Are Contract Terms Really Binding? Part 1 of 2

Author:Mr Jonathan Selby
Profession:Keating Chambers
 
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SECTION 1: GENERAL PRINCIPLES

(1) Unfair Contract Terms Act 1977

Scope

The Unfair Contract Terms Act 1977 ("UCTA") is concerned with terms that exclude or restrict

"business liability". This is defined at section 1(3) as:

"liability for the breach of obligations or duties arising -

from things done or to be done by a person in the course of business (whether his own business or

another's);

from the occupation of premises used for business purposes of the occupier."

Notably, by paragraph 1 of Schedule 1 the relevant provisions of UCTA do not extend to:

" any contract so far as it relates to the creation or transfer of an interest in land, or to the

termination of such an interest, whether by extinction, merger, surrender, forfeiture or otherwise.

Negligence liability

The exclusion or restriction of negligence liability for loss or damage other than personal

injury or death is permissible, but only insofar as the term or notice satisfies the requirement of reasonableness.

This is set out at section 2:

"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.

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 satisfies the requirement of reasonableness."

Liability for breach of contract

Where one party "deals as consumer" or on the other party's "written standard

terms of business", then the other party cannot exclude or restrict his liability for breach of contract,

except subject to the requirement of reasonableness. This is set out at section 3:

" This section applies as between contracting parties where one of them deals as consumer or on the

other's written standard terms of business.

As against that party, the other cannot by reference to any contract term -

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

claim to be entitled—

to render a contractual performance substantially different from that which was reasonably expected

of him, or

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 satisfies

the requirement of reasonableness."

Note also that section 13(1) goes further:

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

prevents—

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

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;

excluding or restricting rules of evidence or procedure…"

The expression "deals as consumer" is defined at section 12, which states that:

"A party to a contract "deals as consumer" in relation to another party if -

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

the other party does make the contract in the course of a business."

The reasonableness test

By section 11(2), the factors set out in Schedule 2 are regarded as relevant to the assessment

of the reasonableness of a contract term. Even though these factors only expressly apply to sections 6 and 7 of

UCTA, they are generally considered in considering the reasonableness of contract terms for other sections of the

Act. The factors are:

" 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;

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;

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 course of dealing between the parties);

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;

whether the goods were manufactured, processed or adapted to the special order of the customer."

It is to be noted that where the term seeks to limit liability, the availability of resources and the

possibility of insurance coverage will be especially relevant to the test of reasonableness, and that limitation

clauses are generally more favourably received than exclusion clauses. However, the House of Lords stated in

Smith v Eric S. Bush [1990] 1 A.C. 831 that it was impossible to set out an exhaustive list of all the

factors and circumstances which the Courts should take into account.

Practical application

A helpful example of the way in which the Courts apply UCTA is Watford Electronics Ltd v

Sanderson CFL [2001] BLR 143:

The Court of Appeal firstly identified the scope and effect of the exclusion clause as a matter of

construction;

The Court of Appeal then considered the circumstances which were, or ought reasonably to have been, known to or

in the contemplation of the parties when the contract was made;

In so doing, the Court of Appeal indicated that UCTA should be applied on the basis that bargains between

commercial parties containing exclusion or limitation clauses should be considered reasonable unless one party has

taken unfair advantage of the other, or a term is so unreasonable that it cannot properly have been considered. The

threshold is therefore high (though note the decision in St Alban's City and District Council v International

Computers [1996] 4 All E.R. 481 where a commercial bargain was found to be unreasonable).

For a recent example of a limitation clause being found to be reasonable under UCTA, see Shepherd Homes

Limited v Encia Remediation Limited [2007] EWHC 70(TCC) where the contractor's liability was limited to the

contract price (which was in fact less than the minimum insurance cover required under the contract).

(2) Unfair Terms in Consumer Contracts Regulations 1999

General effect of the Regulations

The Regulations subject various terms in consumer contracts to a twofold test:

The term should be "fair";

The term should be in "plain, intelligible language."

Scope

The Regulations apply to terms in contracts between any seller or supplier and a consumer: see

Regulation 4(1). A consumer is defined in Regulation 3 as:

"any natural person who, in contracts covered by these Regulations, is acting for

purposes which are outside his trade, business or profession."

A "seller or supplier" is defined as:

"any natural or legal person who, in contracts...

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