Topic 6 – The regulation of the terms of the contract

Learning outcomes
This topic introduces regulation of the terms of a contract to enable you to
discuss and apply in problem analysis its key components (and supporting
authority) including:

 The basis upon which courts decide whether a clause has been
incorporated into a contract.
 The approach taken by the courts when interpreting exclusion clauses.
 The concept and current relevance of ‘fundamental breach’.
 The background to and key provisions of the CRA 2015.
 The key provisions of the UCTA 1977 and their previous and current
application.
 The relationship between the CRA 2015 and UCTA 1977.
 What kinds of clauses are invalidated by the CRA 2015 and UCTA 1977.
 What kinds of clauses are required to be ‘reasonable’ by the UCTA 1977
or fair under the CRA 2015.

Topic reading
Core text

 McKendrick, Chapter 9 ‘The sources of contractual terms’ – Section 9.3

‘Bound by your signature?’ to Section 9.5 ‘Incorporation by a course of
dealing’.
 McKendrick, Chapter 11 ‘Exclusion clauses’.
 Poole, Chapter 5 ‘Content of the contract and principles of interpretation’ –
Section 5.2.2 ‘The effect of signature’ and Section 5.3 ‘Oral contracts:
incorporation of written terms’.
 Poole, Chapter 6 ‘Exemption clauses and unfair contract terms’ – Section 6.1
‘The general approach to exemption clauses’ to Section 6.4 ‘Clause in a B2B
contract must not be rendered unenforceable by the Unfair Contract Terms
Act 1977’.

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Introduction

The law of contract is distinguished from other areas of private law because it
is about the enforcement of consensual agreements.

In theory the parties to a contract are free to choose their own contractual
terms and are then bound by these terms.

However, such a ‘pure’ theory of voluntarily assumed obligations must

immediately be qualified.

It became clear by the late 19th century that many individuals were bound to terms
with which they had no practical choice but to agree to or of which they had no actual
notice.

This was exacerbated by the rise of standard form contracts (i.e. contracts
used by businesses which were not individually negotiated and the terms of
which were rarely modified).

Such contracts, often offered on a ‘take it or leave it basis’, are a common part
of day-to-day life. If you doubt it, when you next take a train try to ‘re-
negotiate’ the standard forms of carriage contract before buying your ticket!

In the past, judges at common law had no means directly to control these
clauses and practices to free individuals from such terms.

Consequently, they relied upon indirect means of control.

Courts went to great lengths to find a particularly onerous clause was not
incorporated into the contract or that the clause, properly construed, did not
cover the actual event which had occurred.

Clauses whereby a contractor sought to exclude (so called ‘exclusion’ or

‘exemption’ clauses) were a particular source of concern, especially when a

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party sought to exclude liability for their own negligence or for a fundamental
breach of contract.

Exclusion (or exemption) and limitation clauses which seek either to exclude,
or perhaps only to limit, the liability of a party in breach of contract will be the
main focus of this topic.

A short review of the direct control of exclusion clauses (hereafter to include

limitation clauses unless separately discussed) is necessary now to understand the
discussion in this topic of the current law and to relate it to any textbooks you choose
to read.

In 1977 the Unfair Contracts Terms Act (UCTA 1977) was enacted.

Despite the Act’s title it did not seek to regulate all unfair contract terms but
rather focused upon exclusion clauses.

When introduced, UCTA 1977 regulated contracts entered between

two businesses (so called B2B contracts) as well as those between
businesses and consumers (so called B2C contracts).

As you would expect, businesses were subject to less constraint when dealing with
other businesses than they were when contracting with consumers.

In 1993 a European Directive on Unfair Terms in Consumer Contracts (93/13

EEC) required all member states to enact a minimum level of consumer protection
including but also extending beyond the control of exemption clauses, in furtherance
of the European single market.

The Directive’s transposition into domestic law was late and untidy. It was
implemented in 1994 (and later again in 1999) by statutory instruments, the
Unfair Terms in Consumer Contracts Regulations (respectively SI 1994/3159
and SI 1999/2083, hereafter ‘the Regulations’) that simply ‘copied out’ the
originating Directive.

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This resulted in two parallel systems for the regulation of exclusion clauses in
B2C contracts represented by UCTA 1977 and the Regulations, which the Law
Commission criticised as ‘unacceptably confusing’.

The Law Commission therefore drafted a single statute integrating both

regimes. The criticism, but not the solution, was accepted by the government
and a different approach was enacted in the Consumer Rights Act 2015 (CRA 2015).

Most of the provisions of the CRA 2015 came into force on 1 October 2015. The
CRA 2015 is the most significant reformulation and consolidation of the contractual
protection of consumers that has been attempted in English law.

It is therefore important to understand the purpose and structure of this new

provision. In the accompanying explanatory notes, it is stated that Part 2 of the
Act:

Consolidates the legislation governing unfair contract terms in relation to

consumer contracts, which currently is found in two separate pieces of legislation,
into one place, removes anomalies and overlapping provisions in relation to
consumer contracts.

The CRA 2015 avoids the previous overlapping regimes of UCTA 1977 and the
Regulations applicable to B2C contracts by amending UCTA 1977 to make it
applicable to B2B contracts only (CRA s.75 and Schedule 4).

The CRA 2015 repeals the Regulations and enacts a new regime (ss.61–69 and
Schedule 2) based upon them but containing additions such as an expanded list
(the so called ‘grey list’) of presumptively unfair terms and other clarifications.

Study task 1

List the reasons why it might be undesirable to allow a party to exclude or limit
liability for breach of contract. Are there any reasons why it might be desirable to
allow such exclusion or limitation?

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Your list might include the fact that such a clause may be unexpected; that parties
should not be able to escape from obligations freely undertaken; and that consumers
and other parties with weak bargaining power may be forced to accept unfair
clauses. All these reasons relate to the protection of parties from the abuse of a
position of power by the other contracting party. As to the reasons why such
exclusion might be desirable, if the parties are of equal bargaining power, a clause of
this kind may simply indicate that they have thought about where the risks under the
contract should lie and have made provision for that by means of an exclusion
clause. If, for example, in a construction contract the owner of the land has
undertaken to insure against the risk of damage to surrounding property from the
work, it will be perfectly reasonable for the developer to exclude its own liability for
such damage.

Self-assessment questions

1. What statutory regime regulates the use of exclusion clauses in B2B

contracts?
2. What statutory regime regulates the use of unfair contract terms, including
exclusion clauses, in B2C contracts?

Having introduced the new regime of direct control exemption clauses we will begin
a more detailed examination of the control of exemption clauses by looking at the
different techniques of indirect control.

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Lecture notes: Anne Street

Chapter 6

Common Law and Statutory control of a contract

Contract Law

Learning objectives

 How the Common Law dealt with contractual terms

 How Parliament has regulated contractual terms

Structure

 Style of questions –there will be a breach

 You identify the breach

 Apply the common law rules

 Apply the statutory controls

Common Law Control

 Incorporation

 Signature

 Timing/Course of Dealing

 Nature of a document

 Notice

Construction

 Does the breach you have identified

 Does the term which tries to exclude or limit liability cover the breach

 Contra proferentem

 Negligent breach –Canada Steamship v R

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Statutory Control

 Business to Business

 UCTA1977 –limitations

 Gateway sections, s2, 3, 6,7

 Reasonableness s11

 Business to Consumer

 CRA2015 –all contract terms

 Good faith

Conclusion

 Ensure you can see the link with this topic and other areas

 Complete all the reading and activities

 the MCQ etc

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6.1 Indirect common law controls

Core text

 McKendrick, Chapter 11 ‘Exclusion clauses’ – Section 11.1 ‘Exclusion

clauses: defence or definition?’ to Section 11.8 ‘Other common law
controls upon exclusion clauses’.
 McKendrick, Chapter 9 ‘The sources of contractual terms’ – Section 9.3
‘Bound by your signature?’ to Section 9.5 ‘Incorporation by a course of
dealing’.
 Poole, Chapter 5 ‘Content of the contract and principles of interpretation’ –
Section 5.2.2 ‘The effect of signature’ and Section 5.3 ‘Oral contracts:
incorporation of written terms’.
 Poole, Chapter 6 ‘Exemption clauses and unfair contract terms’ – Section 6.1
‘The general approach to exemption clauses’ to Section 6.3 ‘Construction: on
its natural and ordinary meaning, the clause covered what happened’.

