Contract Terms: Exclusion Clauses, Unfair Terms and Implied Terms

Question 1

Definition of an exclusion clause

Answer 1

“Any term in a contract restricting, excluding or modifying a remedy or liability arising out of a breach of a contractual obligation”

(Yates, Exclusion Clauses in Contracts, 1982)

Question 2

What is the purpose of exclusion clauses?

Answer 2

To define obligations, enable the allocation of risk, deterrence, defence and standardisation.

Question 3

What are the requirements for an exclusion clause to be included in a contract?

Answer 3

1) The clause must be incorporated in the contract or else it can’t be enforced
2) It must satisfy the rules of interpretation, properly covering the loss that has occured
3) It cannot be enforced if it contradicts another rule of law invalidating the clause, e.g. UCTA

Question 4

Criteria of incorporation

Answer 4

One of the four must be met:

• signature
• notice
• course of dealing
• trade custom

Question 5

Where a contract is signed you are bound by the terms contained thereof regardless of whether you have read them

Answer 5

L’Estrange v Graucob

Question 6

The exclusion clause will not be incorporated if the signature is obtained by a misrepresentation

Answer 6

Curtis v Chemical Cleaning and Dyeing Co Ltd

Wedding dress, asked what signing exclusion of dry cleaner’s liability for, told damage to beads but supposed to be all damage. Her dress stained.

Question 7

The timing of notice needs to be before the contract is formed

Answer 7

Olley v Marlborough Court

Contract normally formed at hotel desk so notice in bedroom too late.

Question 8

Notice needs to be in a sufficiently contractual-type document

Answer 8

Chapelton v Barry Urban District Council

Receipt for use of deckchair not reasonable esp as payment normally collected some time after use.

Question 9

The degree of notice required for incorporation depends on how onerous or unusual the exclusion clause is

Answer 9

Interfoto Picture Library - extortionate fine not drawn enough attention to

J.Spurling Ltd v Bradshaw - some would require ‘red ink/red hand pointing to it’ on the face of document according to Lord Denning

Question 10

If you can show an established course of dealing on traditionally the same terms (incl. the same terms) then held to be incorporated

Answer 10

Hardwick Game Farm v Suffolk AA - 3/4 times a month over a year is enough to incorporate

Hollier v Rambler Motors - 3/4 times over 5 years not enough

Question 11

Terms are incorporated if parties are both in a trade where these conditions are habitually imposed in normal practice

Answer 11

British Crane Hire v Ipswich Plant Hire

Usual to expect terms of crane hire, same trade, both know this.

Question 12

The contra proferentem rule to interpretation

Answer 12

Where there is ambiguity/uncertainty the benefit of the doubt is given to the other party not relying on the exclusion clause. Person responsible for contract had opportunity to make wording clear.

Photo Productions v Securior - Lord Diplock warned not to take rule too far - don’t use if clear meaning.

Question 13

Example of the contra proferentem rule

Answer 13

Houghton v Trafalgar Insurance Co Ltd

Term excluding liability if car carrying an ‘excessive load’ deemed to apply to baggage and not to passengers.

Question 14

Criteria for the inclusion of exclusion clauses with regards to wording

Answer 14

Canada Steamship Lines v The King - only allow clauses where:

a) expressly covers negligence, clear and unambiguous
b) if not, can the words be interpreted to cover negligence?
c) if interpreted, it’s only effective if the clause could ONLY apply to negligence damage

Question 15

An exclusion clause that wasn’t clearly worded enough to cover negligence liability

Answer 15

Hollier v Rambler Motors

Exclusion clause for liability caused by fire to customer’s cars, not clear enough to just cover negligence. Should have used plainer language.
Argument that court so strict because he was consumer and couldn’t strike down unreasonable clauses via UCTA 1977 yet.

Question 16

What is the fundamental breach doctrine?

Answer 16

Karsales v Wallis

Lord Denning - can’t exclude liability for breach of a fundamental term (as this terminates the contract)

Question 17

Who over-ruled the fundamental breach doctrine?

Answer 17

The HoL in Photo Production v Securior - fundamental breach does not bring contract to an end, it only cancels future obligations

Question 18

UCTA s1

Answer 18

Act only applies to business liability

Specifically s2-7. Normally b2c relations but can be b2b.

