The Unfair Contract Terms Act 1977 (Applebey 8)

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THE UNFAIR CONTRACTTERMS ACT 1977

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One of the most important pieces oflegislation in the sphere of contract law. Note however that the Act is subjectto numerous amendments as a result of the new Consumer Rights Bill 2013-14currently in Parliament. The existing law must therefore be treated withextreme caution pending the passing of the Consumer Rights Act in October 2015.The aim of the new Act is to consolidate consumer rights in one statute, in theprocess removing consumer sections from the UCTA.

KEYSECTIONS: All of these are subject to changes in 2015 [ ] Section2Section3Section6Section7 Section11Section12Section13 Schedule2

INTERPRETINGUCTA Wordsand Phrases in the Act of significance 1. ‘Businessliability’

2. [‘Dealing as consumer’] Replaced andreformed 2014Bill

3. ‘WrittenStandard Terms of Business’

TheTwo Most Essential Concepts

4. Whatis an exemption of liability?

5. Howshould reasonableness be defined?

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StAlbans City and District Council v ICL[1995]

business liability - UCTA s.3, 6, 7, 11, 14 - written standard terms of business

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A contract to provide software (COMCIS) for the implementation of the Community Charge ("poll tax") of International Computers Ltd limited its liability to £100,000. The software was meant to create a register of tax payers. Because of errors in the software, the loss to the council was £1,313,846. The council claimed breach of contract, and that the liability limitation was unreasonable under the Unfair Contract Terms Act 1977. International Computers Ltd claimed that the liability limitation should remain.

Scott Baker J awarded the full sum because the city council was operating on International Computers Ltd’s written standard terms of business and so UCTA 1977 section 3 applied. Sections 6 or 7 also applied and under section 11 the clause was unreasonable. Under section 11(4) Scott Baker J highlighted that International Computers Ltd had ample resources and had £50m worldwide product liability insurance. Looking at Schedule 2, he said that the council was in a weaker bargaining position because they had financial restraints and were not in the commercial field. They had no opportunities of other contracts without the term. The council knew of the term and made representations about it. He noted (as in The Flamar Pride) that Schedule 2 should be taken into account just as with ss. 6-7. He summed up by saying that the loss of this size is better to fall on the company and not the local population through increased taxes or reduced services.The Court of Appeal upheld Scott Baker J’s reasoning, but concluded the damages were in fact £484,000 less.

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Stevenson v Rogers [1999]

business liability - UCTA s.4, 6, 7, 12

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A fisherman sold his boat and purchased a replacement. The boat was not of satisfactory/merchantable quality. Had the transaction occurred in the course of a business? Yes, seller liable as breach of implied terms s 14(2) Sale of Goods Act. Broad interpretation to ‘in the course of a business’, therefore implied term. Different interpretation to R&B Customs Brokers v United Dominions Trust which applied the phrase in the context of the Unfair Contract Terms Act 1977

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FeldarollFoundry plc v HermesLeasing (London) Ltd [2004]

UCTA 1977 dealing as consumer - Sale of Goods Act 1979 s.14 Implied term as to quality

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Lamborghini car bought for the use of a director, it was held that the company was dealing as a consumer.

