known to or in the contemplation of the parties when the contract was made. Section 8 of the Act amends s.3 Misrepresentation Act 1967 , which had required that terms excluding liability for misrepresentation should be reasonable.

(2) In determining for the purposes of ss 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or any arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any liability is not a term of the contract.

(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.

(4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but not without prejudice to subsection (2) above in the case of contract terms) to:

(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and

(b) how far it was open to him to cover himself by insurance.

(5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.

The Schedule 2 guidelines

The matters to which regard is to be had in particular for the purposes of ss.6(3), 7(3) and (4), 20 and 21 are any of the following which appear to be relevant:

(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 to accept a similar term;

(c) whether the customer knew or ought reasonably to have known of the existence and 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 is 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.

10. The time for determining reasonableness is the time of entering into the contract. It is unlikely that a court could be persudaded, in the circumstances of this case, given the failure to draw attention to the clause on the back of the document, the relative inequity in the bargaining position of the parties and whether Aardvark could cover himself for insurance – being quite unaware of the exclusion clause and, therebfore, a need to do so. S. 11(4) covers this situation (above). In my opinion the clause is likely to be regarded as unreasonable.

Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).

11. The UTCCR 1999 apply to this contract. Buildatory is a business supplier (reg 3(1)) and Aardvark is a ‘consumer’. The regyulations apply to contract terms, as here and the difficulty for Buildatory Ltd here is that the exclusion clause has not only not been individually negotiated but it was not even drawn to the attention of Aardvark. It is, in effect, a pre-formulated standard contract (reg 5(3)). I am of the view that the caluse would be rendered unreasonable under reg 8(1) on grounds that they are ‘contrary to good faith’ and cause a significant imbalance in the parties rights and obligations arising under the contract. The exclusion clause is, in practical terms, a unilateral imposition of Aardvark and he has not been dealt with fairly or equitably because the clause was not drawn to his attention.

12. For the reasons given, the exclusion clause is unlikely to be upheld and aardvark will be able to pursue his contractual and tortious remedies for injury and damage to property in the usual way.

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