Terms, and Exemption Clauses

Question 1

What is the difference between express and implied terms?

Answer 1

Express terms are statements made by the parties (by which they intend to be bound), while implied terms are those that law deem to exist in the parties contract.

Question 2

What is a representation? What is a term?

Answer 2

Statements of fact or law which may induce the making of the contract which the parties do intend to be binding.

While a term is a statement of fact which the parties intend to be binding.

Question 3

Why does the distinction between representations and terms matter when a statement turns out to be untrue?

Answer 3

If a term is not fulfilled, it will amount to a breach of contract. The innocent party may claim, amongst others, damages.

If a representation turns out to be false, it will be misrepresentation - this is not a breach of contract but remedies are still available.

Question 4

How does one know if a statement made was a representation or a term (or both)?

Answer 4

The law applies an objective test.

Question 5

If a statement was made during negotiations for the purpose of inducing the other party, what is the inference? Can this be rebutted?

Answer 5

That the statement is a term intended to be binding on both parties.

This can be rebutted if the party making the statement can show that it would not be reasonable to hold them bound by it.

Question 6

What five factors should be taken into account when deciding whether a statement is a term or representation?

Answer 6

(i) Importance of the statement;
(ii) timing of the making of the statement;
(iii) reduction of the contract into writing;
(iv) special knowledge or skill; and
(v) assumption of responsibility / further checks

Question 7

What does the first factor relating to statements (i.e. importance) mean?

Answer 7

Where the statement is considered so important to the injured party that they would not have entered the contract but for that statement.

Question 8

Alex and John entered into a contract to supply crops. Alex stated to John that if the crops have been treated with sulphur, he would not be “interested in even knowing the price of them”. John assured Alex that they had not. When John produced samples, Alex asked again if sulphur had been used and was assured that it had not. In fact, a small amount of the crop had been treated with sulphur. Alex found out and treated the contract as repudiated. John argued that the conversations relating to sulphur had been preliminary to the contract. What would this statement amount to?

Answer 8

The statement would likely amount to a term, given the importance that Alex attached to it.

Question 9

What does the second factor relating to statements (i.e. timing) mean?

Answer 9

If the statement was made at the time of contracting, it is more likely to be a term than if it was made at an early stage of the negotiations.

Question 10

What does the third factor relating to statements (i.e. reduction of contract into writing) mean?

Answer 10

If a statement had been significant to the parties then they would ensure its inclusion in the written agreement. This is not a decisive factor however.

Question 11

A private seller of a motorcycle told the buyer, in good faith, that it was a 2020 model. One week later, the buyer and seller entered into a contract of sale. The written memorandum of the sale did not mention the year of the model. The motorcycle was a 2010 model and the buyer sued for breach of contract. Would the remedy lie in breach of contract?

Answer 11

No, because of two factors, namely the timing of the sale being a week later and the fact that the statement was not included in the written contract. As a result, it would more likely be a representation for which the remedy would be in the law of misrepresentation.

Question 12

What does the fourth factor relating to statements (i.e. special knowledge or skill) mean?

Answer 12

Where the party who made the statement had exclusive access to information or special knowledge as compared to the other party, it is likely that this will taken into account in the latter’s favour.

Question 13

Mr Smith of Car Traders Ltd told Mr Bentley that a car had done 20,000 miles only since the fitting of a new engine. The milometer also showed 20,000 miles. Mr Smith repeated these statements when Mrs Bentley came to see the car. In fact, the car had done more than 20,000 miles since the change of the engine. Would this be a breach of contract?

Answer 13

Yes, most likely. Because Mr Smith is a car dealer who would be taken to have better knowledge of such matters than Mr Bentley, the statements made would likely amount to terms. The breach of which, would result in remedies in contract law.

Question 14

What does the fifth factor relating to statements (i.e. assumption of responsibility) mean?

Answer 14

A statement may become a term where the vendor expressly accepts the responsibility of the soundness of the sale item in question.

Question 15

A seller of the boat told the purchaser that they need not look for anything and the boat was sound in every way. The boat was not in fact in good condition and the purchaser sought remedies in contract. Would the remedy fall in contract? Would the position be different had the seller said it was sound but advised to have it surveyed?

Answer 15

Yes, it would be a breach of contract as the seller assumed responsibility for the soundness of the boat.