The first defendant (H) appealed a decision that it was liable to the claimant (F) in relation to the sale of a defective car sold on a hire purchase agreement. F had agreed to the purchase of a Lamborghini motor car by way of hire purchase. H was a finance company which had agreed to provide the necessary finance agreement. The car was to be used by F's managing director (B), who was an enthusiast of high performance cars, and accordingly the use of the Lamborghini was seen as a reward. The car was defective and it was accordingly returned to the dealer within a few days. However F sought to roll-over the terms of the finance agreement to the supply of a replacement performance car. Accordingly F paid initial instalments under the terms of the finance agreement. A replacement car was never provided and the dealer subsequently became insolvent. By the instant proceedings F sought the repayment of the sums paid by way of instalments under the finance agreement, and H sought the remainder of the sums said to have been due. An issue before the trial judge was whether terms of the finance agreement which had excluded implied conditions of reasonable fitness and satisfactory quality had been enforceable, or whether Unfair Contract Terms Act 1977 s 6(2) rendered the exclusion term as nugatory on the grounds that F had acted as a consumer rather than in the course of its business (Unfair Contract Terms Act 1977, s 10). The judge, relying on R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321, held that F had acted as a consumer and that accordingly F had been entitled to reject the car on the grounds of fitness. ISSUE Whether the judge had erred in concluding that F had purchased the car as a consumer. HELD (appeal dismissed) It was clear from the decision of Stevenson v Rogers [1999] QB 1028 that the court in the instant appeal was bound by the decision of R & B. It was a decision that was binding on the Court of Appeal and during its time the relevant provisions of UCTA 1977 had remained unchanged. If the case of R & B was to be challenged, the Court of Appeal was not the forum. Furthermore, R & B was not distinguishable from the facts of the instant case. Accordingly, since the judge had correctly found that F had properly rejected the car, F had been entitled to reject the car on the grounds of fitness. The appeal would accordingly be dismissed.

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Salvage Association v CAP Financial Services Ltd [1995]

'written standard terms of business' - UCTA 1977

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In a contract for services to provide a particular product it is virtually impossible for there to be a total failure of consideration unless no part of the services have been provided. P entered into two contracts with D for computer accounting software. The software contained numerous errors and P terminated the second contract prior to completion, alleging a repudiatory breach by D. P contracted with a third party for a completely new system and sued D, claiming damages for breach of contract, together with a claim for restitution based on a total failure of consideration. D sought to rely on a clause limiting its liability to GBP 25,000, which P claimed was unreasonable under the Unfair Contract Terms Act 1977 . Held, giving judgment for P, Sch.1 para.1(c) of the 1977 Act only applies to those provisions in a contract which deal with the creation or transfer of a right or interest in the relevant intellectual property, and does not necessarily extend to the whole contract, in respect of the first contract, the parties dealt on D's written standard terms. The terms had been drafted by D in advance and P did not attempt to negotiate them. In respect of the second contract, whilst D's standard terms formed a starting point for negotiation, P sought legal advice and D largely agreed amendments sought by P. The parties were of equal bargaining power and negotiations took some considerable time. Accordingly the second contract did not fall within s.3; (3) since both contracts imposed duties on D within s.2(2) in respect of negligence, these terms were subject to the reasonableness test; (4) as to reasonableness, it was virtually impossible and prohibitively expensive for P to insure against D's failure to perform, whereas D had insurance up to GBP 5 million. since the project was far from completed, it was reasonable for P to terminate and start again from scratch with a third party; (6) in a contract for services it is very difficult to prove a total failure of consideration unless no part of the services contracted for have been provided. Failure to produce the final product is not sufficient

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PhotoProduction Ltd v SecuricorTransport Ltd [1980]

exemptions of liability - scope of UCTA 1977 s.13 - qualifying an obligation

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A contract for provision of security services by Securicor at the Claimant’s factory. The security guard’s negligence caused the destruction of the claimant’s factory by fire. The contract contained a clause excluded liability for negligence of Securicor’s workers. Held: Where the parties are negotiating at arms length, and have set out who should bear the risks, the courts should be unwilling to interfere. Lord Wilberforce, writing for the Court, overturned Denning and found that the exclusion clause could be relied upon. Wilberforce explicitly rejected Denning's application of the doctrine of fundamental breach and opted for a "rule of construction" approach. Exemption clauses are to be interpreted the same as any other term regardless of whether a breach has occurred; the allocation of risk should lie with the respondent - they are in the best position to insure the factory. The scope of the exclusion is determined by examining the construction of the contract. The appellants had met their duty of care by not hiring negligently. On the facts, Wilberforce found that the exclusion clause precluded all liability even when harm was caused intentionally. He went out of his way to disapprove the doctrine of fundamental breach of contract.Lord Diplock held that the clause's effectiveness was a question of construction of the contract and that it did cover the damage (very clear construction). He noted "the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses" though the need should have gone since the passage of the Unfair Contract Terms Act of 1977. Under freedom of contract, parties can determine their obligations to one another as long as they are explicit in those obligations.