In the past the courts did not have available to them the statutory schemes
introduced above which would allow them to deny enforcement to harsh exclusion
clauses.

Instead, they developed rules relating to the ‘incorporation’ (is the clause a part of
the contract?) and ‘construction’ (does the clause cover the breach?) of clauses, as
a means of controlling their effect while still ostensibly supporting the parties’ right to
contract on whatever terms they chose, often summarised as the parties’ ‘freedom to
contract’.

At one stage the courts went further and developed a rule of law that prevented a
party from relying upon an exclusion clause when that party was himself in
‘fundamental breach’ of contract (is the breach so serious that the exclusion clause
cannot apply?). The potential of this approach was, however, severely limited by the
House of Lords, as is explained in Section 6.1.3.

It is important to note that the rules applied in this area are based on rules which
potentially apply to all clauses within a contract: even though their most common use
is in relation to exclusion and limitation clauses. For this reason, one of the leading

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modern cases on incorporation, Interfoto Picture Library v Stiletto Visual
Programmes [1988] 2 WLR 615, deals with the question of whether a so-called
penalty, rather than an exclusion, clause was included in the terms of the parties’
contract.

6.1.1     Incorporation

In order for an exclusion clause to have any effect it must be a term of the contract.
Where the contract has been signed, as in L’Estrange v Graucob [1934] 2 KB 394,
the party signing will be bound by the clause, even if it has not been read or
understood, so long as the party seeking to rely upon the clause has not made any
misrepresentation as to its effect (as in Curtis v Chemical Cleaning & Dyeing
Co [1951] 1 KB 805).

On this basis the inexperienced purchaser of an investment product was held bound
by the contract he signed despite his reliance upon an earlier, and different,
telephone description of the product (Peekay Intermark Ltd v Australia and New
Zealand Banking Group Ltd [2006] EWCA Civ 386).

However, many exclusion (and other onerous) clauses may be contained in

unsigned documents or notices. Look for these if you are in a car park, hotel or are
leaving something at a left luggage facility or dry cleaners. Such unsigned
documents or notices may become incorporated into the contract upon the principles
which were restated in the Interfoto case. Incorporation occurs when all of the
following three conditions are satisfied.

1. Notice – The party seeking to rely upon the unsigned document or notice
must take reasonable steps to bring it to the attention of the other party. The
test of what is reasonable was first stated in Parker v South Eastern Railway
Co [1877] 2 CPD 416 and is clearly a question of fact to be determined in the
light of all the circumstances. It was held in Thompson v London, Midland and
Scottish Railway Co [1930] 1 KB 41 that the clause itself does not have to be
on the document put forward: it is sufficient that the document indicates the
existence of the clause and where it can be consulted.
A number of cases have made it clear that the more unusual or onerous the

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 clause, the more that must be done to draw it to the other party’s attention.
This was captured by Lord Denning who said that for some clauses he had
seen to be valid they ‘would need to be printed in red ink on the face of the
document with a big red hand pointing’ at them (J Spurling
Ltd v Bradshaw [1956] 1 WLR 461 and later see Thornton v Shoe Lane
Parking [1971] 1 QB 163). It does not only apply in the context of consumer
contracts, as shown by Interfoto Picture Library v Stiletto Visual
Programmes (1988) (though the clause in this case was not an exclusion
clause) and AEG (UK) Ltd v Logic Resource Ltd [1996] CLC 265.
2. Timing – Any term which is to be part of the contract must be brought to the
attention of the parties before or at the time of contracting.
See Olley v Marlborough Court Hotel [1949] 1 KB 532 and Thornton v Shoe
Lane Parking (1971).
3. Nature of the document – If the terms are in a written document then that
document must be one which the party would reasonably believe to have
contractual force. In Chapelton v Barry Urban DC [1940] 1 KB 532 the ticket
containing the contractual notice was one used to prove payment. The court
found that this was not generally believed to be contractual in nature. It is not
merely because it was a receipt, as some receipts are contractual, it was the
purpose of the receipt.

A different way in which a clause may be incorporated is through a ‘course of

dealing’.

If the parties have dealt with each other in the past, and an exclusion clause has
been used, this may in itself lead to a presumption that the clause will be
incorporated in any new contract, even if on this occasion reasonable notice of it has
not been given.

The course of dealing in the past must however be both regular and consistent.
In Kendall (Henry) & Sons v Lillico (William) & Sons Ltd [1969] 2 AC 31 it was held
that 100 dealings over three years were sufficiently recurrent to be ‘regular’ but
in Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 that three or four dealings
over five years were not. In McCutcheon v MacBrayne [1964] 1 WLR 125 there were

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regular dealings, but the document containing the exclusion clause was not always
used: it was held that the clause had not been incorporated.

These requirements may be applied less strictly where both parties are commercial
entities (i.e. it is a B2B contract (British Crane Hire Corp Ltd v Ipswich Plant Hire
Ltd [1975] QB 303)).

Study task 2

Marika, a Polish woman who understands very little English, buys a ticket for entry to
Upton Castle (a theme park). The ticket states on it that no liability is accepted for
the loss of, or damage to, property belonging to entrants. Will this clause be
regarded as being incorporated into Marika’s contract?

Show feedback
The question is whether Marika has been given ‘reasonable notice’ of this clause.
In Thompson v LMS Rly (1930), it was held that reasonable notice had been given,
even though the claimant was illiterate and could not read the clause. This would
suggest that, if Upton Castle have acted reasonably as regards adult entrants who
understand English, then the clause will be incorporated. The answer to this question
may also depend on whether the ticket is a ‘contractual document’ or a mere receipt
(see Chapelton v Barry UDC (1940)). Note that if the clause is incorporated, it will
need to be considered in the light of the Consumer Rights Act 2015.

Study task 3

Angela takes her car for repair at Magna Garages. She is asked to sign a contract
which states that Magna ‘accept no liability for minor damage to the bodywork of
vehicles left for repair, howsoever caused’. When she queries this, she is told,
incorrectly, by an employee of Magna, that it only applies to damage by third parties
while the car is parked in Magna’s car park. Angela signs the contract. Is Angela
bound by the clause?

Show feedback
Generally the signing of a contract is sufficient to make the signer bound by the
terms contained in it (see L’Estrange v Graucob (1934)). This would suggest that

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Angela is bound by the clause. The only exceptions to this are, first, where the signer
can claim that the contract was a fundamentally different document from what it was
thought to be – that is the plea of ‘non est factum’ dealt with in Chapter 8, Section
8.3.3. This has no application to Angela. Secondly, there is an exception where the
principle applied in Curtis v Chemical Cleaning and Dyeing Co Ltd (1951)
operates. Here an employee innocently misrepresented to a customer the effect of
an exclusion clause in a dry-cleaning contract. It was held that the customer, who
had signed the contract, could nevertheless recover for losses which fell within the
actual scope of the clause, because the company was bound by their employee’s
misrepresentation. Here, therefore, the answer would be likely to be that a court
would hold that the clause was part of Angela’s contract, but only to the extent that it
excluded liability in the situation specified by Magna’s employee.

Study task 4

David has used a particular supermarket car park for his monthly shop since moving
to the area two years ago. At the entrance there is a large noticeboard which warns
that ‘All cars are parked at the owner’s risk’. This is repeated on the ticket David
purchases after entering the car park. On the last occasion David visited the car park
it was windy and the notice had been blown down. While he was shopping, the
supermarket’s poorly maintained advertisement hoarding fell on David’s car. Is this
event a part of any contract David has entered with the supermarket? Would the
answer be different if David was delivering supplies from his farm for sale in the
supermarket?