Had he advised it to be surveyed, it would indicate that the seller did not intend this statement to be taken as a term and that the onus of verification lay with the purchaser. It would be a misrepresentation.

Question 16

What four ways can express terms be incorporated into a contract?

Answer 16

(i) a signed written contract;
(ii) incorporation by notice;
(iii) incorporation by a course of dealing; and
(iv) other ways of agreeing express terms.

Question 17

What does the first way in which an express term can be incorporated into a contract (i.e. signed contract) entail? Any exceptions?

Answer 17

In almost all cases written terms set out in a signed written contract show that the parties intended to be bound by it.

An exception to this general rule is when the document signed is not intended to have any contractual effect (e.g. a document acknowledging the receipt of goods).

Another exception is if one party orally misrepresented the meaning of the clause to other party.

Question 18

What does the second way in which an express term can be incorporated into a contract (i.e. by notice) entail?

Answer 18

A term will be incorporated into the contract if the party relying on the term has taken reasonable steps to bring that term to the other party’s attention.

Question 19

A customer took her wedding dress to the cleaners and was asked to sign a form which excluded the cleaners from any liability arising form any damage whatsoever to the dress. The customer queried this and the assistant said it meant only damage to ‘beads or sequins’. Damage to the dress ensued and the cleaners relied on the fact that the term was incorporated by signature. Could the customer claim for damage to the dress?

Answer 19

Yes, because although the term was incorporated by a signed written document, it was orally misrepresented.

Question 20

A passenger purchased a ticket for rail travel from the company and in small print it said that customers could find the full terms and conditions on the timetable for a fifth of the price. Was the small print pointing to the terms incorporated into the contract reasonable notice?

Answer 20

Yes, giving notice that the terms existed is sufficient enough to incorporate them into the contract.

Question 21

A contract was formed at the hotel desk and an exemption clause was found in the bedroom when the guest entered it. The exemption clause was clear. Could it still be incorporated by notice?

Answer 21

No, because the terms must be presented when the contract was formed and not after.

Question 22

A driver drove his car to a multi storey automatic car park that he had never used before. At the entrance was a sign giving the charges for the car park. The driver drove up to the entrance and the movement of the car turned a light at the entrance from red to green, and a ticket machine produced a ticket that stated that the ticket was issued ‘subject to the conditions of issue as displayed on the premises’. The driver drove into the car park without reading the ticket or those displayed on a pillar opposite the ticket machine. When the driver returned to the car park, he paid the charges and was severely injured whilst attempting to put his belongings in the car. The company claimed that the ticket was a contractual document and that it incorporated condition exempting them from liability for injury to the customer when their vehicle was in the car park. Was this term incorporated into the contract?

Answer 22

No, as the contract was formed before the machine produced the ticket. The conditions referred to on the ticket (or later) would not be considered incorporated into the contract.

Question 23

SVP ordered 47 photographic transparencies from IPL. At the bottom of the delivery note was a a term in very small print imposing a fine of £25 per transparency per for any late returns (after 14 days) of transparencies. SVP returned the transparencies four weeks later and received a bill for £16,450 and refused to pay. Would the term be considered to have been incorporated and thus enforceable?

Answer 23

No, given it was so onerous (excessive fine) it should have been reasonably been brought to the attention of SVP and IPL failed to do so.

Question 24

What does the third method in which an express term can be incorporated into a contract (i.e. by course of dealing) entail?

Answer 24

It is reasonable to assume that a contract operates on the same terms as the previous ones the parties entered in to. However, it must be shown that the course of dealing has been consistent and regular over a period of time.

Three or four transactions over a period of five years has been considered insufficiently regular, whereas three or four times per month and five instances over 13 months has been considered sufficiently regular.

Question 25

What other ways of agreeing express terms will a court likely give effect to?

Answer 25

Where the parties adequately express an intention to be bound by those terms. Obvious examples include: the agreement of terms in a conversation or verbal exchange and terms are set out in writing (for eg an email).

Question 26

Are exemption clauses (where one party seeks to limit or exclude liability) generally considered onerous?

Answer 26

Yes.

Question 27

Are entire agreement clauses (providing that a particular document(s) constitutes the entire agreement between the parties) enforceable?

Answer 27

Yes, provided that they are a genuine attempt to avoid any misunderstanding about the scope of the parties' agreement, especially where the parties want to avoid confusion about whether any oral terms or preceding written statements form part of the contract.