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Smith v Eric Bush [1990]

exemptions of liability - scope of UCTA 1977 s.13 - 'but for' test - the meaning of reasonableness: judicial interpretation

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A survey report of the claimant’s house carried out by the defendant failed to advise on some structural damage to the property which resulted in the chimney breast collapsing. There was no contractual relationship between the claimant and defendant as the mortgage company arranged the survey and the claimant made payment to the mortgage company. The contract between the claimant and the mortgage company contained a clause exempting the surveyor from liability. In considering if such a clause was reasonable under the Unfair Contract Terms Act 1977 the court took into account the fact that it was a modest house to be used as the family home and concluded that it was an unreasonable clause and therefore ineffective. The House of Lords held that it might be reasonable for a surveyor to exclude liability if the property was of higher value or to be used for investment or business purposes. It was held that it was not unreasonable for the purchaser of a modest house to rely on the surveyors' evaluation, as it was such common practice. In this way the court extended Hedley Byrne liability to proximate third parties. Under UCTA 1977 an initial issue was the scope of the Act's coverage under s 13. Lord Templeman said the Act regulated ‘all exclusion notices which would in common law provide a defence to an action for negligence.’ Lord Griffiths said s.13 was ‘introducing a ‘but for’ test in relation to the notice excluding liability’, so courts should decide whether a duty of care would exist but for the exclusion. Lord Jauncey said the wording of s 13 was ‘entirely appropriate to cover a disclaimer which prevents a duty coming into existence.’ The Lords decided that even though the defendants had issued a liability waiver, this could not stand up to the test of reasonableness under s.11. That was because the purchase of a house by a private citizen like Mrs Smith was bound to be one of the most expensive in a lifetime, and it was more reasonable that a professional surveyor bear the risk of liability. The Lords did however say that not all exclusion clauses used by surveyors would be unreasonable, for instance in big property developments.

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Phillips Products v Hyland [1987]

exemptions of liability - scope of UCTA 1977 s.13 - purpose of the term

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Hamstead Plant Hire hired out a JCB excavator to Phillips Products. It also hired out a driver, Mr Hyland. Condition 8 of their contract stated the driver would be deemed to be the employee of Phillips Products. The driver crashed into Phillips’ factory wall. Phillips argued that Hamstead Plant Hire should pay for the damage cause by Mr Hyland, because condition 8 was caught by UCTA 1977 section 2(2) and was unreasonable. Hamstead Plant Hire argued it was not, asserting there had been no negligence on its part that was even being excluded, because there was no ‘breach’ of obligation in section 1(1)(b). The effect of condition 8, they contended, was that no liability for the driver had ever been assumed. Slade LJ rejected Hamstead Plant Hire’s argument. Condition 8 was caught by UCTA 1977, and was unreasonable in excluding its liability for Mr Hyland's damage. When deciding what breach there is, the court should not include the exclusion clause in deciding whether a breach existed. Read with section 13(1), section 2 encompasses ‘terms and notices which exclude or restrict the relevant obligation or duty’, so section 2 clearly extends to duty defining, not just duty excluding clauses. Condition 8 failed the reasonableness test under section 11 and Schedule 2, because the claimants’ hire was for a short period, there was little opportunity for arranging insurance and no choice over the driver. Hamstead Plant Hire Co were in the best position to take out insurance.