Show feedback
The question arises here whether David’s previous dealings (24 times in two years)
have been ‘regular and consistent’. The frequency and duration of the dealings is
less than in Kendall (Henry) & Sons v Lillico (William) & Sons Ltd (1969) but more
than in Hollier v Rambler Motors (1972) so a firm conclusion is hard to reach.
Questions are often posed which ‘sit between’ decided cases like this and your
answer requires interpolation (i.e. you must decide if the hypothetical you are
considering is closer to one of the decisions you refer to than the other). It is perhaps
more likely here that the course of dealing would be held to resemble that
in Kendall rather than that in Hollier.
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If David was delivering produce from his farm it is more likely that the clause would
be binding on him as under British Crane Hire v Ipswich Plant Hire Ltd (1975) a
lesser frequency of dealing is regarded as sufficient in so called B2B contracts.

6.1.2     Construction

If a particular clause is found, on the principles outlined above, to be a part of the

contract, it must then be decided whether, on its true construction, the clause covers
the particular breach which has occurred. The courts have traditionally been strict in
this area and interpret any ambiguity against (contra) the person trying to rely on the
clause (the proferens); hence the principle is sometimes called the contra
proferentem rule. In Andrews v Singer [1934] 1 KB 17, for example, a clause
excluding liability in relation to implied terms was ruled ineffective to exclude liability
for breach of an express term.

Unfortunately, the contra proferentem rule is easier to state than it is sometimes to

apply. When studying its application in the following paragraphs you should
remember the following points.

 That though its application may appear complex the underlying principle is
simple (i.e. that any ambiguity in an exclusion clause is to be interpreted
against the person seeking to rely upon it).
 There is an increasing tendency to look at the issue of contractual
interpretation more generally. In other words, the construction of exclusion
clauses must be related to the approach to the interpretation of all contractual
provisions which was discussed in Topic 5.
 Consumers are now protected by dedicated legislative provisions, chiefly the
CRA 2015. Courts have indicated that since the precursors of this latest
protection were introduced the need to adopt ‘strained’ constructions of
clauses in order to limit their scope is reduced. See, for example, the
comments of Lord Wilberforce in Photo Production Ltd v Securicor Transport
Ltd [1980] AC 827 at 843.
 For some time courts have suggested that a more relaxed view can be taken
of clauses which merely limit liability, as opposed to excluding it altogether
(see Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964).

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 Such a view may cause difficulties in application because a limitation of
liability to a very modest amount is in effect almost indistinguishable from a
full exclusion of liability.
 There is a clear modern tendency not to interfere too readily in relation to
commercial contracts. Typical comments include those of Jackson LJ
in Persimmon Homes v Ove Arup Partners [2017] EWCA 373 who said that
the contra proferentem rule now performed ‘a very limited role’ in relation to
commercial contracts and further that, following the enactment of the Unfair
Contract Terms Act 1977, the approach of the courts to exemption clauses
has considerably ‘softened’.

A particular problem arises where a contractor seeks to exclude liability in respect of

his own negligence. In Canada Steamship Lines Ltd v The King [1952] AC 192 Lord
Morton stated a number of principles to guide the process of interpretation in such
cases:

 if the clause contains express language exempting a person from the

consequence of the negligence, effect must be given to it
 if there is no express reference to such negligence, the court must consider
whether the words used are wide enough, in their ordinary meaning, to cover
it
 if the words used are wide enough, the court must then consider whether
liability may be based on some ground other than negligence; if so, this will
prevent reliance on the clause in relation to negligence.

An example of the application of the second and third rules was White v John

Warwick [1953] 1 WLR 1285. In a contract for the hire of a bicycle, a clause
exempting the owners from liability for personal injuries was held to cover only
breach of strict contractual liability as to the condition of the bicycle, and not injuries
resulting from negligence in the fitting of the saddle. The usual implication of the
rules were subverted (e.g. in Hollier v Rambler Motors (1972) it was said, obiter
dicta, that where the only possible liability was liability for negligence an exclusion
clause was ineffective to exempt such liability because it could ‘be given adequate
content by construing [it] as a warning’ (i.e. that there would be no liability in the
absence of negligence)). The tendency to subvert the approach taken
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in Canada Steamship has increased to the extent that it is not at all clear now what
weight, if any, must be given to the Canada Steamship rules. In Australia, Lord
Morton’s guidance has been expressly discarded; in England and Wales the process
has been more subtle. For while ‘lip service’ is still given to his words
(e.g. EE Caledonia Ltd v Orbit Valve Co Europe plc [1994] 1 WLR 1515) the House
of Lords qualified their application
in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL
6 (see also Persimmon Homes v Ove Arup Partners [2017] EWCA 373) by
emphasising the overriding importance of giving effect to the intention of the parties.
The clear implication of this is that where there is a conflict between that intention
and the result indicated by Lord Morton’s approach, the former should prevail.

6.1.3     Fundamental breach

At one time the courts, and in particular the Court of Appeal, developed a rule of law
by which it was held that an exclusion clause could never be effective against a
particularly serious breach of contract – a ‘fundamental’ breach.

A fundamental breach could be one where: the breach relates to a particular

obligation which is central to the contract, the consequences of the breach are
exceptionally serious or a deliberate refusal to perform obligations under the
contract).

This approach to fundamental breaches was reviewed by the House of Lords

in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. The House
rejected the Court of Appeal’s assertion that there was a rule of law in this area
preventing reliance on an exclusion clause following a fundamental breach.

For some time it was thought that the doctrine of fundamental breach survived, not
as a rule of law, but rather as a presumption against any exclusion clause being
interpreted to cover a fundamental breach of contract. However, this has now
explicitly been denied (AstraZeneca UK Ltd v Albemarle International
Corp [2011] 1 All ER (Comm) 510). Rather, the question was one of construction.

Does the clause cover the breach which occurred? Although it may be difficult to
convince a court that an exclusion clause was intended to cover a breach which has

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deprived the other side of all benefit, ‘…but, if it does, it is no longer permissible at
common law to reject or circumvent the clause by treating it as inapplicable to “a
fundamental breach”’ (Neill LJ in Edmund Murray Ltd v BSP International
Foundations Ltd [1992] 33 Con LR 1).

Applying this approach, the High Court held that exclusion clauses in an agreement
stated to comprehensively govern the parties’ relationship that were drafted in clear
language capable of covering alleged breaches would apply to any breach of the
agreement, including wilful, fundamental or deliberate breaches (Mott
Macdonald v Trant Engineering [2021] EWHC 754 (TCC).

Study task 5

Read the case of Photo Production Ltd v Securicor Transport Ltd (1980).

1. What type of fundamental breach was involved in this case?

2. Why did the House of Lords think that it may well have been the parties’
intention that Securicor would have a very minimal level of liability under the
contract?

Show feedback

The approach adopted in Photo Production v Securicor may be justified by the fact

that there are now statutory protections for consumers in relation to very broad
exclusion clauses and that commercial contracts may appropriately be left to be
governed by the principle of ‘freedom of contract’. The approach is therefore most
appropriate where the parties are businesses contracting on equal terms. The effect
of the Consumer Rights Act 2015 is that in all consumer contracts an exclusion
clause which attempts to exclude liability for a fundamental breach will either be
automatically void or subject to a test of ‘fairness’.

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Self-assessment questions

1. What is the effect of signing a contract?

2. What conditions must be fulfilled before an unsigned document or notice may
be said to be incorporated into a contract?
3. What is the relevance of prior contracts entered between the parties? How
can an unwritten clause be incorporated into a contract ‘in the course of
dealing’?
4. What is the contra proferentem rule?
5. What is the present status of the so-called doctrine of ‘fundamental breach’?

Summary

The common law controls the use of exclusion clauses by means of the rules of
incorporation and construction. The rules relating to incorporation require close
attention to be given to when the clause was put forward and the notice that was
given of it. The rule of construction is based around the contra proferentem rule and
according to a traditional approach is applied more strictly where the defendant
alleges that liability for negligence has been excluded. More recently the courts have
declined to apply this approach so strictly. Where there is a fundamental breach, an
exclusion clause does not automatically cease to apply but if the parties use very
clear language to express their intention that the protection of an exclusion clause
should extend to such a breach that intention will now be respected (subject to the
statutory controls examined in Section 6.2).