Question 19

UCTA s2 - Negligence liability

Answer 19

s2(1) - cannot exclude or restrict liability for death or personal injury resulting from negligence
s2(2) - in the case of other loss/damage the restriction of liability for negligence must satisfy the requirement of reasonableness

Question 20

UCTA s3 - Liability arising in contract

Answer 20

s3(1) must deal with consumer or one of their’s ‘written standard terms of business’ (standard form contracts)
Cannot exclude or restrict liability for breach of contract or render any performance substantially different from that expected of him, or render no performance at all except insofar as term satisfies the test of reasonableness

Question 21

UCTA s4 - Unreasonable indemnity clauses

Answer 21

s4(1) consumers cannot be required to indemnify the other party, unless the term satisfies the requirement of reasonableness

Question 22

UCTA s6 - Sale and hire-purchase

Answer 22

s6(1) the exclusion/restriction of liability in relation to title warranties (s12 Sale of Goods Act 1979) is ineffective
s6(2) exclusion of other terms (e.g. conformity of goods with description or sample etc - s13-15 of 1979 Act) against a person dealing as a CONSUMER is ineffective
s6(3) terms above when dealing with non-consumer is subject to reasonableness test

Question 23

UCTA s11 - The “reasonableness” test

Answer 23

s11(1) the term should have been a fair and reasonable one to be included 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

Question 24

UCTA schedule 2 guidelines on application of reasonableness test

Answer 24

Consider:
-strength of bargaining power
-whether inducement to agree to the term (lower price)
-whether the consumer ought to have known of the term
etc.

Question 25

The reasonableness test when a party is seeking to restrict liability to a specific sum of money

Answer 25

s11(4) regard shall be had to the resources available to him for the purpose of meeting the liability should it arise and how far it was open to him to cover himself by insurance

the smaller the resources and the less opportunity to insure against the liability the more understandable the attempt to limit liability

Question 26

Case that interprets s12 UCTA - dealing as a consumer

Answer 26

R&B Customs Brokers v United Dominions Trust

Bought car for its directors to use for business and private purposes.
CoA held not acting in the course of business, purchase not integral to the business so could rely on s6(2) prohibiting any exclusion of liability under Sale of Goods Act 1979, against anyone dealing as a consumer.

Question 27

Application of s2(2) - restriction of liability for negligence which causes damage subject to reasonableness test

Answer 27

Phillips Products Ltd v Hyland

Hire of digger, driver also supplied. Condition 8 in standard form contract ‘the hirer shall be responsible for all claims arising in connection with the operation of such plant by the said drivers or operators’.
Driver negligently damaged hirer’s property. Clause did exclude liability of the owner - no one to sue.

Question 28

Hire of digger where claim was allowed

Answer 28

Thompson v T Lohan (Plant Hire) Ltd

Hire of digger, driver also supplied. Condition 8 in standard form contract ‘the hirer shall be responsible for all claims arising in connection with the operation of such plant by the said drivers or operators’.
Driver negligently killed third party, Mr T. Different from Phillips as his widow not hirer so not subject to condition 8. Transferred negligence liability to the hirer - indemnity.

Question 29

Case where liability limited to specific sum of money - deemed not reasonable

Answer 29

George Mitchell v Finney Lock Seeds

Contract with farmer for cabbage seeds but sent defective, wrong seeds. Merchant had tried to limit liability to £201 in contract (cost of providing more seeds) but estimated loss to farmer £61,000 because of failed crop.
Court held not to be a reasonable clause - could have insured against farmers loss (standard practice) and often practice to settle out of court for more than cost of seed

Question 30

What is the definition of an unfair term under UTCCR?

Answer 30

Reg.5(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 out of the contract, to the detriment of the consumer.”

Question 31

What terms does UTCCR not regulate?

Answer 31

Core terms:

• the main subject matter of the contract (this is up to the parties to negotiate)
• adequacy of price

Question 32

Director General of Fair Trading v First National Bank [2002]

Answer 32

Strict approach to the core terms not reviewable under UTCCR - good thing as more subject to the regulations.
Special bank interest payments due from customers in default to First National Bank were considered an ancillary term.