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Thompson v T Lohan (Plant Hire) Ltd [1987]

exemptions of liability - scope of UCTA 1977 s.13 - purpose of the term

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T Lohan hired out a JCB excavator and driver, Mr Hill, to JW Hurdiss Ltd, the owners of a quarry. Condition 8 of the contract said the driver was employed by JW Hurdiss Ltd. The driver caused Mr Thompson’s death. Mrs Thompson got damages from T Lohan for her husbands life. T Lohan sought to recover the cost of compensation from JW Hurdiss Ltd. T Lohan argued that condition 8 was caught by UCTA 1977 section 2(1). Fox LJ held that condition 8 was not caught by UCTA 1977 and was effective to transfer liability to the hirers. Section 2(1) had no effect because liability was not excluded towards the victim of the negligent act, Mr Thompson. It only excluded liability towards the hirers themselves. It transferred liability. This distinguished the case from Phillips Products Ltd v Hyland and Hamstead Plant Hire Co Ltd.[2] So there is a distinction between an exclusion and transfer of liability. In particular he noted the following. “In my opinion, section 2(1) is concerned with protecting the victim of negligence and, of course, those who claim under him. It is not concerned with arrangements made by the wrongdoer with other persons as to the sharing or bearing of the burden of compensating the victim. In such a case it seems to me there is no exclusion or restriction of the liability at all." It is usually read with Phillips Products Ltd v Hyland and Hamstead Plant Hire Co Ltd[1] where a similar contract clause (an older version of the same standard industry term) was held to be unreasonable, but where the liability being shifted had the effect of leaving a victim of loss without a remedy. In Thompson there was no exclusion of liability to the victim of the accident.

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Macdonald "Exclusion Clauses: The Ambit of s 13(1) of the Unfair Contract Terms Act 1977" 12 Legal Stud. 277 (1992)

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to be read, considered a good article

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The Meaning of Reasonableness

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The idea of reasonableness is meant to denote flexibility. The court is free to determine this as amixed question of fact and law. Thisinvolves a mixture of factors, and higher courts are reluctant to overturn sucha finding on appeal (they say, although in fact, they do). Every case is to be judged on its ownmerits. Reasonableness is not a matterof precedent. (a) S. 11 and Schedule 2UCTA 1977

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GeorgeMitchell (Chesterhall) Ltd v Finney Lock Seeds [1983]

meaning of reasonableness - judicial interpretation

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Finney Lock Seeds Ltd agreed to supply George Mitchell (Chesterhall) Ltd with 30lbs of Dutch winter cabbage seed for £201.60. 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 (250,000 m2) of crops failed, and £61,513 was claimed for loss of production.The two main issues in the case were, first, 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; and second, whether under the Unfair Contract Terms Act 1977, s 2(2) the limitation was reasonable (s 11). Lord Bridge of Harwich said: “The decisive factor, however, appears from the evidence of four witnesses called for the appellants, two independent seedsmen, the chairman of the appellant company, and a director of a sister company (both being wholly-owned subsidiaries of the same parent). They said that it had always been their practice, unsuccessfully attempted in the instant case, to negotiate settlements of farmers’ claims for damages in excess of the price of the seeds, if they thought that the claims were ‘genuine’ and ‘justified.’ This evidence indicated a clear recognition by seedsmen in general, and the appellants in particular, that reliance on the limitation of liability imposed by the relevant condition would not be fair or reasonable.” and “There will sometimes be room for a legitimate difference of judicial opinion as to what the answer [under s 11] 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.” A decision as to reasonableness is akin to the exercise of a discretion.

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WatfordElectronic Ltd v Sanderson CFL Ltd[2001]

the meaning of reasonableness: judicial interpretation

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Where a contract included an entire agreement clause which stated that no reliance had been made by the parties on statements or representations made by them, the court should when determining the extent of a limit of liability clause have regard to the importance and effect of such an acknowledgement.

S appealed against a decision ([2000] 2 All E.R. (Comm) 984) that two clauses purporting to limit liability in respect of a contract it had entered into with W were unreasonable in their entirety. The contract contained an "entire agreement clause" which stated that no reliance had been made by the parties on statements or representations made by them. Held, allowing the appeal, that the judge had erred in (1) failing to properly identify the scope and effect of the limit of liability clause since the clause did not attempt to exclude liability for pre-contract misrepresentation; (2) failing to treat the obligation agreed to by S in an agenda to the contract, to use best endeavours to allocate appropriate resources to the project in order to minimise potential contractual losses, as an additional obligation to those imposed by the standard terms and conditions, and (3) treating W's own standard terms of business as irrelevant since they showed that W was well aware of the commercial considerations which would lead a supplier to include limit of liability clauses. This was directly relevant to determining whether such clauses were fair and reasonable having regard to the circumstances which were, or ought to have been known to or in the contemplation of the parties when the contract was made.