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6.2 Statutory control
Core text

 McKendrick, Chapter 11 ‘Exclusion clauses’ – Section 11.9 ‘The Unfair

Contract Terms Act 1977’ to Section 11.15 ‘Conclusion’.
 Poole, Chapter 6 ‘Exemption clauses and unfair contract terms’ –
Section 6.4 ‘Clause in a B2B contract must not be rendered
unenforceable by the Unfair Contract Terms Act 1977’.

The statutory controls examined in this section only become relevant if it is first
established that the exclusion clause is a term of the contract (by signature,
incorporation or course of dealing) and, properly construed, it would
otherwise operate to protect the party in breach from liability. For further
guidance on how to answer questions involving exclusion clauses see the
concluding section of this topic.

The Introduction above should be re-read at this point. It contains an overview of

recent statutory developments, particularly the CRA 2015. From this section you will
have learned that the regulation of contractual exclusion clauses is effected
differently depending upon whether the clause is contained in a contract between a
business and a consumer or a contract between two businesses. To repeat this
fundamental point:

Business to consumer (B2C)

If the contract is between a business and a consumer it will be necessary to

look at the CRA 2015.

Business to business (B2B)

If the contract is between two businesses then the relevant legislation is the
Unfair Contract Terms Act 1977 (UCTA 1977).

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6.2.1 The Consumer Rights Act 2015

Most of the provisions of the CRA 2015 came into force in October 2015. The
background to these provisions in a European Directive and two sets of
implementing Regulations (the latter repealed by the CRA 2015) have been
described in Section 1.4.2. The CRA 2015 has three parts:

 Part 1 Goods, services and digital content – this part simplifies and

clarifies the law over consumer rights arising from the purchase of goods,
services and digital content. Existing legislation (e.g. the Sale of Goods Act
1979 and the Supply of Goods and Services Act 1982) is amended or
repealed and new rights are created by the CRA 2015 to apply to all B2C
contracts.
 Part 2 Unfair protection – this part contains provisions relating to unfair
terms which reflect recommendations made by the Law Commission and
Scottish Law Commission. The Unfair Contract Terms Act 1977 (UCTA 1977)
is repealed so far as it affected B2C contracts. A single regime is enacted to
regulate unfair terms which is based on, but has a wider application than, the
repealed 1999 Unfair Terms in Consumer Contracts Regulations (UTCCR
1999).
 Part 3 Enforcement/new civil remedies – this part covers the
enforcement powers of public enforcers as well as the reform of consumer
collective actions for anti- competitive behaviour.

The changes effected by Part 1 in regard to the statutory implied terms have been
examined in Topic 5. The changes introduced by Part 2 will now be examined.

The core provision of Part 2 is s.62(1) which provides that: ‘An unfair term of a
consumer contract is not binding on the consumer’. This simple statement begs a
number of questions.

What is a consumer contract?

A consumer contract is one entered between a ‘trader’ and a ‘consumer’
(s.61(1) CRA 2015). A trader is defined as a ‘person acting for purposes relating to

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that person’s trade, business, craft or profession…’ (s.2(1), made applicable by
s.76(2)). A ‘business’ expressly includes any government department, local or public
authority (s.2(7)). A ‘consumer’ is defined as the converse of a trader (i.e. ‘an
individual acting for purposes that are wholly or mainly outside the individual’s trade,
business, craft or profession’ (s.2(3), made applicable by s.76(2)). The reference to
an ‘individual’ means that a company cannot now be considered a consumer. The
definition of a consumer has been extended to cover someone who is ‘mainly’ acting
outside their ‘trade, business…’, etc. This will affect the level of protection offered to
persons who purchase goods for mixed purposes. For example, if a car is purchased
primarily for private use but is nonetheless sometimes used for business purposes,
the contract will still be subject to Part 2 of the CRA 2015.

The European Directive (93/13 EEC) and the now repealed UTCCR (SIs 1994/3159
and 1999/2083) stated that a term could only be set aside as unfair where that term
was not ‘individually negotiated’. A term drafted in advance in circumstances where
the consumer was unable to influence its substance was not regarded as individually
negotiated. It is of potential significance that this pre-condition is not simply
reproduced in the CRA 2015. Following the CRA 2015 a consumer may challenge a
clause as unfair even though it was individually negotiated. The change effected to
the law may however be small as the fact of individual negotiation, though no longer
an absolute bar to challenge, may be one of many factors relied upon by the trader
as evidence that the term was not unfair.

What makes a contract term ‘unfair’?

Section 62(4) CRA defines an unfair term as one which:

contrary to the requirement of good faith…causes a significant imbalance in the

parties’ rights and obligations under the contract, to the detriment of the consumer.

This formulation suggests that an unfair term has two key elements: a requirement of
good faith and that the offending term would otherwise result in a ‘significant
imbalance’ between the parties’ rights and obligations.

The requirement of good faith may itself be said to have two parts:

a procedural and a substantive aspect. The procedural aspect is in

issue when a term’s existence came as a surprise to the party subject to it.

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The Court of Justice of the European Union (CJEU) considered the appropriate test
in a case where a mortgagor who had defaulted on payments challenged a clause
that increased the applicable rate of interest to almost 19 per cent per annum. The
CJEU advised that the national court applying this requirement had to assess
whether the seller or supplier, dealing fairly and equitably with the consumer, could
reasonably assume that the consumer would have agreed to such a term in
individual contract negotiations (Aziz v Caixa d’Estalvis de catalunya, Tarragona I
Manresa (Catalunyacaixa) (2013)).

In West v Ian Finlay & Associates (2014) the Court of Appeal held that a term in a
contract for architectural services was not unfair ‘…bearing in mind the savvy nature
of the Wests’ (at [60]) who were a professional couple comprising a successful
banker and his wife, a neuroscientist.

In contrast in Office of Fair Trading v Ashbourne Management Services Ltd (2011)

terms in gym membership agreements setting minimum membership periods of one,
two or three years were considered unfair.

The Court emphasised the defendant’s business model which was ‘calculated to
take advantage of the naivety and inexperience of the average consumer using gym
clubs at the lower end of the market.’ Where a term is put forward by either the
consumer or the consumer’s professional advisers the element of unfair surprise will
be absent and the clause most unlikely to be found to be unfair (Bryen & Langley
Ltd v Boston (2005)).

The substantive aspect of the requirement of ‘good faith’ means that there will be
some terms that will always be regarded as unfair whatever steps are taken to
publicise them. Any such term is, however, likely to offend the second element of
‘unfairness’ (i.e. that the clause causes a significant imbalance in the parties’ rights
and obligations).

In this way there would appear to be a considerable overlap between the two
requirements according to Lords Steyn and Bingham in Director General of Fair
Trading v First National Bank plc [2001] All ER (Comm) 1000 (at [17] and [37]).

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In OFT v Asbourne Management Services, considered above, the court emphasised
the requirement that the imbalance in the parties’ rights must be a significant one.

Terms in contracts for gym membership which prevented termination before the end
of lengthy minimum membership periods had this effect whereas terms which
permitted termination in defined circumstances before this period had elapsed might
evidence an imbalance in the parties’ rights, but not a significant one (at [17]).

Further explicit guidance on how to ascertain if a contract term is unfair is provided

by s.62(5) which requires the court to take ‘into account the nature of the subject
matter of the contract’ and ‘all the circumstances existing when the term was agreed
and… all of the other terms of the contract’.

The timing mentioned here is important.

The assessment of fairness is made when the contract is concluded; it is not a

retrospective judgment and so cannot take account of circumstances that arise after
the contract was entered.

More specific guidance in the first version of the implementing Regulations

expressly referred to: the bargaining positions of the parties; whether the
consumer had an ‘inducement’ to accept the term; whether the goods or
services were made to special order; and the extent to which the seller or supplier
had acted fairly.

These factors reflected parallel considerations under UCTA 1977 (see below).
Though the factors may still be relevant under the CRA 2015 they are not
expressly referred to in the Act.

Despite the guidance discussed above, the test for unfairness is a flexible one
that will probably provoke differences of opinion. The guidance offered by
the Aziz case above was applied by the UK Supreme Court
in ParkingEye v Beavis [2015] UKSC 67 concerning the legality of a ‘Parking
Charge’ of £85 levied after a customer had exceeded a two- hour free parking
allowance.

