Exemption Clauses And Unfair Terms

Question 1

What is an exemption or limitation clause?

Answer 1

A clause that excludes or limits liability.

Question 2

What are the three legal rules that need to be considered with exemption clauses?

Answer 2

1. Incorporation
2. Interpretation (wording must cover the loss)
3. Statutory controls

Question 3

What is freedom of contract?

Answer 3

A contract shall be governed by the law chosen by the parties, without outside interference from the government.

Question 4

Since the Unfair Contract Terms Act 1977 (UCTA 1977), which piece of primary legislation has cleared up confusion around exemption clauses in commercial and consumer contracts?

Answer 4

Consumer Rights Act 2015 (CRA 2015) which only applies to consumer contracts.

Question 5

Match these two Acts with commercial or consumer legislation:

Unfair Contract Terms Act 1977
Consumer Rights Act 2015

Answer 5

Unfair Contract Terms Act 1977 (UCTA 1977): Commercial sales (business to business)

Consumer Rights Act 2015 (CRA 2015): Consumer Sales (Business to consumer)

Question 6

When is an exemption clause incorporated into a contract?

Answer 6

Signature

Notice (actual or reasonable/constructive)

Consistent/Previous Course of Dealing

Question 7

If you sign a contract, are you legally bound by it?

Answer 7

Yes, a person who signs a contract is deemed to have read it.

Case: L’Estrange v Graucob [1934], where a cafe owner bought a cigarette vending machine. She signed the Sales Agreement without bothering to read the terms. She was bound by the agreement and defendants were protected by their exclusion clause.

Question 8

Do electronic signatures hold the same weight as normal signatures?

Answer 8

Yes. s7 Electronic Communications Act provides that electronic signatures have the same function and effect as written signatures.

Question 9

What if a contractual document is read but not signed?

Answer 9

They have actual notice which are therefore incorporated. E.g. acceptance by conduct.

Question 10

What 3 factors does incorporation depend on?

Answer 10

• Is it signed?

If yes - clause incorporated.

If no:
- Is there sufficient notice?

Actual: They know, e.g. read terms but not signed, e.g. acceptance by conduct.

Reasonable/Constructive: They don’t know, but reasonable notice was given.

i) Timing, at or before time of contract

ii) Type of document, one that looks to contain contractual terms e.g. a ticket, notice, not a receipt.

iii) Onerousness of clause, must be pointed out if clause is particularly difficult, e.g. Red Hand Rule

If yes, clause incorporated.

If no:
- Is there a consistent or previous course of dealing?

If yes, clause incorporated.

If not, clause not incorporated.

Question 11

What is the ‘contra proferentum’ rule?

Answer 11

The courts will rule against the party that created the clause if it is ambiguous.

Question 12

Why was the contra proferentem rule put into place?

Answer 12

To redress the perceived imbalance between the contractual bargaining power of the consumer, who often has no input in the clause, and the commercial concern who puts the clause forward.

Question 13

Before statutory controls on exclusion clauses, which rule was relied upon to dis-apply these clauses?

Answer 13

The contra proferentem rule (any ambiguity is interpreted in a way that is not favourable to the party who has written the clause)

Question 14

Which legislation expressly reserves the contra proferentem rule in favour of consumers in the construction of exemption clauses?

Answer 14

s69 CRA 2015

Question 15

When do negligence clauses stand?

Answer 15

Only if the clause expressly refers to negligence or a synonym of negligence.

Question 16

Explain misrepresentation in exemption clauses.

Answer 16

If the party who wrote the exemption clause misrepresents what it is/what is in it, they likely won’t be able to rely on the clause.

Curtis v Chemical Cleaning and Dyeing Co Ltd [1954] - wedding dress, sequins and beads explanation, dress stained, couldn’t rely on clause due to misrepresentation.

Question 17

Which piece of legislation cover exemption clauses for business to business contracts?

Answer 17

Unfair Contract Terms Act 1977 (UCTA 1977)

Question 18

Which piece of legislation cover exemption clauses for business to consumer contracts?

Answer 18

Consumer Rights Act 2015 (CRA 2015)

Question 19

Which types of contracts are exempt from control under UCTA 1977?

Answer 19

Contracts relating to:

• Insurance
• Interests in land
• Formation/Dissolution of a company
• Securities

Also:
- Marine salvage
- Charter parties
- Carriage of goods by ship or hovercraft
- International supply contracts

Question 20

What does UCTA 1977 usually apply to?

Answer 20

‘Business liability’ - i.e. breach of obligations or duties arising from things done in the course of a business.

Question 21

Alongside exemption clauses, what else does UCTA 1977 cover?