Question 28

What are the three scenarios when terms are implied by fact (i.e. to give effect to the presumed but unexpressed intentions of the contracting parties)?

Answer 28

(i) trade or professional customs; (ii) a course of dealing between the parties; and (iii) business efficacy / necessity.

Question 29

What is the test for implying a term out of business efficacy / necessity?

Answer 29

A court will likely imply a term in a contract where there must be an obvious omission - if an objective bystander was listening to the parties' negotiations, they would conclude that the parties had overlooked an obvious term to include into the contract.

Question 30

Owners of a riverside jetty contracted with shipowners to unload there. The shipowner needed to land the ship on the riverbed. However, the riverbed was unsafe and would have caused damage to the owner's ship had they docked there. Would a court imply a term?

Answer 30

Yes, because otherwise the contract would make no sense. The whole business purpose of the contract was to licence ship owners to use the jetty for unloading purposes. Yet, they could not use it for this purpose without damaging the ship. A court would therefore likely imply a term that the riverside jetty owners would take reasonable care to ensure the jetty was safe for shipowners.

Question 31

Can terms be implied at common law? Any examples?

Answer 31

Yes, the law might imply a term as a matter of policy such as in the context of landlord / tenant relationship - for example to keep common parts of the building in reasonable repair.

Question 32

What implied terms does the Sale of Goods Act 1979 impose on contracts?

Answer 32

Section 13 - Sale by description "Where there is a contract for the sale of goods by description, there is an implied term that the goods will correspond with the description". Section 14(2) - Goods must be of satisfactory quality "Where the seller sells goods in the course of business, there is an implied term that the goods supplied under the contract are of satisfactory quality". Section 14(3) - Fitness for a particular purpose Goods sold must also be first for purpose.

Question 33

What three contracts does the Supply of Goods and Services Act 1982 provide for the implication of terms?

Answer 33

(i) certain contracts for the transfer of property in goods; (ii) contracts for the hire of goods; and (iii) contracts for the supply of services.

Question 34

Section 1 of the Supply and Goods and Services Act 1982 stipulates that a 'contract for the transfer of goods' means a contract under which one person transfers or agrees to transfer to another the property in goods other than what five contracts?

Answer 34

(i) contracts for the sale of goods; (ii) a hire purchase agreement; (iii) a contract under which the property n goods is or is to be transferred in exchange for trading stamps; (iv) a transfer made by deed for which there is no consideration other than presumed consideration; and a contract intended to operate by way of security.

Question 35

What three implied terms are imposed in contracts for the supply of services pursuant to the Supply of Goods and Services Act 1982?

Answer 35

(i) care and skill (s.13); (ii) time of performance - supplier will carry out the service within a reasonable time if this is not fixed in the contract (s.14); and (iii) consideration - the party contracting with the supplier will pay a reasonable sum if this is not fixed in the contract (s.15).

Question 36

The Consumer Rights Act 2015 comprises of what three parts?

Answer 36

Part I - consumer contracts for goods, digital content and services Part II - regulates unfair terms (in consumer contracts) Part III - miscellaneous and general nature

Question 37

What are the cornerstone rights implied in a consumer sale of goods per the Consumer Rights Act 2015?

Answer 37

Goods should be of satisfactory quality (s.9) If the buyer makes known to the trader only particular purpose for which the buyer wants the goods, “the contract is to be treated as including a term that the goods are reasonably fit for that purpose” (s.10) Where goods are sold b description, the goods should match that description (s.11)

Question 38

What are the three remedial options when goods are regarded as non-conforming (failing to meet the cornerstone rights) under the Consumer Rights Act 2015?

Answer 38

(i) the short term right to reject; (ii) the right to repair or replacement; or (iii) the right to a price reduction or the final right to reject.

Question 39

When is the short time right to reject under the CRA 2015 available?

Answer 39

30 days running from the time that ownership has passed and the goods have been delivered

Question 40

When is the right to repair under CRA 2015 available?

Answer 40

It is available unless repair or replacement is either impossible or disproportionate (i.e. subjecting trader to unreasonable costs).

Question 41

When can the right to a price reduction and final rejection under CRA 2015 be exercised?

Answer 41

Where (a) after one repair or one replacement, the goods do not conform; or (b) the consumer can require neither repair nor replacement of the goods (because it is impossible or disproportionate); or (c) the consumer has required the trader to repair or replace, but trader has not done so within a reasonable time and without significant inconvenience to the consumer.