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Most of the discussion in the Supreme Court centred on whether the £85 charge was
an unenforceable penalty (for this aspect see Section 14.7) but Mr Beavis further
challenged the clause under the consumer protection legislation.

Applying this regime produced a difference of opinion; the majority of the

Supreme Court Justices considered the clause to be fair but Lord Toulson
dissented on this point. He criticised the other Justices for watering down the
test described in the Aziz case on the basis that his fellow Justices incorrectly
‘substituted their judgment of reasonableness… [for whether] the supplier
could reasonably have assumed that the customer would have agreed to the
term’.

The ‘grey list’

The Regulations which preceded the CRA 2015 contained a list of terms which
will be presumed to be unfair which became known as ‘the grey list’.

An expanded version of this ‘indicative and non-exhaustive list of terms of

consumer contracts that may be regarded as unfair’ is now found in CRA 2015
Schedule 2 Part 1.

The list of presumptively unfair terms demonstrates the breadth of the CRA 2015
and extends beyond terms intended to exclude or restrict a trader’s liability for
death or personal injury which are described in para.1 of the ‘grey list’.

This provision does not affect a trader’s attempt to exclude liability for death
and personal injury arising from negligence which is rendered unenforceable by
s.65(1), as opposed to being presumptively unenforceable under Schedule 2.

The ‘grey list’ refers to 20 different types of contractual provision

including:

 a term which permits the trader to retain, without compensation, sums paid
by the consumer if the consumer decides not to continue with the contract
(para.4)

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  a term which requires a consumer who does not fulfil his obligations to pay
a disproportionately high sum in compensation (para.6)
 a term which has the effect of binding the consumer to terms which the
consumer, before contracting, had no real opportunity of becoming aware of
(para.10)
 a term which allows the trader without a valid reason specified in the
contract unilaterally to alter the contract terms (para.11)
 a term which permits the trader to increase the price of goods or
services without the consumer having a corresponding right to cancel if the
price demanded is too high compared to that first agreed (para.15).

The terms added by the CRA 2015 to the ‘grey list’ are:

 a term which requires a consumer who does not fulfil his obligations to pay
a disproportionately high sum in compensation for services that have not been
supplied (para.5)
 a term which permits the trader to determine the characteristics of the
contractual subject matter after the consumer has become bound by the
contract (para.12)
 a term giving the trader a discretion to determine after the consumer has
entered the contract the price payable where no method of price
determination was made known before contracting (para.14).

The consequence of unfairness

Where a term is found to be unfair the rest of the contract ‘…continues, so far as
practicable, to have effect in every other respect’ but the unfair term is ‘…not
binding on the consumer’ (s.67).

In Unicaja Banco SA v Hidalgo Rueda (2015) the European Court of Justice, in

a case involving a term in a mortgage that upon the debtor’s default increased
the applicable rate of interest to 18 per cent, held that Directive 93/13 did

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not empower a national court to vary a term that is held to be
unfair. Rather, the national court must ‘exclud[e] the application of that clause
in its entirety with regard to that consumer’. However, a national court may,

having ‘deleted’ an unfair term, substitute for it a supplementary provision

of national law according to the same court’s decision
in Kasler v OTP Jelzalogbank (2014).

In the latter case (at [79]) it was explained that a simple power of revision would
compromise the primary purpose of the Directive because it would tempt
sellers or suppliers (now ‘traders’) to use unfair terms in the knowledge that
even if they were held invalid the contract would nevertheless be adjusted.

Exclusion from the assessment of fairness under the CRA

2015
Certain terms do not, subject to certain conditions, fall within the power of review
created by the CRA 2015. The most important category, which under the previous
Regulations gave rise to extensive (and expensive – see Office of Fair
Trading v Abbey National plc (2009)) litigation, is now found in s.64(1).

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A contract may not be assessed for fairness … to the extent that:
it specifies the main subject matter of the contract, or 
the assessment is of the price payable under the contract by comparison with the
goods, digital content or services supplied under it.

Significantly, this exclusion will only apply to terms that are ‘transparent and
prominent’ according to s.64(2) (previously under the Regulations it needed to
be in ‘plain intelligible language’). It is not certain whether this change of
language has resulted in a change of meaning.

However, both tests seem to provide for a high standard of comprehensibility

that reaches beyond the common law doctrine of contra proferentem, discussed in
Section 6.1.2, which merely resolves any ambiguity against the party relying upon
the exclusion clause. In Kasler v OTP Jelezalogbank Zrt (2013) the European Court
of Justice interpreted Directive 93/13 as requiring not only that the relevant term
should be ‘grammatically intelligible’ to the consumer but further that it ‘should set
out transparently the specific functioning [of the term] so that that consumer was in a
position to evaluate, on the basis of clear, intelligible, criteria, the economic
consequences’ (at [75]).

This section states an important limit upon the scope of the CRA 2015. The CRA
2015, the preceding Regulations and the originating European Directive,
provided that where certain tests are satisfied, terms in a contract which
operate to the disadvantage of consumers will not be enforced.

If the scope of this power of review is not precisely defined it would create
uncertainty by leaving many contractual provisions at the core of a contract as liable
to challenge.

The purpose of CRA 2015 s.64 is to avoid putting in jeopardy of review all
contractual provisions.

This is achieved by providing that certain central or core matters are excluded
from assessment as unfair.

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It is important to appreciate the effect of a wide, as opposed to a narrow,
interpretation of these ‘exclusions’. If the excluding provision is interpreted broadly it
would protect from review so many clauses that it might negate the very object of the
original Directive. For this reason Lord Bingham, in Director General of Fair
Trading v First National Bank [2001] 1 All ER 240 cautioned that the ‘object of
the regulations [then in force, now the CRA 2015] would plainly be frustrated if
[the core exception was] so broadly interpreted as to cover any terms other than
those falling squarely within it’ (at [12]).

Consequently, the House of Lords held that a contractual provision providing that
upon the debtor’s default on a loan the bank was entitled to recover the balance of
the loan as well as outstanding interest and the cost of obtaining judgment did not
define the main consideration which the bank anticipated from the loan.

Rather it was a default provision whose operation was contingent upon the
creditor’s breach. As it was not a core provision within the then applicable
Regulations it was susceptible to review as an unfair term.

A similar approach was applied in Office of Fair Trading v Foxtons Ltd [2009]

EWHC 1662 (Ch) where a standard agreement with a letting agent provided for the
payment by the landlord to the agent of a commission upon the introduction of a
suitable tenant and again if that tenant renewed the lease.

It was the requirement to pay a second or successive commission on renewal that

was in dispute as this required no, or little, extra work by the agent. Again it was
concluded that the provision for further payment was not a core term and so was
susceptible to review. The judge emphasises the parties’ belief that the term would
operate only in exceptional circumstances as well as its lack of conspicuousness.

The Supreme Court’s decision in Office of Fair Trading v Abbey National

plc (2009) would appear to conflict with the narrow interpretations of the core
provisions’ exclusion examined in the previous two cases.

The case concerned terms in contracts for the provision of personal banking
services under which banks levied charges for so called ‘unauthorised overdrafts’

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and was of huge commercial importance, involving all the leading UK banks, the
smallest of which, Clydesdale bank, had over 2.4 million UK customers! In a decision
that was, perhaps, popular only with the banks and the ‘all-star’ legal cast
representing them (at first instance including 11 Queen’s Counsel and all the major
commercial firms of solicitors) the Supreme Court reversed the decision of the Court
of Appeal.

The Supreme Court held that it was not possible to distinguish between the different
ways in which a bank charged for its services. The provision, which was challenged,
under which fees were charged for unauthorised overdrafts, contributed to the
undifferentiated consideration the banks received in exchange for the provision of
services.

Consequently, the provision was a core term and so immune from challenge under
the then prevailing Regulations as being unfair. The decision in Director General of
Fair Trading v First National Bank was distinguished, rather unconvincingly, on
the basis that the case dealt with a clause that defined an ‘ancillary’ (at [113]) rather
than the main consideration of the contract.

