9.) Unfair Contract Terms PDF

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Unfair Contract Terms Exclusion clauses: Clauses that exclude liability or a legal duty Limitation clauses: Clauses that limit liability or a legal duty. Background: -

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In English law, the courts never sought to fashion a general common law power with which to strike down all unfair terms in contracts, or even all unfair exclusion (or limitation) clauses. Two common law tools employed in order to do this: 1.) Incorporation 2.) Construction/interpretation

Now… -

Now there has been legislative interpretation which provides assistance in solving cases regarding unfair terms. Three pieces of legislation aided this: 1.) The Unfair Contract Terms Act 1977 2.) Unfair Terms in Consumer Contracts Regulations 3.) The Consumer Rights Act 2015

How to approach exemption clauses and notices: -

When dealing with a question regarding unfair contractual terms there is a clear process that must be followed in order: (1) Cause of action What cause of action is alleged to be modified or excluded by the contractual term? (2) Incorporation Was the clause in question actually incorporated into the contract. (3) Construction Properly construed, does the clause cover the problem which has arisen, e.g. is the wording of the relevant clause apt to exempt the party seeking to rely upon it from the breach of duty (contractual or tortious) which has arisen.

(4) Nature of the contract? What is the nature of the contract? Identify the correct piece of legislation – can the legislation be of any assistance?

The correct piece of legislation depends on who the parties to the contract are: a. If business to business (B2B) – Unfair Contract Terms Act 1977 b. If business to consumer (B2C) – Consumer Rights Act 2015

Course of Action

Incorporation Incorporation of express terms in contracts: -

This concerns how terms come to be incorporated into a contract. Two introductory points can be made about incorporation: (1) Although the rules discussed are applicable to all contractual terms, the cases usually involve the question of whether very one sided terms such as exclusion or limitation causes. (2) There is an important distinction between contracts that have been signed and those that have not. If one party has signed the contract, they are bound by the terms contained; in other cases, terms will only be incorporated if the party relaying the info has taken reasonable steps to bring them to notice.

Signed contracts – incorporation by signature: L’Estrange v Graucob [1934] 2 KB 394 -

Incorporation by signature includes a clause written on a document that all the parties have signed. If you have signed the contract then there is always incorporation. L’Estrange – It doesn’t matter if the clause has been seen or read but if it has been signed then it is incorporated. This is not the case if subject to fraud or misrepresentation.

Benefits of signature -

Provides commercial certainty – if there is a signature, no more stpes are needed to draw terms to a parties attention.

Critics of signature -

Lord Denning argued the commercial certainty argument was not compelling. He argued that in L’Estrange there was an inequality in bargaining power and she was in no position to decide whether or not to agree to the terms.

Unsigned contracts – incorporation by way of notice: -

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Where the contract is not embodied in a signed document, a term will be incorporated only where reasonable steps are taken by one party to bring it to the others notice. The test for this is objective: it is in regards to whether one party reasonably brought it to the others attention, not whether the defendant read and understood the terms. The courts take into consideration a number of factors to determine whether reasonable steps where taken to give notice:

1.) The Nature of the Document - Chapelton v Barry UDC [1940] 1 KB 532 -

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If the terms are found in a document in which the reasonable person would not expect to find contractual terms, this is unlikely to count as a reasonable step. In Chapelton terms were written on a receipt, and the courts deemed that this was not a reasonable place to put contractual terms, and therefore the terms where not incorporated. However, in Thompson v London, Midland and Scottish Railway [1930] 1 KB 41 the courts deemed a railway ticket and timetable as sufficient in providing notice reasonably, and her claim failed.

2.) Time of Notice - Olley v Marlborough Court Ltd [1949] 1 KB 531 -

Terms can only be introduced before or at the time the contract is made. Thereafter, no amount of notice will suffice, as it is too late for incorporation. In Olley it was deemed that the exemption clause was dictated too late (after they had checked in at reception) therefore, it was simply too late for the hotel to incorporate such a term.

3.) Onerous Terms -

The degree of notice required to count as reasonable depends on the content of the term and the more onerous it is, the greater the steps needed to bring it to notice. Before the Unfair Contract Terms Act 1977 the courts used this to basically say that very onerous terms must be drawn to the other parties attention.

4.) Prior course of dealings

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The contract in question might not be an isolated transaction – the parties may have dealt contractual before. Sometimes, if they have always contracted on certain terms in the past, it will not matter that those terms are not expressed. They can be incorporated on the basis of a course of dealings between the parties. Two conditions apply: (1) The course of conduct must be consistent – if not there is no reason to assume that the conditions were included this time. McCuthcheon v David MacBrayne [1964]. (2) The course of conduct must be regular – these terms were used regularly enough that the parties must have intended to transact on that basis. Hollier v Rambler Motors [1972]

Construction -

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The rules of construction, like the rules for incorporation, are of general application, and can be used in relation to all clauses within a contract, and not just exclusion/limitation clauses. However, it is in relation to the exclusion of liability that most case law have arisen. The rules of construction discussed below were originally devised to curb the worst excesses of exclusion clauses at a time when there was no legislation intervention to challenge the appropriateness of certain terms.

