Unfair Contract Terms Act 1977 Flashcards
If the clause has been incorporated into the contract and (properly construed) excludes / limits the liability being considered, then you must move on to consider:
(a) In the case of contracts between businesses, the Unfair Contract Terms Act 1977 (UCTA);
(b) In the case of contracts between a business and a consumer, the Consumer Rights Act 2015 (CRA).
When you are considering whether a party can rely on an exemption clause, you need to consider the following three points:
Incorporation
Is the exemption clause part of the contract? This depends on the ordinary principles governing the incorporation of terms, and these are not considered in this topic. However, it is worth noting that much of the case law about incorporation and about giving ‘reasonable notice’ of clauses was created in the context of exemption clauses.
Construction
Does the clause, as drafted, cover the alleged breach(es) and resulting loss?
Statutory controls
What is the effect on the clause of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015?
What is the purpose of UCTA 1977?
It regulates contracts by limiting the extent to which one party can avoid liability through use of exclusion clauses such as disclaimers.
The preamble to UCTA clearly sets out its purpose:
“An Act to impose further limits on the extent to which … liability for breach of contract, of for negligence or other breach of duty, can be avoided by means of contract terms and otherwise”
This purpose is achieved by provisions that ensure:
(a) Certain types of exemption clause have no effect;
(b) Other types of exemption clause are effective only so far as they satisfy the requirements of reasonableness.
What are the three matters fundamental to the scope of UCTA?
Firstly, the provisions we are exploring in this element do not apply to ‘consumer contracts’, which, as stated above, are governed by the different statutory regime in the Consumer Rights Act 2015.
A consumer contract is one where one party is acting in the course of his trade, business, craft or profession, and the other party is not.
Secondly, section 1(3) of UCTA states that the operative provisions of UCTA (sections 2 to 7) apply only to ‘business liability’. Accordingly, unless you are dealing with this type of liability, UCTA will generally not apply.
Section 1(3) sets out a definition of ‘business liability’ as follows:
“… liability for breach of obligations or duties arising:
(a) from things done or to be done by a person in the course of a business (whether his own business or another’s);
(b) from the occupation of premises used for business purposes of the occupier; and references to liability are to be read accordingly.”
The combined effect of these two considerations is (broadly) that:
(a) Where both parties are acting in the course of a business, UCTA applies;
(b) Where one parties is acting in the course of a business and the other party is not, the CRA 2015 applies;
(c) Where neither party is acting in the course of a business, neither statutory regime applies.
Thirdly, given its name, it might be assumed that UCTA applies to all ‘unfair’ terms. In fact, that is not the case. Instead, UCTA only regulates exemption clauses, ie those clauses which limit or exclude liability (whether directly or indirectly).
As previously mentioned, UCTA provides that certain types of exemption clause have no effect, but that other types of exemption clause are effective only so far as they satisfy the requirements of reasonableness.
Negligence includes the breach of:
(a) Any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract;
(b) Any common law duty to take reasonable care or exercise reasonable skill
The tort of negligence is covered by UCTA’s definition of negligence (s 1(1)(b)).
Duties of care imposed by contract are also caught (s 1(1)(a)), for example a breach of s 13 of the Supply of Goods and Services Act 1982, to carry out a service in the course of a business with reasonable care and skill, constitutes negligence (s 1(1)(a)).
Explain: exempting liability for death or personal injury resulting from negligence
Section 2(1) of UCTA provides that:
A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence
Accordingly, any attempt to exclude or restrict liability for death or personal injury resulting from negligence will be void.
Explain: exempting liability for other loss resulting from negligence
In relation to other loss or damage (for example, damage to personal property) resulting from negligence, s 2(2) of UCTA provides:
a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness
Explain: exempting liability for breach of statutory implied terms about quality of goods
Section 6(1A) of UCTA provides that liability for breach of section 13 – 15 of the Sale of Goods Act 1979 (conformity with description or sample, quality or fitness for a particular purpose)
[…] cannot be excluded or restricted by reference to a contract term except in so far as the term satisfies the requirement of reasonableness.
Explain exempting liability arising in contract
Pursuant to s 3, where any party deals on its own written standard terms of business (s 3(1)), that party cannot rely on a contract term to exclude or limit its liability in the event it commits any breach of contract, except so far as the term passes the reasonableness test (s 3(2)(a).
Similarly, under 3(2)(b)(i & ii) a party cannot by reference any contract term claim to be entitled to
• render a contractual performance substantially different from that which was reasonably expected (s 3(2)(b)(i)); or
• Claim to be entitled in respect of the whole or any part of the contractual obligation, to render no performance at all (s3(2)(b)(ii));
Except in so far as the contract term satisfies the requirement of reasonableness.
What is the Reasonableness test (s 11 & schedule 2)?
The UCTA reasonableness test is set out in s 11(1). In order to pass the UCTA reasonableness test, the term:
“… shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”
As can be seen from the wording, the requirement of reasonableness is judged at the time the contract was made, not at the time the term is considered by the Court.
In the abstract, ‘fair and reasonable’ is clearly a difficult test to apply.
Fortunately, UCTA gives some guidance as to the factors to be taken into account when applying the test.
Section 11(2) provides that, when considering the reasonableness test, ‘regard shall be had in particular to the matters specified in Schedule 2 to this Act’.
Although s 11(2) explicitly states that the Schedule 2 guidelines should be taken into account for the purposes of s 6 and s 7 of UCTA, the Courts have clarified that the Schedule 2 guidelines may be used more widely (ie at any time the UCTA reasonableness test is being applied): Stewart Gill Ltd v Horatio Myer & Co. Ltd [1992] 1 QB 600.
The guideline factors in Schedule 2 which, where appropriate, should be taken into account when applying the reasonableness test are as follows:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.
Some indication of the judicial approach to ‘reasonableness’ is found in the case of…
…George Mitchell (Chester Hall) Ltd v Finney Lock Seeds Ltd (1983) 2 AC 803.
In the House of Lords, Lord Bridge (with whom the majority of their Lordships agreed) emphasised that the question whether an exemption clause is reasonable can largely, though not entirely, be equated with the concept of judicial discretion.
In other words, it involves a large element of judgment of the facts governed by a few legal rules. As such there is scope for legitimate differences of judicial opinion as to the reasonableness or otherwise of an exemption clause. Lord Bridge warned that:
“the appellate court should treat the original decision [of the trial judge] with the utmost respect and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong. “
This approach suggests that, as the deliberations regarding reasonableness are significantly dependent upon the facts of the case, there will be little precedent value in the decisions themselves.
Death or personal injury resulting from negligence –
Void (s 2(1))
Loss (other than death or personal injury) resulting from negligence -
Valid if reasonable (s 2(2))
Breach of statutory implied terms about quality of goods -
Valid if reasonable (s 6(1A)(a))
