Are Contract Terms Really Binding? Part 2 of 2

Author:Mr Jonathan Selby
Profession:Keating Chambers
 
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(5) Section 3 of the Misrepresentation Act 1967

Section 3 of the Misrepresentation Act 1967 ("the MRA 1967"), as substituted by

section 8 of UCTA, provides:

"If a contract contains a term which would exclude or restrict -

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him

before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation.

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in

section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that

requirement to show that it does."

The terms "any liability" and "any remedy" are wide enough to cover provisions which

would exclude or restrict a claim to damages, or the right to rescind, or the right to set up a misrepresentation by

way of defence to an action: see Chitty paragraph 6-134.

(6) Onerous clauses requiring a "red hand" to be incorporated

There are certain circumstances in which a clause (typically in a party's standard terms and

conditions) will not be incorporated into a contract because it is so onerous that special notice of it should have

been given. This is a common law rule. In J Spurling Ltd v Bradshaw [1956] 1 WLR 461, Denning LJ commented

that "some clauseswould need to be printed in red ink on the face of the document with a red hand pointing

to it before the notice could be held to be sufficient."

Whether a clause is particularly onerous or unusual is considered by reference to the nature of the

transaction in question, the character of the parties to it and whether in all the circumstances it is fair to hold

the parties bound by it: Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1987] 1 QB 433.

For a recent consideration of these principles, see Shepherd Homes Limited v Encia Remediation

Limited [2007] EWHC 70 (TCC).

SECTION 2: SPECIFIC CLAUSES

(1) Net Contribution Clauses

The nature of net contribution clauses

An example of a net contribution clause is paragraph 8.1B of the ACE Conditions of

Contract:

"Notwithstanding anything to the contrary contained elsewhere in this Agreement, the total liability of

the Consulting Engineer under or in connection with this Agreement (other than liability for claims arising out of

or in connection with pollution or contamination which is excluded) whether in contract or in tort, in negligence or

for breach of statutory duty or otherwise for any claim shall be limited to the lesser of:

the amount stated in the Memorandum of Agreement as the limit of the Consulting Engineer's total liability,

and

such sum as the Consulting Engineer ought reasonably to pay having regard to his responsibility for the total

loss or damage suffered on the basis that all Other Consultants and all other parties providing design management or

financial services or labour or materials or plant or equipment for incorporation in the Project or the Works or

executing the project or the works or any part thereof shall be deemed to have provided contractual undertakings on

terms no less onerous than that set out in condition 2.4 hereof to the Client (whether or not they shall have been

so provided to the Client) in respect of the provision of their services or labour or materials or plant or

equipment in respect of executing the Project or the Works or any part thereof and shall be deemed to have paid to

the Client such contribution which it would be just and equitable for them to pay having regard to the extent of

their responsibility for any loss or damage."

The purpose of a net contribution clause is to ensure that where two or more parties to a

construction project are liable for the same damage, the liability of each party will be limited to the amount which

would normally be apportioned to that party. If, for example, an architect and a contractor were each liable for the

same defective work (the former being 70% liable and the latter 30% liable), in the absence of a net contribution

clause the client could recover 100% of the damages from the architect who would then have to recover from the

contractor under the Civil Liability (Contributions) Act 1978. However, the effect of the net contribution clause

is that the client can only recover 70% from the architect.

Such clauses clearly have unattractive implications for an employer. In their absence, the risk of insolvency of

one or other professionals, contractors or sub-contractors will fall on the solvent professionals, contractors or

sub-contractors, from whom the employer may claim 100% of the damages. However, when such clauses are introduced the

limitation of their liability entails that the risk falls on the employer.

When will net contribution clauses be unenforceable?

There is no authority on whether such clauses are unenforceable.

Nevertheless, a net contribution clause could fall within the scope of UCTA and so would be subjected to the

test of reasonableness in accordance with section 11. Equally, it could fall within the scope of the Regulations.

The circumstances of the contracting parties will be looked into to determine whether the cap on liability is

reasonable. However, the key issue which needs to be determined is whether the employer or the professional should

bear the risk of the contractor's insolvency. On this issue, a material consideration will be the existence of

professional indemnity insurance on the one hand and the availability of appropriate insurance for the employer on

the other.

(2) Entire Agreement Clauses

Entire agreement clauses are frequently relied upon in an attempt to prevent one party from

asserting that the written contract is not the sole repository of the terms of the contract and that there is in

fact another term of the contract which has been broken by the other party. The aim is thus to prevent liability

arising for breach of contract outside of the terms of the written agreement, and has the effect of denuding what

would otherwise constitute a collateral warranty of contractual effect. Entire agreements can also be utilized for

another purpose, namely the elimination of any possible liability for misrepresentation.

Examples of entire agreement clauses

An entire agreement clause which sought to achieve both of these functions was the subject of

dispute in Watford Electronics Ltd v Sanderson CFL Ltd [2001] BLR 143:

"The parties agree that these terms and conditions (together with any other terms and conditions

expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and

purchase of the Equipment and that no...

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