(a) The ‘Contra Proferentum’ Rule: Houghton v Trafalgar Insurance [1954] 1 QB 247 -

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The contra proferentem rule is a rule in contract law which states that any clause considered to be ambiguous should be interpreted against the interests of the party that requested that the clause is include. Houghton found that the clause exempted the insurers for damages caused “whilst the car is carrying any load in excess of that for which it was constructed.” We should no longer use this as the primary rule to resolve contractual ambiguity, but it is still useful to use – Hut Group v Nohabar-Cookson [2016]

(b) Excluding or Limiting Liability for Negligence: Canada Steamship Lines v The King [1952] AC 192 -

Contract has strict liability therefore fault must not be proven. The courts are very weary in excluding liability for negligence, and will only do so if the wording is very clear. The case of Canada Steamship Lines v The King [1952] AC 192 created a test which the courts will consider when assessing whether an exclusion clause excluding liability for negligence will be valid:

1.) Where the clause contains language which expressly excludes liability for negligence. -

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If the clause language explicitly refers to exemption from liability of the consequences of negligence, the courts will uphold this type of exclusion clause. A strict interpretation of this is required - Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698.

2.) Where the clause does not expressly exclude liability for negligence but excludes damage which would be considered to be negligent damage. -

If the wording of the clause must be construed to cover negligent liability, if the only liability that arises on the facts is negligent may the exemption clause be given effect - Alderslade v Hendon Laundry Ltd[1945] 1 KB 189.

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The words attempting to exclude liability must also be clear and unambiguous - Hollier v Rambler Motors AMC Ltd [1971] EWCA Civ 12.

Doctrine of Fundamental Breach: -

If an exclusion clause relates the root of the contract, the heart of the contract, then the clause will not work. Denning argued that if this is so fundamental to the contract, then you cannot have an exclusion clause for it.

However… -

The Unfair contract terms act found this doctrine no longer required.

Photo Production v Securicor Facts: - Securicor where employed to keep the factory safe. - They had an exclusion clause that said they are not responsible for what their workers do. - The Securicor worker burned down the factory. Held: -

House of Lords held that the doctrine of fundamental breach was not relevant here, and that the case was a matter of construction of the contract. The exclusion clause did on the facts, cover the damage in question and therefore Securicor were not liable for the damage.

Exclusion v Limitation clauses:

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When it comes to the interpretation of these two clauses, the courts are slightly less strict when it comes to limitation clauses. This is because limitation clauses only limit lability. Whereas exclusion clauses exclude all liability. This precedent was set in Ailsa Craig Fishing v Malvern Fishing

Nature of the Contract – legislative controls on unfair terms -

There are various statutory provisions which prevent the effect of certain exclusion clauses. This section will examine and analyse two of the most relevant pieces of legislation.

1.) The Unfair Contract Terms Act 1977 – Business to business 2.) The Consumer Rights Act 2015 – Business to consumer

Unfair Contract Terms Act 1977 (UCTA) -

The Unfair Contract Terms Act 1977 applies only to liability arising in the course of a business and in relation to liability arising towards other businesses. It does not therefore provide comprehensive protection against unfair terms. The UCTA is a piece of legislation which prevents the exclusion of liability in certain circumstances. It does not apply to all unfair contract terms – only those that attempt to exclude or limit liability. UCTA does not focus on whether terms are unfair but whether they are reasonable!!!!

s. 1(3) - Business liability -

Section 1(3) of UCTA defines business liability as arising in things done or to be done in the ‘course of business’. Business is defined loosely in Section 14. This definition is loose in order to protect smaller businesses within contractual relations.

Exemption Clauses: -

UCTA is concerned primarily with “exemption clauses” (ie clauses which attempt to exclude or restrict liability in both contract and tort).

Stewart Gill v Horatio Myer [1992] 1 QB 600 Facts: - The Claimant and Defendant had a contract under which the Defendant purchased an overhead conveyor system from the Claimant.

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The system was defective however and the Defendant did not pay the full sum of the contract (with 10% outstanding). The Claimant started the claim and the Defendant attempted to defend by setting it off against what was owed to them. The conditions of sale had a clause however, which prohibited the purchaser (in this case the defendant) from refusing to pay or from attempting to set off any amount owed for whatever reason.

Held: - The court held that the Unfair Contract Terms Act 1977 applied to this case and that the anti-set off clause effectively amounted to an exclusion clause. - The reasonableness test was to be applied to the clause as a whole and not just the aspect relied on and as a result, this clause was deemed to be unreasonable for the purposes of the act, since it effectively can act to exclude liability for breach of contract. - It was observed that anti-set off clauses should be deemed to be unreasonable where they prevent the attempted set off of credits which the other party had admitted to owing the party seeking to set off.

s. 2 – Exclusion of liability for negligence -

UCTA provides that one important category of liability can never be excluded, namely liability in negligence for causing death or personal injury.

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S.2(1) provides that a business cannot exclude or restrict liability for death or personal injury arising from negligence. This provision is absolute and not subject to the requirement of reasonableness.