Such a formal distinction would seem to push the courts in the direction which
Lord Bingham was at pains in First National to avoid (i.e. an approach which seems
to ‘frustrate’ the object of consumer protection that lies at the core of the original
European Directive (93/13 EEC)).

In addition to the core terms, discussed above, which are excluded from review on
the basis of unfairness, the CRA 2015 prohibits the exclusion of some liabilities.
Section 65 provides that a trader cannot by a term in a consumer contract exclude
liability for death or personal injury caused by negligence (reflecting the parallel
provision in s.2 UCTA 1977 now applicable only to businesses).

Terms in contracts for the supply of goods to a consumer by a trader which exclude
or limit the liability of the trader in respect of the goods’ unsatisfactory quality (s.9),

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fitness for a particular purpose (s.10) and conformity to description (s.11) or sample
(s.13) may not, according to s.31, be excluded.

This and associated prohibitions upon exclusion is sometimes referred to as a

‘black list’ in contrast to the presumptive unfairness of terms in the so called ‘grey list’
examined above.

The obligations arising under ss.9, 10,11 and 13, whose exclusion is prohibited,
correspond to terms formerly implied into contracts for the sale of goods by ss.11–14
SGA 1979.

The CRA 2015 contains parallel provisions to the s.31 prohibition on exclusion of
liabilities arising under contracts for the sale of goods in ss.47 and 57, which apply to
contracts under which a trader agrees to supply a consumer with, respectively,
digital content and services.

Enforcement

The CRA 2015, like the Regulations it supersedes, both makes an ‘unfair’ term
unenforceable in individual cases but also permits certain ‘regulators’ to take action
against the use of such terms. We have seen that several of the important cases on
the Regulations were brought by the Office of Fair Trading (OFT). The OFT was
closed in 2014 pursuant to the Government’s policy of reducing the number of
‘quasi-governmental’ bodies, or quangos. The successor to the OFT’s powers of
intervention and enforcement is now the Competition and Markets Authority. Actions
brought by such bodies may have wide market effects.

6.2.2     The Unfair Contract Terms Act 1977

In contrast to Part 2 of the CRA 2015 which will render unenforceable by a trader
against a consumer any unfair term, the UCTA 1977 is primarily concerned with only
one type of ‘unfair’ term, namely, exclusion and limitation clauses, rather than ‘unfair
terms’ in general. The scope of the UCTA 1977 has been further reduced by the
CRA 2015 so that it will now apply only to contracts between businesses (so called
B2B contracts (Schedule 4)).

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Certain types of contracts are excluded from the main protective provisions of the
UCTA 1977. These include contracts of insurance, contracts concerning land and
international supply contracts (s.26 and Schedule 1). If the contract requires goods
to be carried from one state to another it is classified as an international supply
contract – as is a contract where, at the time of signing, it is expected, but not
stipulated, that the goods will be so transported (Trident Turboprop (Dublin)
Ltd v First Flight Couriers Ltd (2009)).

A preliminary question to ask, therefore, when considering the impact of the UCTA
1977 on an exclusion clause, is whether the Act applies to the contract at all.

6.2.3     Negligence liability

The UCTA deals with clauses which attempt to exclude liability for ‘negligence’ in
s.2. ‘Negligence’ is defined as covering: an obligation to take reasonable care in the
performance of a contract; the tort of negligence; and liability under the Occupier’s
Liability Act 1957.

Under s.2(1) any contract term or notice which seeks to exclude or restrict liability
for negligence causing death or personal injury is void.

In contrast, s.2(2) provides that any contract term or notice which aims to exclude
or restrict liability for negligently inflicted damage to property is not automatically
rendered void.

Instead, it is subject to the reasonableness test. If the clause satisfies that test it is
enforceable, if it does not, it is void.

Section 2(2) of the UCTA deals with negligence giving rise to loss or damage apart
from death or personal injury. We are talking here about damage to property or
financial losses (lost profits, etc.).

In relation to such loss or damage, s.2(2) provides that a clause purporting to restrict
liability will only be effective ‘in so far as [it] satisfies the requirement of
reasonableness’. The requirement of reasonableness is discussed below.

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6.2.4     The ‘reasonableness’ test

The standard of reasonableness referred to in s.2(2) is utilised throughout

UCTA. Section 11 defines it as a requirement that the term was:

a fair and reasonable one to be included having regard to the circumstances

which were, or ought reasonably to have been known to…the parties when the
contract was made.

Three preliminary points should be noted before examining this important standard in
more detail. First, the reasonableness of the term will be judged by reference to the
time of entering the contract, without the benefit of hindsight (Stewart Gill
Ltd v Horatio Myer & Co Ltd [1992] QB 600).

This is clear from the wording of the section. Second, the burden of proving that the
clause is reasonable is borne by the party relying upon it (s.11(5)). Third, it is difficult
to generalise about the application of the standard of reasonableness because each
case very much depends upon its own facts.

The emphasis upon the facts of the case as found by the judge at first instance
means that courts of appeal are reluctant to interfere with the decision of the trial
judge ‘…unless satisfied that [he/she] proceeded on some erroneous principle or
was plainly and obviously wrong’ (George Mitchell Ltd v Finney Lock Seeds [1983] 2
AC 803).

Fortunately, UCTA itself provides some further guidance. When considering a

limitation, as opposed to an exclusion, clause s.11(4) provides that the court should
take account of the resources of the person who may be subject to liability as well as
the extent to which that liability might have been covered by insurance. However, the
availability and cost of insurance has been referred to many times in relation to
cases involving exemption clauses (e.g. Smith v Eric S Bush (1989)). Section 11(2)
refers to a number of guidelines contained in Schedule 2 which should be taken into
account in assessing reasonableness.

This checklist is only expressly said to be relevant when considering the concept of
reasonableness to be applied under UCTA ss.6 and 7 (dealing with the exclusion of

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statutory implied terms). This formal position has been ignored and the checklist is
considered to be relevant to any section of UCTA that seeks to apply the standard of
reasonableness (see Overseas Medical Supplies Ltd v Orient Transport Services
Ltd [1999] Lloyd’s Rep 273). A key factor is the relative bargaining positions of the
parties.

Recent cases have paid particular attention to this factor, which has been said to be
‘the starting point’ for any enquiry into the reasonableness of a contractual exclusion
(Axa Sun Life Services v Campbell Martin (2011) at [59]).
In Watford Electronics v Sanderson [2001] EWCA Civ 317 the claimant sought
damages of over £5.5 million including loss of profits for breach of a contract to
supply a bespoke software system.

The Court of Appeal held that clauses which excluded liability for indirect or
consequential loss and which also limited any other liability to the contract price of
£104,600 were reasonable.

The parties to the contract were experienced business people who had decided to
allocate the risks of defective or non-performance in a particular way which the court
should not upset. Chadwick LJ (at [54]) said that the court should only interfere when
satisfied that ‘one party has, in effect, taken advantage of the other’ or where ‘the
term is so unreasonable that it cannot properly have been understood or
considered’.

This approach of respecting, and so enforcing, the terms negotiated by commercial

contractors of roughly equal bargaining power is a further application of the approach
to fundamental breach that was applied in Photo Production v Securicor [1980] 3 All
ER 146 (see above Section 6.1.3). Other recent applications include:

 Sterling Hydraulics Ltd v Dichtomatik [2006] EWHC 2004. Clauses in a

contract for the sale of engine seals similar to those in Watford
Electronics v Sanderson were upheld.
 Regus (UK) v Epcot Solutions [2008] EWCA Civ 361. In a contract for
serviced office accommodation clauses limiting liability for loss of profit and
commercial losses were held to be reasonable. The Court of Appeal was

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 possibly influenced by the fact that the party subject to the clause used a
similar provision in his own business!

6.2.5     Contractual liability

The exclusion of contractual liability other than through negligence is covered by s.3
of the UCTA. This will now only apply in a business context where one of the parties
deals on the other’s ‘written standard terms of business’. This implies two pre-
conditions: that the relevant party has written standard terms of business and that,
on this occasion, he contracted on the basis of them. Where the contract is preceded
by negotiations that leave the ‘general conditions…substantially untouched’ the
parties will still be held to be contracting on written standard terms of business (St
Albans City and District Council v International Computers Ltd [1996] 95 LGR 592).
However, ‘any more than insubstantial’ difference between the terms proposed and
agreed will indicate that the contract was not on the other’s written standard terms
(African Export-Import Bank v Shebah Exploration & Production Co Ltd [2017]
EWCA Civ 845).