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FACTORS TO BE TAKEN INTOACCOUNT IN JUDGING REASONABLENESS; THE UNDERLYING PRINCIPLE IS INEQUALITY OFBARGAINING POWER

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Was it reasonable toincorporate the clause? Was it reasonable to relyon the clause? Was the contract ‘take itor leave it? ie Standard Form contract? Did the party have achoice? Were alternatives offered to him or her? Did one party deal asconsumer? Burden of proof Rules of Construction; is‘contra proferentem’ still relevant? Knowledge and awareness ofthe term Course of dealings Insurance by either partyagainst the risk Allocation of risk by thecontract itself Resources available tomeet liability The consideration or priceof the contract Differential pricing Special rules applicableto negligence Was liability expressly orimpliedly excluded? Proportionality of the clauseto the breach of contract and losses resulting Amount of the limitationclause Reasonableness at date ofcontract In negligence at the timeof injury Reasonableness does nothave to be pleaded by the injured party Wider policy implicationsof a finding of reasonableness on other contracts Exclusion not wide enoughto include a fundamental breach. Or is this no longer relevant?Two endangeredCommon Law Species: Are they now redundant?

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Lease Management v Purnell Secretarial Services [1994]

Reasonableness and the Common Law Doctrine of Fundamental Breach

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It is not reasonable to exclude liability for breach of a term which is fundamental to a contract. P sought to lease a photocopying machine, making it plain that a certain feature was required. The machine which was supplied did not have this feature. The lease agreement was made with a finance company, and not, as P had thought, with the suppliers of the copier. The lease excluded liability for representations made about the machines. P contended that the exclusion clause was unreasonable and could not apply. Held, that the exclusion clause in the lease agreement was unreasonable, and was overridden by the representations made to P by the copier salesman (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 Q.B. 480 applied; R&B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 W.L.R. 321 distinguished). Where the agreement used by a finance company for leasing purposes misled the customer to believe they were leasing the equipment from the supplier rather than the finance company, they were estopped from asserting that the suppliers had no authority to act on their behalf. It followed therefore, that the lease agreement was subject to an implied term that the equipment was the same as the demonstration model. The practice by finance companies of using forms and a trading style similar to those of well known suppliers with the intention of misleading customers should be stopped as soon as possible.

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Sovereign Finance Ltd v Silver Crest Furniture Ltd [1997]

Reasonableness andthe Common Law Doctrine of Fundamental Breach

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F selected a machine produced by TMS. SF acquired the machine for the purpose of it forming the subject matter of a hire purchase agreement between F and SF. TMS installed the machine at F's premises. The hire purchase agreement contained a comprehensive exclusion clause. When F failed to pay under the agreement, SF sued M as a guarantor. A preliminary issue arose as to whether SF were entitled to rely on the exclusion clause as being fair and reasonable, pursuant to the Unfair Contract Terms Act 1977 s.11 . Held, that (1) SF could not rely on the exclusion clause, the clause was a wide one purporting to exclude all liability and was therefore prima facie unreasonable and as a result unenforceable, and (2) an unreasonable clause between buyer and seller could not be relied upon by a finance company merely because the finance company had not inspected the goods, Lease Management Services v Purnell Secretarial Services [1994] C.C.L.R. 127 applied.

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Privity of Contract andthe Contracts (Rights of Third Parties) Act 1999

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The Act allows parties to supersede the common law rule that theparties may not confer a benefit on a third party. See s. 1(6). However, under s. 7 (2) of the 1999 Act, the test of reasonableness inUCTA s.2 (2) is applicable. Also (s.2(1) will still be applicable). The Act may be ‘written out’ of any contract(ie a default set of rules, not mandatory). If so the common law rules on privity, including the numerous exemptionsand means of avoiding the rule devised over the last 150 years, continue to beavailable.