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S.2(2) provides that a business may exclude or restrict liability for other types of loss only if it is reasonable to do so. The question of what is reasonable is decided by applying the reasonableness test set out in s.11. S.2(3) provides that where a person is aware of an exclusion clause this is not to be taken as a voluntary acceptance of risk.

s. 3 – Exclusion of liability for breach of contract -

S.3 only applies where there exists a standard form contract. The provisions are subject to the reasonableness test in s.11 and provide restrictions on the ability to: (a) Exclude or restrict liability for breach of contract (b) Provide substantially different performance to that reasonably expected (c) Provide no performance at all

s. 6 – Exclusion of liability in contracts for the sale of goods -

S.6 applies to contracts for the sale of goods and contracts of hire purchase. The provisions relate to liability arising under the implied terms under the Sale of Goods Act 1979 and the Supply of Goods (Implied Terms) Act 1973.

s. 7 – Exclusion of liability in contracts of hire -

S.7 applies to contracts of hire and provides:

(a) Provisions relating to description, sample, quality and fitness for purpose can only

be excluded in so far as it is reasonable to do so - reasonableness is decided by reference to the reasonableness test under s.11 and the factors set out in sch 2. (b) Provision relating to title under s.2 Supply of Goods and Services Act 1982 cannot be excluded - absolute. s. 8 – Liability arising from misrepresentation 

S.8 amends s.3 of the Misrepresentation Act 1967 and makes provision for exclusion or restriction of liability arising from a misrepresentation, subject to the requirement of the reasonableness test under s.11 UCTA

s. 11 – THE REASONABLENESS TEST

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The term is required to be a fair and reasonable one to include in the contract. This is judged by all the circumstance which were known, or ought to have been known or in the contemplation of the parties The fairness and reasonableness is decided at the time the contract is entered - not with hindsight knowing of the events which in fact occurred The burden is on the party seeking to enforce the term to show that it was fair and reasonable.

Sch 2: -

Sch 2 provides the factors for the court to consider in applying the reasonableness test when looking at non-consumer sales in relation to s.6 & 7 UCTA. The factors are:

(1) The strength of the bargaining positions of the parties taking into account alternative

suppliers available to the purchaser.

(2) Whether the customer received an inducement to accept the term. Eg whether

they were given the opportunity to pay a higher price without the exclusion clause. (3) Whether the customer knew or ought to have known of the term and whether such

terms are in general use in a particular trade. (4) Where exclusion relates to non-performance of a condition whether it was

reasonably practicable to comply with the condition. (5) Whether the goods were made or adapted to the special order of the customer.

The Consumer Rights Act 2015 -

This replaces the Unfair Terms in Consumer Contracts Regulations and the Unfair Contract Terms Act 1977 in consumer contracts and notices. Provisions relating to unfair terms are contained in Part 2 Consumer Rights Act. Part 2 CRA 2015 applies to: (1) Consumer contracts between a trader and consumer. (2) Consumer notices between a trader and consumer.

Purpose: -

To establish a framework that consolidates in one place key consumer rights covering contracts for goods, services, digital content and the law relating to unfair terms in consumer contracts.’

When does it apply? S.61 Contracts and notices covered by this Part -

S.61(1) outlines that the Act applies to a contract between a trader and a consumer. Individually negotiated terms are not excluded from assessment under the Act.

Definitions: Trader -

s.2(2) - means a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf.

Consumer

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S.2(3) – means an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession.

Burden of Proof -

S.2(4) – Burden of proof is on the trader to prove that the individual is not a consumer.

Part 2 Consumer Rights Act 2015: Unfairness: UCTA = Reasonableness CRA = Unfairness -

The CRA 2015 establishes a test for assessing the validly of an allegedly unfair term:

S.62: Requirement for contract terms and notices to be fair -

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s.62 (4) A term or notice is unfair 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. Where a term or notice is found to be unfair, it is not binding on the consumer under s.62 (1 & 2) Consumer Rights Act 2015. The consumer may rely on the term or notice if they choose to do so (s 62(3).

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S.62(5) Whether a term or notice is fair is to be determined by:

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(a) taking into account the nature of the subject matter of the contract or notice, and (b) by reference to all the circumstances existing when the term or notice was agreed and to all of the other terms of the contract or of any other contract on which it depends.

Contract terms which may or must be regarded as unfair: -

s.63 CRA AND Schedule 2. Consumer contract terms which may be regarded as unfair (the “grey list”).

Examples: -

exclusion/limitation clauses in respect of death or personal injury resulting from an act/omission by the seller/supplier (Schedule 2(1)) exclusion/limitation of liability for total or partial non-performance or inadequate performance (Schedule 2(2)) forfeiture/deposit clauses (Schedule 2(4))

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penalty clauses (Schedule 2(5) and (6)) termination clauses in favour of the seller/supplier (Schedule 2(8)) unilateral rights to variation in favour of the seller/supplier (Schedule 2(13)) price-variation clauses in favour of seller/supplier (Schedule 2(14))

Is the term an excluded term? s.64 Exclusion from assessment of fairness -

There will be no assessment of fairness in relation to a term that relates to the subject matter of the contract or the price —S.64 (1) Consumer Rights Act 2...