Exclusion Clauses (Contract)

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Having considered thelaw on performance and breach of contract, we are in a position to understandthe statutory regulations governing exclusion clauses under the Unfair ContractTerms Act 1977 (UCTA) and the Consumer Rights Act 2015

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But exclusion clauses are not alwaysbad, nor are they always exploited by powerful parties. They are an essentialmeans by which parties can agree who shouldbear the commercial risks arising within a contract - ie, who should payfor insurance cover.

Used properly and reasonably, therefore, exclusion clauses area commercially efficient mechanism for managing commercial risk.

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How does the law strike the balance? Recall the Common Law on Express Terms First, recall the law of express terms. There you see how the common law deals with unfair clauses by the principles of (a) "incorporation" and (b) "interpretation." (See eg Interfoto Picture Library Ltd v Stiletto Visual Programmes [ Was it reasonably brought to the attention of the other party? -->Especially if it is a particularly onerous clause --->common law test of reasonable notice ], Parker v South Eastern Railway Co, Chappleton v Barry DC, McCutcheon v David MacBrayne, Olley v Marlborough Court Hotel, Thornton v Shoe Lane Parking).

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When considering statutory restrictions, therefore, the logic of the analysis is first to consider the validity of the clause at common law and then to move to statute. Thus, IF the clause has been incorporated into the contract and on its proper construction covers the event in question (at common law), THEN move to consider its validity under UCTA and the Consumer Rights Act 2015.

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UCTA 1977 s 2 --> negligence means the breach of an obligation to exercise reasonable care --> section does not apply to attempts to exclude or restrict liability that occurs irrespective of fault --> s 2(1) also makes any attempt to exclude liability for death or peronal injury caused by negligence ineffective -->

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Negligence liability.(1)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.(2)In the case of other loss or damage, 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.(3)Where a contract term or notice purports to exclude or restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.

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S 4 (1)A person dealing as consumer cannot by reference to any contract term be made to indemnify another person (whether a party to the contract or not) in respect of liability that may be incurred by the other for negligence or breach of contract, except in so far as the contract term satisfies the requirement of reasonableness.(2)This section applies whether the liability in question—(a)is directly that of the person to be indemnified or is incurred by him vicariously;(b)is to the person dealing as consumer or to someone else.

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Deals with indemnity clauses --> clause by which one party is obliged to pay a sum of money to the other in respect of a libaility which that oither party has incurred --> only applies where the party is required to make the indeminity is consumer e.g. a consumer who hires a car from a hire company, company must insert into its term of business a term to the effect that the consumer must indemnify the car hire company in respect of any liability it may incur to a third party as result of the consumer's use of the car --> section 4 says SUCH A TERM NEEDS TO BE REASONABLE --> COMMERCIAL INDEMNITIES ARE OUTSIDE THE SCOPE OF S 4

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s 11 --> speaks of the reasonableness test

When determining reasonableness:

i) The meaning of the clause --> courts need to ascertain its meaning before deciding whether r not it is reasonable --> in Watford Electronics Ltd v Sanderson CFL Ltd, Chadwick LJ said we need to first determine the scope and effect of the term as a matter of construction and identify the nature of the liability which the term is seeking to exclude or restrict --> whether or not a term is reasonable within the meaning of s 11 of the UCTA 1977 does not fall to be determined in isolation

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ii) Equality of bargaining power --> the greater the equality of bargaining power of the parties, the more likely it is that the clause will pass the reasonable rest --> e.g. businessmen with experience should be taken to be the best judge of the commercial fairness of the agreement they have made including the fairness of each of the terms in that agreement and whether they are reasonable

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iii) Regard must be had to the clause as a whole

The clause must be tested at the moment of entry into the contract and not at the moment of breach and so cannot just pay attention to the part of the clause that is in issue between parties on the facts as they have turned out --> the fact that the court may have to regard some hypothetical events when deciding reasonableness has important implications for drafting of these clauses --> resist temptation to draft broad clauses to cover everything