Section s.3(2) makes any attempt to exclude or limit liability subject to the
requirement of reasonableness – s.3(2)(a). It also subjects to the same test clauses
which purport to allow a party ‘to render a contractual performance substantially
different from that which was reasonably expected’, or ‘to render no performance at
all’ – s.3(2)(b). There is an important distinction between the provisions contained in
s.3(2)(a) and s.3(2)(b). It appears that s.3(2)(a) is aimed at the ‘classic type’ of
exclusion clause ‘exonerating a contractual party in default from the ordinary
consequences of that default’ according to Bingham MR in Timeload Ltd v British
Telecommunications plc [1995] EMLR 459. The proper interpretation of s.3(2)(b) has
been more problematic. It must be intended to apply to situations where the party
seeking to rely on the clause is not himself in breach of contract, otherwise it would
add nothing to s.3(2)(a). In Axa Sun Life Services v Campbell Martin [2011] EWCA
Civ 133, the Court of Appeal held that a so called ‘entire agreement clause’ (i.e. one
stating that a particular document contained all the parties’ contractual terms) is not
subject to s.3(2)(a) because it seems to prevent any collateral contract from arising,
but it could nonetheless be caught by s.3(2)(b).

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In AXA Sun Life Services plc v Campbell Martin Ltd (2011), the Court of Appeal
began its consideration of reasonableness with the recognition that the agreements
were made between commercial organisations in a commercial context, although the
claimant was a larger entity than the defendants.

Study task 6

A Ltd engages B Ltd to service the machines in A Ltd’s factory. The contract is
based on a written contract put forward by B Ltd. There is, however, considerable
negotiation over the price and the periods between services before the contract is
agreed. Will it fall within the scope of s.3 of the UCTA?

Show feedback

Study task 7

C Ltd contracts with D Ltd for D Ltd to paint the exterior of C’s office premises. The
contract is made through an exchange of letters. Is the contract within s.3 of the
UCTA?

Show feedback

6.2.6     The supply of goods

The UCTA 1977 contains special provisions in ss.6 and 7 dealing with
contracts for the sale or supply of goods. This includes hire purchase, hire
transactions and contracts for the supply of work and materials.

In relation to the statutorily implied terms as to title (ownership) that operate in

relation to such contracts, the UCTA prohibits any exclusion of liability.

In relation to the implied terms as to description or quality (for example, under

ss.13 and 14 of the Sale of Goods Act 1979), then liability under these terms
can only be excluded or limited in so far as the clause satisfies the
requirement of reasonableness.

Previously, UCTA regulated the exclusion of the same terms when the purchaser of
goods or services was a consumer. However, since the CRA 2015 came into force

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both the underlying obligations (as to title, description, quality, etc.) and the control of
their exclusion is found in the 2015 Act (see Section 6.2.1).

Study task 8

To answer a question involving an exemption clause requires a number of questions

to be asked. What are these questions and in what order should they be asked? If
you find it helpful you may wish to present these as a flow chart.

Show feedback
The following questions must be asked. If the answer is negative you should move
on to the next question. Your written answer to a problem might include such a
negative conclusion but you should be careful to do so briefly. There is a thin line
between stating a negative conclusion and including irrelevant material in an answer.

1. First ignore the exemption clause! Consider what liability would arise if there
were no exemption clause. If there are other express contract terms these will
need to be interpreted. Do not forget the possible statutory implied terms or
obligations. Be careful to consider all possible liabilities (e.g. breach of an
express term or terms, breach of any implied terms or obligations and
possible liability for misrepresentation). If there would be liability then:
2. Does the exemption clause form part of the contract? If it is in a signed
document consider the signature rule. If it is an unsigned document or notice
consider the preconditions of incorporation. If yes then:
3. Does the clause cover the breach or breaches that have occurred? This will
involve the application of the principles of contractual interpretation of
exclusion clauses including the contra proferentem rule and the doctrine of
fundamental breach. If the clause or clauses do otherwise cover the breaches
that have occurred:
4. Is the contract a B2B or B2C contract?

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 5. The previous answer will direct you to the correct statutory regime applicable
to exclusion clauses contained in that type of contract, either:

B2C      CRA 2015

B2B      UCTA 1977

Apply the relevant statutory provisions.

Study task 9

Xerxes plc includes an exclusion clause in all its contracts stating that ‘Xerxes plc is
in no circumstances liable for any losses whatsoever resulting from the breach of this
contract, whether resulting from negligence or any other cause.’ Xerxes has broken
a contract with Zenon Ltd. The contract is worth £50,000 to Zenon. Xerxes’ breach,
which is not caused by the negligence of Xerxes or any of its employees, causes
Zenon a loss of £2,500. Zenon claims this amount from Xerxes. Can Xerxes rely on
the clause?

Show feedback
The way this question is put ‘saves’ you from stage 1 and 2 above because you are
told that there has been a breach of contract and from the facts we can assume that
the clause is incorporated and that its wording covers the breach. It clearly falls
within either s.2 or s.3 of the UCTA. The question is, is it reasonable? The test is
whether it was a fair and reasonable clause to include in the contract at the time it
was made – not whether it is fair and reasonable to allow Xerxes to rely on it in the
circumstances which have occurred (see Stewart Gill v Horatio Meyer (1992)).

If the latter was the test to be applied then, in the light of the apparently minor nature
of the breach in relation to the contract as a whole, and the fact that it was not
caused by negligence, it might well have been reasonable to allow exclusion.
Looking at the potential scope of the clause at the time of the contract, however, it
becomes much less reasonable. The burden of proof is on Xerxes to prove that it is
reasonable (s.11(5) UCTA). A court would have to make a judgment taking into
account all the circumstances. The breadth of the clause would suggest that it is

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likely to be found to be unreasonable. Xerxes would not, therefore, be able to rely on
it.

Self-assessment questions

1. Name three types of contract that are not covered by the provisions of the
UCTA.
2. What is the general attitude of the courts to those who make contracts by way
of business?
3. What, in general, do exclusion clauses purport to exclude?

Summary

The CRA 2015 has made many changes and we have yet to see the true impact and
application of this Act. The protection offered by this Act is much broader in its
control of consumer contracts than the UCTA. The UCTA now applies to certain
contracts concluded between parties acting in the course of business. Clauses are
either rendered invalid or made subject to the requirement of reasonableness.
Clauses which are invalid are those excluding liability for negligence causing death
or personal injury and those excluding liability for the implied terms in supply of
goods contracts with consumers. Clauses which are subject to the test of
reasonableness include those excluding liability for negligence causing loss or
damage to property; clauses excluding contractual liability in relation to those
contracting on the other party’s written standard terms; and clauses excluding liability
for the implied terms in supply of goods contracts with business customers.

The test of reasonableness looks at all the circumstances of the case, but inequality
in the strength of bargaining power is likely to be a particularly strong consideration.

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Sample examination question
Question

Andrew is a surveyor. Four months ago he bought a nine-month old

‘Landmaster’ car from Brenda’s Garage Ltd for use in his practice. He paid
£12,500 for the car. As part of the contract for the purchase of the car he was
given a written guarantee in the following terms: ‘Brenda’s Garage Ltd
guarantees that, for three months from the date of purchase, it will put right
free of charge any defects in the vehicle which cannot be discovered on
proper examination at the time of purchase. Thereafter all work and materials
will be charged to the customer.’

The sales manager recommended to Andrew that he should take out the
‘special extended warranty’ under which, for payment of £350, the car would
have been guaranteed in respect of all defects for a further two years, but
Andrew declined.

Last week the engine and gearbox seized up. The repairs will cost £2,000.

Advise Andrew. Would your answer differ if he also used the car at the
weekends for domestic purposes?