Answer 21

• limitation clauses
• liability subject to restrictive or onerous conditions
• restricting a right to a remedy
• excluding or restricting the rules of evidence or procedure

Question 22

What is the definition of negligence in UCTA 1977?

Answer 22

The breach of obligation to take reasonable care or exercise reasonable skill in the performance of the contract which arises from:

• express/implied terms in a contract
• common law duty to take reasonable care/skill
• common duty of care by the Occupiers’ Liability Act 1957

Question 23

Which terms are made void according to UCTA 1977?

Answer 23

• Liability in negligence for personal injury or death - s2(1)
• Liability of breach of implied terms regarding passing of possession or ownership in relation to sale or hire purchase of goods - s6(1) (e.g. title, from Sale of Goods Act and Supply of Goods (Implied Terms) Act)

Question 24

Which clauses of UCTA 1977 are subject to the reasonableness test?

Answer 24

Reasonableness test (s11)

s2(2) - liability for loss or damage other than death or personal injury resulting from negligence

s3 - deals with contracts where one party ‘deals on the other’s written standard terms of business’

s6(1a) - liability for breach of the obligations arising from ss13-15 SGA 1979 or s9-11 of SG(IT)A 1973 (i.e. satisfactory quality, fitness for purpose, description)

s7(1a) - business liability for breach of an implied obligation in a contract where possession or ownership of the goods passes under the contract (other than a contract governed by the law of sale of goods or hire purchase)

s8 - deals with term attempting to exempt liability for misrepresentation.

Question 25

In the UCTA 1977, what are the two options for clauses to be treated as?

Answer 25

1. Void
2. Subject to the reasonableness test

Question 26

What are the 5 questions in Schedule 2 UCTA 1977?

Answer 26

1. Bargaining powers
2. Incentive
3. Reasonable notice
4. Reasonable/practicable term
5. Bespoke

Question 27

When will reasonableness be evaluated for UCTA 1977?

Answer 27

At the time of the contract, not at the time of the breach.

Question 28

What are the respective tests for UCTA 1977 and CRA 2015?

Answer 28

UCTA 1977: Test of reasonableness

CRA 2015: Test of fairness

Question 29

What does Part 2 CRA 2015 look at?

Answer 29

Unfair terms in a contract and consumer notices.

Question 30

In the CRA 2015 (Part 2), what are the three options for clauses to be treated as?

Answer 30

1. Void
2. Subject to the test of fairness
3. Grey list (clauses that may be unfair)

Question 31

In CRA 2015, when is a term unfair?

Answer 31

If, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.

Question 32

In a consumer contract or notice, what must it be in order for it to be fair?

Answer 32

It must be transparent, expressed in ‘plain and intelligible language and it is legible’.

This gives some statutory effect to the contra proferentum rule, as if the term is unclear, the interpretation which is most favourable to the consumer prevails.

Question 33

In the CRA 2015, in which 2 instances will the fairness test not apply?

Answer 33

1. clause specifies the main subject matter of the contract
2. clause refers to the price (it is not for the courts to decide what it fair)

Although, the fairness rule WILL apply if the term is not transparent and prominent.

Question 34

According to the CRA 2015 (Part 2), which terms will automatically become void?

Answer 34

s31 - sale of goods: breach of a statutory implied term (e.g. satisfactory quality, fitness for purpose, description)

s47 - supply of digital content: breach of a statutory implied term (e.g. satisfactory quality, fitness for purpose, description)

s57 - Contract for services: breach of a statutory implied term (reasonable care/skill, reasonable price, reasonable time)

s65 - a term excluding or restricting liability for death or personal injury resulting from negligence

Question 35

Which Act allows the consumer or a business the right to claim compensation against the producer of a defective product if it has caused damage, death or personal injury?

Answer 35

The Consumer Protection Act 1987.

Question 36

In Part 2 CRA 2015, what is included in the ‘grey list’?

Answer 36

Terms that are thought to be unfair. It is not a list of automatically banned clauses, as some terms on the list could be fair in certain circumstances.

E.g. if subject matter of contract is determined after the consumer has been bound by the contract.

Question 37

What does CRA 2015 offer that UCTA 1977 does not?

Answer 37

Public and private rights of action, meaning enforcement may be taken either by the consumer or a public body (e.g. Trading Standard).

Any unfair term will be unenforceable to the consumer. s70 CRA 2015 obliges the Competition and Markets Authority and other regulators to enforce these rules. And unlike the UCTA 1977, the CRA 2015 grants regulators preventative powers as they may seek an injunction to prevent the continued use of a term.