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Courts have held that they do not have the power to sever unreasonable parts of an exclusion clause so as to render the clause reasonable --> clauses either stand or fall and are not re-written by courts

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iv) The importance of insurance --> the fact that a D was actually insured for a sum in excess of the sum stipulated in the limitation clause should not, in itself, suffice to establish that the clause was unreasonable e.g. if you have 50 grand insurance but limit liability to 25 grand in a clause

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v) Two different losses within the same clause --> not advisable to include two very different types of loss within the same limitation clause --> e.g. in Overseas Medical Supplies Ltd (1999), they limited their liability both for any damage suffered through transit and in respect of their failure to take out insurance to 600 quid --> CA upheld that transit stuff was one thing but was unreasonable for a failure to insure --> had the foods been damaged in transit, the D's liability would have been limited to 600 but the Cs would have been able to look to their insurers for the rest of their loss --> in terms of failure to insure, there was no one else to whom the Cs could look in relation to loss in excess of 900 quid

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vi) Advantages of limitation clauses --> in many cases, sensibly drafted limitation clauses are more likely to be considered reasonable than exclusion clauses --> the onus of proof of showing that the clause is reasonable lies on the party seeking to rely on it

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When dealing as a consumer (within s 12) you cannot make the contract in the course of a business nor hold yourself out as doing so --> the other party too the contract must make the contract in the course of business --> two parties not acting in the course of bysiness does not constitute a "consumer" contract for the purposes of the Act

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George Mitchell (Chesterhall) Ltd. v Finney Lock Seeds Ltd.

In December 1973 the plaintiffs orally ordered 301bs. of Finney's Late Dutch Special cabbage seed from the defendant seed merchants from whom they had purchased seed for many years. The plaintiffs knew that the sale was subject to the relevant conditions of sale. The defendants delivered seeds to the plaintiffs in February 1974 with an invoice in their customary form describing the goods delivered in accordance with the oral order. The conditions of sale on the back of the invoice provided, inter alia, (1) that if the seeds sold or agreed to be sold did not comply with the express terms of the contract or proved defective in varietal purity the liability of the defendant vendors was limited to their replacement or to refund of the price paid, (2) for the total exclusion of all liability for any loss or damage arising from the use of any seeds supplied save their replacement or price refund, (3) for the exclusion of any express or implied condition or warranty, statutory or otherwise, and they stated (4) that the price of seeds supplied was based upon the stated limitations upon liability.

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Owing to errors by the defendants' suppliers and employees the seed supplied was not late cabbage seed and was un-merchantable. After the seed was planted in an area of over 60 acres by the plaintiffs, it germinated and grew but was commercially useless and had to be ploughed in. The price of the seed was £201.60. The loss to the plaintiffs was over£61,000.

On the plaintiffs' claim for damages, the defendants relied on the conditions of sale which in reply the plaintiffs claimed were void and unenforceable by section 55 (3) and (4) of the Sale of Goods Act 1893 (now, in relation to a contract made between May 18, 1973, and February 1, 1978, section 55 (3) and (4) of the Sale of Goods Act 19791 by virtue of section 55 (3) of and paragraph 11 of Schedule 1 to that Act). Parker J. held that it was making commercial nonsense of the contract to suggest that either party intended it to operate where what had been delivered was wholly different in kind from what had been ordered and agreed to be supplied and he gave judgment for the plaintiffs for £61,513 and interest. The defendants appealed. The Court of Appeal held (a) (by a majority) that the conditions limiting liability did not apply to the contract; (b) but that in any event they were unenforceable by virtue of section 55 (4) of the Sale of Goods Act 1979 in paragraph 11 of Schedule 1 to that Act, and dismissed the appeal.On appeal by the defendants:

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Held, dismissing the appeal,(1) that on their true construction the conditions limited the liability of the defendants to a refund of the price paid or replacement of the seeds and that the ambit of the conditions could not be confined to breaches of contract arising without negligence on the part of the defendants