Question 42

What remedy is available for a breach of a condition?

Answer 42

The innocent party has the right to treat the contract as repudiated (i.e. they can terminate the contract). The innocent party may also sue for damages immediately.

Question 43

If an innocent party affirms a breach of a condition, what is the legal consequence?

Answer 43

The contract remains in full force and effect, but the innocent party can still sue for damages.

Question 44

What remedy is available for the breach of a warranty?

Answer 44

Sue for damages.

Question 45

How to distinguish conditions from warranties?

Answer 45

A condition is an important term 'going to the root of the contract', a warranty is less important. The crucial question is whether the parties, at the time of contracting, intended that any breach of the term in question could result in the innocent party terminating.

Question 46

What is an 'innominate term'?

Answer 46

Where a term is broad and capable of being breached in both trivial and serious ways.

Question 47

Charters hired a ship for 24 months, and the relevant terms of the contract were that the ship would be fully seaworthy and "in every way fitted for ordinary cargo service". What sort of term would this be and why?

Answer 47

This would be an innominate term because it is very broad and potentially could be breached in both serious and trivial ways.

Question 48

When can an innocent party terminate for breach of an innominate term? What factors should be looked at?

Answer 48

Only if the breach is sufficiently serious. The court will look to whether the breach will deprive the innocent party of substantially the whole benefit of the contract and/or will make further commercial performance of the contract impossible.

Question 49

A contract for the sale of pellets was entered into for the buyer to make cattle food, with a term that read that the pellets was "to be made in good condition". Part of the goods were not in this condition but all could still be used for the original purpose for making cattle food. It later transpired that the buyer wanted to get out of the contract to take advantage of a huge drop in the market and buy pellets at a cheaper price. Would the breach of this term allow the buyer to terminate the contract?

Answer 49

It is an innominate term, the breach of which does not appear sufficiently serious to allow for termination of the contract given that the contract could still be performed.

Question 50

Are time clauses (specifying that something needs to be done by a certain time) generally conditions or warranties?

Answer 50

They are often treated as conditions because they are so important.

Question 51

In a contract that formed a string of dependent contracts, there was a clause requiring the buyer to give 15 days notice to ship goods. This was given too late. Would this be a breach of a condition or a warranty?

Answer 51

This time clause would likely be considered a condition given that this contract was one of a string of dependent contracts - indicating its importance. The breach therefore would entitle the innocent party to repudiate the contract.

Question 52

If an exemption clause is used excluding total liability and it is ambiguous, what is the result?

Answer 52

The general rule is that exemption clauses will be construed contra proferentum i.e. the person responsible for including the clause in the contract had the opportunity to make the wording clear and so should be the one to lose out if there is any ambiguity.

Question 53

Does the contra proferentum rule apply in commercial contracts or where the exemption clause merely limits (rather than excludes) liability?

Answer 53

Yes, but courts will apply with sensitivity.

Question 54

What three things should you consider when examining whether an exemption clause is enforceable?

Answer 54

Has it been validly (i) incorporated; (ii) constructed; and (iii) is it subject to any statutory controls

Question 55

When are exemption clauses that exclude liability for negligence effective?

Answer 55

Clearly constructed exemption clauses. Clauses which are less explicit but are treated as wide enough to cover negligence may be effective. However, clauses will not be effective if it is wide enough to cover other potential liabilities, not solely negligence.

Question 56

If an exemption clause has been properly constructed, what else should you consider?

Answer 56

Whether any statutory controls (i.e. Unfair Terms Act 1977 and Consumer Rights Act 2015) operate against it.

Question 57

Which statute is used to determine if an exemption clause is subject to any statutory controls between two businesses? What about contracts between a business and a consumer?

Answer 57

Unfair Terms Act 1977 - business to business Consumer Rights Act 2015 - business to consumer

Question 58

What are the two steps to take when applying the Unfair Terms Act 1977 to determine whether an exemption clause is ineffective?

Answer 58

Step 1 - determine which type of liability the business is attempting to exclude. Step 2 - Apply the 'reasonableness test' where appropriate.

Question 59

What exemption clauses under the Unfair Terms Act 1977 are automatically ineffective?

Answer 59

(i) excluding or restricting liability for death or personal injury resulting from negligence (section 2(1)); (ii) implied terms as to the title of goods (section 6(1)).