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Feedback

In answering questions of this type you should start by indicating the way in which
the potential defendant is in breach of contract. Here it is to be assumed that
Brenda’s Garage is in breach of contract as regards the implied term of satisfactory
quality under s.14 of the Sale of Goods Act 1979. The question then becomes
whether Brenda’s Garage can take advantage of the exclusion of liability which is
included in the ‘guarantee’. This aspect of the question was examined in Topic 5. We
turn now to the issues of whether or not the clause was incorporated and, if so, how
the clause is regulated by the legislation.

As regards the common law rules, the main issue would seem to be that of
‘incorporation’. Was the ‘guarantee’ and the exclusion clause which it contains part of
Brenda’s Garage’s contract with Andrew? This will depend on whether the clause
was shown to Andrew before or at the time when he entered into the contract. If it
was handed to him after he had made the contract for the purchase of the car then it
would probably not be incorporated, and would therefore be ineffective
(Olley v Marlborough Court). One argument against this which the garage might use
would be that there was a separate unilateral contract under which Brenda’s Garage
Ltd said, ‘we will give you a three-month full guarantee, in return for your acceptance
of the limitation of our liability after three months’.

Assuming that the exclusion clause was incorporated, there would not seem to be
any argument that it covers the breach which occurred. Any detailed discussion of
the rules of construction is therefore unnecessary.

The main focus in answering this question should be the Unfair Contract Terms Act
1977. (Note that the Consumer Rights Act 2015 does not apply, since Andrew is not
a consumer for the purposes of those regulations.) Since the contract is for the sale
of goods, then the relevant provision is s.6. This requires you to decide whether
Andrew is contracting as a consumer (as defined in s.12 of the UCTA) or not. Is he
buying the car in the course of his business as a surveyor? It seems likely that he is
(but see R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 All
ER 847). If so then the clause limiting liability must satisfy the requirement of
reasonableness. In applying this test, as well as thinking about the matters set out in

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Schedule 2 to the UCTA, you should note the offer of the extended guarantee. Does
Andrew’s rejection of this opportunity mean that the exclusion contained in the
guarantee is more reasonable?

The alternative scenario increases the likelihood that Andrew will be treated as
contracting as a consumer under the R & B Customs Brokers approach. If he
is contracting as a consumer then the Garage will be unable to exclude its liability
under the Consumer Rights Act 2015.

Exemption Clauses in Contracts, a Case Study

Sebastian has entered into a contract with Brisbane Shipping Ltd and not directly
with Townsville Ltd. The question that arises here is therefore whether or not
Townsville can rely on the exemption clause in the contract between Sebastian and
Brisbane Shipping Ltd. It is also necessary to establish the effectiveness of the
exemption clause itself. If Townsville are liable to Sebastian, then it will also be
necessary to advise as to the recoverability of Sebastian’s losses.

Beginning first with the issue of whether the exemption clause is capable of relieving
Townsville Ltd of their liability, in Scruttons Ltd v Midland Silicones Ltd[1] a shipping
company agreed to carry some chemicals for the claimants. The bill of lading limited
the shipping company’s liability to $500. The shipping company utilised stevedores
to unload the drum, and stated that they were also to have the benefit of the
limitation clause. The drum was damaged by the stevedores who were then sued by
the claimant. The stevedores tried to rely on the limitation clause. It was held by the
House of Lords that they could not rely on the limitation clause because they were
not party to the contract.

However, the House of Lords did think that sub-contractors etc would be able to rely
on exemption clauses in some circumstances. Lord Reid said:

“I can see a possibility of success of the agency argument if (first) the bill of lading
makes it clear that the stevedore is intended to be protected by the provisions in it

40
which limit liability, (secondly) the bill of lading makes it clear that the carrier, in
addition to contracting for these provisions on his own behalf, is also contracting as
agent for the stevedores that these provisions should apply to the stevedore, (thirdly)
the carrier has authority from the stevedore to do that, or perhaps later ratification
by the stevedore would suffice, and (fourthly) that any difficulties about
consideration moving from the stevedore were overcome.”

In that case there was nothing suggesting that the parties intended the limitation of
liability to extend to the stevedores[2]. However, in New Zealand Shipping Co. Ltd v A
M Satterthwaite & Co Ltd (The Eurymedon)[3] a different outcome was reached. In that
case there was a contract to ship drilling equipment to New Zealand. The contract
contained an exemption clause which purported to exempt the carrier and its
servants and agents from liability. It was stated for the purposes of the exclusion
clause that the carrier was acting as agent. The defendants were employed as
stevedores and damaged the machinery. They then attempted to rely on the
exclusion clause. Following the four conditions set out by Lord Reid, the case turned
on whether there was consideration. It was held that a promise to perform a duty to
the carrier could amount to consideration for the promise of the consignor [4] and
therefore the stevedores were able to rely on the exemption clause.

The type of exemption clause which is used in this type of case are sometimes
referred to as ‘Himalaya’ clauses, after the name of a ship in a case (Adler v Dickson[5]).
Typically such a clause will state that every servant, agent, subcontractor etc shall
benefit from exemptions etc and that the carrier enters into the provisions on his
own behalf as agent.

The Contracts (Rights of Third Parties) Act 1999 provides that these ‘Himalaya’
clauses are lawful, affirming the principles set out in The Eurymedon (s. 6(5)), and,
providing the third party is named or is a member of a class answering a particular

41
included description, it will not matter that the third party was unascertainable at the
time of the formation of the contract (s. 1(3)).

This is exactly the type of clause contained in the contract entered into by Sebastian.
Townsville may therefore be able to rely on the exemption clause. They will need to
show that it was intended that they should be protected by the clause [6] and that
Brisbane Shipping had the authority to contract as agent on their behalf. As the
exemption clause specifically provides this, Townsville will be able to rely on the
exemption clause.

However, this does not necessarily mean that the exemption clause is sufficient to
exclude liability for the type of damage caused. If Sebastian has entered into the
contract personally then he is likely to be held to be in the position of “consumer”.
This will have the effect of causing the Unfair Contract Terms Act 1977 (UCTA) to
apply to the contract.

Although Schedule 1 to UCTA states that contracts for carriage of goods by sea are
excluded from the operation of much of the Act, this is not the case where liability
arises in favour as a person acting as a consumer and liability has arisen by virtue of
section 2(1) (negligence). Section 12(1) UCTA states that “A party to a contract ‘deals
as consumer’ in relation to another party if – (a) he neither makes the contract in the
course of a business nor holds himself out as doing; and (b) the other party does
make the contract in the course of a business… It can therefore be seen that
Sebastian does satisfy the definition of ‘consumer’ for the purposes of UCTA.

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Director General of Fair Trading v First National Bank [2001] UKHL
52 House of Lords 

The House of Lords was concerned with the interpretation of Reg 3 of the
1995 Unfair Terms in Consumer Contract Regulations which are identical
in wording to Reg 6 of the 1999 Regulations. The House of Lords were
determining the question of whether a clause, providing that interest at
the contractually agreed price, was payable after a judgment, came
within the ambit of Regulation 3 of the 1995 Regulations. It was held that
this did not represent a core term under the Regulations notwithstanding
the fact that it was an agreed term representing the price of
remuneration.

Lord Steyn:

"In any event, article 3(2) must be given a restrictive interpretation.

Unless that is done article 3(2)(a) will enable the main purpose of the
scheme to be frustrated by endless formalistic arguments as to whether a
provision is a definitional or an exclusionary provision. Similarly, article
3(2)(b) dealing with "the adequacy of the price of remuneration" must be
given a restrictive interpretation. After all, in a broad sense all terms of
the contract are in some way related to the price or remuneration. That
is not what is intended....It would be a gaping hole in the system if such

43
clauses were not subject to the fairness requirement."

On the issue of the meaning of good faith under Reg 5

Lord Bingham:

"Good faith in this context is not an artificial or technical concept... It

looks to good standards of commercial morality and practice. It lays down
a composite test, covering both the making and the substance of the
contract, and must be applied bearing clearly in mind the objective
which the regulations are designed to promote. Fair dealing requires that
a supplier should not, whether deliberately or unconsciously, take
advantage of the consumer's necessity, indigence, lack of experience,
unfamiliarity with the subject matter of the contract, weak bargaining
position"

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