(2) But that in all the circumstances, including the fact of the clear recognition in the seed trade that reliance on the conditions would not be fair or reasonable and that the defendants could insure against crop failure without materially increasing the price of seeds, it would not be "fair or reasonable" within the meaning of section 55 (4) of the Sale of Goods Act 1979 in paragraph 11 of Schedule 1 to that Act to allow reliance on the conditions which were accordingly unenforceable

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The case is concerned with the construction of the now repealed s 55 if tgh Sale of Goods Act 1979

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Phillips Products Ltd. v Hyland and Another

The plaintiffs hired an excavator and driver from the second defendants, the plant owner. The contract, by clause 8, provided that drivers “supplied by the owner …shall for all purposes in connection with their employment in the working of the plant be regarded as the servants or agents of the hirer who alone shall be responsible for all claims arising in connection with the operation of the plant by the …drivers.” The driver negligently drove the excavator into collision with and damaged the plaintiffs' building.

On the plaintiffs' claim for damages for negligence against the driver and the second defendants, the judge, giving judgment for the plaintiffs, in section 2(2) of the Unfair Contract Terms Act 1977 and, accordingly, the second defendants were precluded from relying on the clause as exempting them from liability for negligence.

On the second defendants' appeal:

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Held , dismissing the appeal, that, by reason of the driver's negligence in causing loss to the plaintiffs during the performance of his duties as the second defendants' servant, there was negligence on the part of the second defendants within the definition of section 1(1)(b) of the Act; that, since the effect of clause 8, if valid, was to negative a common law liability in tort which would otherwise fall on the plant owner, the clause “excluded” that liability within the meaning of section 2(2) ; and that, on the facts and in the circumstances existing at the time when the contract was made, the judge was justified in his conclusion that the second defendants had not discharged the onus placed on them by section 11 of the Act to show, on the balance of probabilities, that clause 8 was “a fair and reasonable” term to include in the contract

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Phillips Issues:

(i) was there on the part of Hamstead “negligence” within the definition of that word contained in section 1(1) of the Act?

(ii) If the answer to (i) is “Yes,” is clause 8 a contract term which, apart from the effect of the Act, can properly be said to “exclude or restrict” Hamstead's liability for negligence within the meaning of these words in section 2(2) of the Act?

(iii) If the answers to (i) and (ii) are both “Yes,” does clause 8 satisfy the requirement of reasonableness, within the meaning of that phrase as used in the Act?

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Issue 1

Accordingly, though the validity of clause 8 still remains to be on the part of Hamstead falling within section 1(1)(b) of the Act. This took the form of a breach (subject to the effect, if any, of clause 8) of Hamstead's common law duty to take reasonable care, by reason of the fact that Mr. Hyland who, subject to clause 8, was Hamstead's servant, had caused the loss to Phillips by his negligence in the performance of his duties as such servant.

Issue (i) therefore has to be answered “Yes.”

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Issue 2

There is no mystique about “exclusion” or “restriction” clauses. To decide whether a person “excludes” liability by reference to a contract term, you look at the effect of the term. You look at its substance. The effect here is beyond doubt. Hamstead do most certainly purport to exclude their liability for negligence by reference to clause 8. Furthermore, clause 8 purports to “exclude or restrict the relevant obligation or duty” within the provisions of section 13(1) of the Act. Issue (ii) has to be answered “Yes.”

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Issue 3 --> was the clause reasonable?

Under section 11(5) the onus falls on Hamstead to show that clause 8 satisfies the condition of reasonableness.

For this purpose, having regard to section 11(1), they have to show that the condition was:“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.”

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The UCTA is focused on the substantive effect rather than the form of words of a clause or its label. This means that regardless of whether the wording of a contractual clause or non-contractual notice purports to exclude liability and remedy or to define the scope of duty and obligation, it will not be effective unless it satisfies the reasonableness test imposed by the UCTA.33 Th

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kajs

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Businesscontracts are governed by the UCTA 1977.

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I. LIABILITY IN NEGLIGENCE 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(s 2(1)).