Question 33

Bairstow Eves London Central Ltd v Smith [2004]

Answer 33

An additional commission rate was considered an ancillary term.
Term providing for payment of commission to estate agent at “early commission rate of 1.5%” regarded as core term.
Term providing for payment at rate of 3% if payment not made within 10 days of completion was ancillary (despite description as ‘standard commission rate’) and so subject to review under UTCCR and held to be unfair.
Held 1.5% to be core as in practice most would pay by this rate.

Question 34

Office of Fair Trading v Abbey National plc [2009]

Answer 34

UK banking system - could operate a current account for free if remained in credit but incurred significant charges for services if became overdrawn.
Whether charges constituted ‘the price or remuneration, as against the services supplied in exchange’ reg.6(2)(b)
Supreme Court held that were part of the normal price or remuneration of the banking package bought by the consumer and therefore, a core term that could not be assessed under the regulations.

Question 35

What types of contract does UTCCR govern?

Answer 35

Only applies to consumer contracts
Consumer defined as:
-any natural or legal person acting outside his trade, business or profession (Reg.3)

Question 36

What is a ‘term that has not been individually negotiated’?

Answer 36

One which has been drafted in advance without the influence of the consumer - Reg.5(1)-(2)

Question 37

What is the effect of UTCCR?

Answer 37

It makes unfair terms non-binding on the consumer - reg.8(1)
The consumer has the burden of proof but if there is ambiguity the term must be construed in a favourable way for the consumer.
The remainder of the contract shall continue to bind the parties if capable of continuing in existence without the unfair terms.

Question 38

Who considers a complaint that a term is unfair under UTCCR?

Answer 38

Reg.10 - the office of fair trading.
Normally can resolve through negotiations rather than applying to court for an injunction against use of such terms (last resort).

Question 39

Reform proposals for UCTA and UTCCR

Answer 39

Law Commission 2005

• drafted new Unfair Contract Terms Bill to combine the scope of UCTA and UTCCR in one act
• any unfair term would be invalid whether or not individually negotiated for consumers
• extend many consumer protections to small businesses except for: challenging negotiated terms and burden of proof falling on business

Question 40

Types of implied terms

Answer 40

• implied terms in law
• implied terms in fact
• implied terms by custom or trade usage

Question 41

Implied terms in law

Answer 41

e.g. Sale of Goods Act ss.12-15 there is an implied term that the seller has the right to sell the goods etc

Terms also developed by case law:

• Liverpool City Council v Irwin; local authority has duty to maintain council flats.
• Scally v Southern Health Board; employer is obliged to bring to employees’ attention certain pension technicalities. Use necessity test (must be necessary to imply and reasonable to impose).
• Crossley; no duty to provide detailed pensions advice. Criticism of necessity test; advocate reasonableness and policy

Question 42

Define implied terms in fact

Answer 42

It is the unexpressed intention of the parties. The courts will not, unlike with terms in law, find an implied term on the fact that it would be reasonable or fair. High standard

Question 43

Tests used for implied terms in fact

Answer 43

Use the officious bystander test (Shirlaw v Southern Foundries ltd)
or
the business efficacy test: implied term may be found when without the suggested term the contract would not make any real business sense
(The Moorcock) - contract for unload of ship, no mention of riverbed being safe

Question 44

An implied term in fact cannot be implied when…

Answer 44

1) one party unaware of term (Spring v NASDS)
2) if it is not clear that one of the parties agreed to its inclusion at time of negotiations (Luxor (Eastbourne) Ltd v Cooper)
3) when parties drafted a detailed contract that has been closely negotiated between them (Philips Electronique Grand Publique SA v British Sky Broadcasting)
4) if contradicts an express term

Question 45

Implied terms in custom or trade usage

Answer 45

Requires clear evidence that under local custom/particular trade parties intend to include a term - unless otherwise expressly stated in the contract

Cunliffe-Owne criteria:

• custom must be notorious (Turner v Royal Bank of Scotland)
• custom must be certain i.e. clearly established
• it must be reasonable
• it cannot be inconsistent with written terms
• must be perceived as binding in law

British Crane Hire v Ipswich Plant Hire - urgent oral contract, court found included standard terms used by industry