Contract Terms: Exclusion Clauses, Unfair Terms and Implied Terms Flashcards
Definition of an exclusion clause
“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)
What is the purpose of exclusion clauses?
To define obligations, enable the allocation of risk, deterrence, defence and standardisation.
What are the requirements for an exclusion clause to be included in a contract?
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
Criteria of incorporation
One of the four must be met:
- signature
- notice
- course of dealing
- trade custom
Where a contract is signed you are bound by the terms contained thereof regardless of whether you have read them
L’Estrange v Graucob
The exclusion clause will not be incorporated if the signature is obtained by a misrepresentation
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.
The timing of notice needs to be before the contract is formed
Olley v Marlborough Court
Contract normally formed at hotel desk so notice in bedroom too late.
Notice needs to be in a sufficiently contractual-type document
Chapelton v Barry Urban District Council
Receipt for use of deckchair not reasonable esp as payment normally collected some time after use.
The degree of notice required for incorporation depends on how onerous or unusual the exclusion clause is
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
If you can show an established course of dealing on traditionally the same terms (incl. the same terms) then held to be incorporated
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
Terms are incorporated if parties are both in a trade where these conditions are habitually imposed in normal practice
British Crane Hire v Ipswich Plant Hire
Usual to expect terms of crane hire, same trade, both know this.
The contra proferentem rule to interpretation
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.
Example of the contra proferentem rule
Houghton v Trafalgar Insurance Co Ltd
Term excluding liability if car carrying an ‘excessive load’ deemed to apply to baggage and not to passengers.
Criteria for the inclusion of exclusion clauses with regards to wording
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
An exclusion clause that wasn’t clearly worded enough to cover negligence liability
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.
What is the fundamental breach doctrine?
Karsales v Wallis
Lord Denning - can’t exclude liability for breach of a fundamental term (as this terminates the contract)
Who over-ruled the fundamental breach doctrine?
The HoL in Photo Production v Securior - fundamental breach does not bring contract to an end, it only cancels future obligations
UCTA s1
Act only applies to business liability
Specifically s2-7. Normally b2c relations but can be b2b.
UCTA s2 - Negligence liability
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
UCTA s3 - Liability arising in contract
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
UCTA s4 - Unreasonable indemnity clauses
s4(1) consumers cannot be required to indemnify the other party, unless the term satisfies the requirement of reasonableness
UCTA s6 - Sale and hire-purchase
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
UCTA s11 - The “reasonableness” test
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
UCTA schedule 2 guidelines on application of reasonableness test
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.
The reasonableness test when a party is seeking to restrict liability to a specific sum of money
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
Case that interprets s12 UCTA - dealing as a consumer
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.
Application of s2(2) - restriction of liability for negligence which causes damage subject to reasonableness test
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.
Hire of digger where claim was allowed
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.
Case where liability limited to specific sum of money - deemed not reasonable
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
What is the definition of an unfair term under UTCCR?
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.”
What terms does UTCCR not regulate?
Core terms:
- the main subject matter of the contract (this is up to the parties to negotiate)
- adequacy of price
Director General of Fair Trading v First National Bank [2002]
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.
Bairstow Eves London Central Ltd v Smith [2004]
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.
Office of Fair Trading v Abbey National plc [2009]
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.
What types of contract does UTCCR govern?
Only applies to consumer contracts
Consumer defined as:
-any natural or legal person acting outside his trade, business or profession (Reg.3)
What is a ‘term that has not been individually negotiated’?
One which has been drafted in advance without the influence of the consumer - Reg.5(1)-(2)
What is the effect of UTCCR?
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.
Who considers a complaint that a term is unfair under UTCCR?
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).
Reform proposals for UCTA and UTCCR
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
Types of implied terms
- implied terms in law
- implied terms in fact
- implied terms by custom or trade usage
Implied terms in law
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
Define implied terms in fact
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
Tests used for implied terms in fact
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
An implied term in fact cannot be implied when…
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
Implied terms in custom or trade usage
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