In the case of other loss or damage, 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(s 2(2)). -->If you just cause economic loss, then you can exclude your liability subject to the test of reasonableness

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2. LIABILITYIN CONTRACT WITH PARTIES OF UNEQUAL BARGAINING POWER Section3(1) This section applies as betweencontracting parties where one of them deals on the other's written standard terms of contract.

(2) As against that party, the othercannot by reference to any contract term -(a) when himself in breach of contract, exclude or restrict liability of his in respect ofthe breach; or(b) claim to be entitled - (i) to render a contractualperformance substantially different from that which was reasonably expected ofhim, or (ii) in respect of the whole or any part of his contractual obligation,to render no performance at all,exceptin so far as … the contract term satisfies the requirement of reasonableness.

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R&B Customs[U2] Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321

-There are some transactions which are clearly integral parts of the business concerned… and this would cover…a one-off adventure in the nature of trade where the transaction itself would constitute a trade or business. There are other transactions, however, such as the purchase of the car in the present case, which are at highest only incidental to the carrying on of the relevant business; here a high degree of regularity is required before it can be said that they are an integral part of the business ((Dillon LJ).

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R&BCustoms Brokers Co Ltd v UnitedDominions Trust Ltd [1988] 1 WLR 321

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Asks the question: are you a business at all? à small business (Import/export)à they bought a car within their business for their personal use à was the transaction conducted in the course of business if it was not essential to their business? -->nah it was a consumer contract and so it was governed by the Consumer Protection Act (2015 now)

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St Albans City and DC v International Computers Ltd [1996] 4 All ER 481 --> when does it cease to be written standard terms? --> relatively minor adjustments won’t stop it from being so

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…the defendant’s general conditions remained effectively untouched in the negotiations and...the plaintiff accordingly dealt on the defendant’s written standard terms for the purposes of section 3(1) (Nourse LJ, 491).

Under s 3(2)(b)(i), how can performance be "substantially different" from the very contract terms both parties have agreed?

Stronger party can’t exclude his liability

Software did not do what the purchaser expected and seller said they didn’t tell them that -->standard term contract complicated because further details had been inserted by the parties in the contract --> did that stop if being written standard terms --> court said the effect to which they were modified was so modified, it should be considered as being written on one party’s terms à normally a standard contract is written on the one party’s terms

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SALEAND HIRE PURCHASE (S 6) Liabilityfor breach of 12 of the Sale of Goods Act 1979 (implied condition as to title)may never be excluded. (Same for s 8of the Supply of Goods (Implied Terms) Act 1973 for hire purchase.) Asagainst a consumer, liability arising from breach of sections 13, 14, and 15 ofthe Sale of Goods Act 1979 (conformity with description, quality and fitnessfor purpose) may never be excluded.(Same for ss 9, 10, and 11 of the Supply of Goods (Implied Terms) Act 1973 forhire purchase.) As between non-consumer parties,liability in respect of ss 13, 14 and 15 can be excluded but only subject tothe requirement of reasonableness.

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12 Implied terms about title, etc.

(1)In a contract of sale, other than one to which subsection (3) below applies, there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass.

(2)In a contract of sale, other than one to which subsection (3) below applies, there is also an implied term that—(a)the goods are free, and will remain free until the time when the property is to pass, from any charge or encumbrance not disclosed or known to the buyer before the contract is made, and(b)the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known.(3)This subsection applies to a contract of sale in the case of which there appears from the contract or is to be inferred from its circumstances an intention that the seller should transfer only such title as he or a third person may have.(4)In a contract to which subsection (3) above applies there is an implied term that all charges or encumbrances known to the seller and not known to the buyer have been disclosed to the buyer before the contract is made.(5)In a contract to which subsection (3) above applies there is also an implied [F1term] that none of the following will disturb the buyer’s quiet possession of the goods, namely—(a)the seller;(b)in a case where the parties to the contract intend that the seller should transfer only such title as a third person may have, that person;(c)anyone claiming through or under the seller or that third person otherwise than under a charge or encumbrance disclosed or known to the buyer before the contract is made.