Question 60

What exemption clauses under the Unfair Terms Act 1977 are subject to the reasonableness test?

Answer 60

(i) excluding or restricting liability in the case of loss or damage (other than personal injury or death) resulting from negligence (section 2(2)); (ii) excluding liability for breach of contract (section 3);

Question 61

When making an assessment of whether an exemption clause is reasonable under the Unfair Terms Act 1977, what factors under Schedule 2 should be taken into account?

Answer 61

- The strength of the bargaining positions of the parties; - Whether the customer received an inducement to agree to the term (i.e charged a lower price in return for the exclusion); - Whether the customer knew or ought reasonably to have known of the existence and extent of the term having regard to any sitcom of he trade or previous dealings between the parties; - Where the term excludes liability if some condition was not complied with (e.g. a clause whereby liability is excluded unless a complaint is made within 7 days); and - Whether the goods were made or adapted to the special order of the customer.

Question 62

A clause limited uncertified potatoes. The purchaser could purchase certified seeds at a higher price elsewhere. Would this exemption clause be considered effective?

Answer 62

Step 1 - it does not exclude death or PI, nor is it to do with the title of the goods. Therefore, we must apply the reasonableness test. Step 2 - applying the reasonableness test, we can see that given that customers would pay at a higher price elsewhere, it may be considered reasonable to uphold this clause.

Question 63

HF supplied and installed a fire detection and suppression system for GF in their frozen food factory for a contract price of £8,000. The conditions of supply were that HF warrantied to cover repair costs only and would only instal the system. 10 years later, a fire broke out at GF's premises due to a fault in HF's system which caused extensive damage to GF's premises (valued at £6.6mn). However, HF had an exemption clause which limited liability for loss, damage, expense consequential or otherwise caused to GF's property, goods, persons negligence. Would this clause be enforceable?

Answer 63

Step 1 - the clause restricts liability for damage and not death or PI, therefore we must consider whether it is reasonable Step 2 - Some of the factors to consider here include the fact that the parties are of equal bargaining power in a commercial context, GF could have contracted elsewhere, contract price was small and HF supplied the system on a one-off basis. In light of these factors, the term would likely be considered reasonable and therefore enforceable. The legal consequence would be that HF would not be liable to pay any damages.

Question 64

Under the Consumer Rights Act 2015, what exemption clauses are rendered non-binding on a consumer?

Answer 64

Clauses that exclude death or PI resulting from negligence (s.65). Exempting liability for breach of statutory implied terms about goods (i.e. goods to be of satisfactory quality, fit for purpose and to be as described) (s.31). If the term is 'unfair' (s.62).

Question 65

When is a term considered unfair under the Consumer Rights Act 2015?

Answer 65

When, contrary to good faith, it causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer (s.62(4)).

Question 66

Mr B overstayed his parking by just over an hours. The retail park stay (operated by ParkingEye) was only for 2 hours for free. There were clear notices of this and it was also made clear that the penalty for overstaying was £65. Could this term be enforceable?

Answer 66

Yes, as the park stay operator had a legitimate interest in making the charge in order for them to make the scheme of 2 hours free parking effective. Furthermore, the charge for overstaying was neither unconscionable nor extravagant. Therefore, it would not be considered unfair and would be enforceable.

Question 67

What criteria should be taken into account when considering whether a term is unfair under the Consumer Rights Act 2015?

Answer 67

- Would the consumer enter into the contract if they were treated fairly? - Did there exist a freedom of choice to contract elsewhere? - Was it open and fair, or did the contract / clauses contain concealed pitfalls and traps? - Was the term brought fairly to the attention of the consumer and could they be said to have ben fairly agreed to? Bearing in mind onerous terms must be bought to the attention of the consumer.

Question 68

Under Schedule 2 (known as the 'Grey List') of the Consumer Rights Act 2015, there are 20 terms that are prima facie unfair. What are some of these terms?

Answer 68

No 1 - a term which attempts to exclude liability for death or personal injury due to any form of breach of duty (not negligence as this is automatically non-binding) No 6 - A term which requires a consumer who fails to fulfil his obligation under the contract to pay a disproportionately high sum No 13 - a term which has the effect of enabling the trader to alter unilaterally without a valid reason any characteristics of the goods, digital content or services to be provided.