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(c) the term implied was one which the House thought was reasonable in relation to the normal expectations of the obligations as between landlord and tenant. Despite the fact that Lord Wilberforce insisted on referring to the test as one of‘necessity’ rather than ‘reasonableness’, it is clear that in practice it is the latterword which indicates the approach being taken, once the preconditions for anyimplication in law have been met. In other words, if it is established that theagreement is one of ‘common occurrence’, and that it is ‘incomplete’, the courtswill themselves decide what term should be implied in order to make the contractwork ‘reasonably’ – meaning here ‘as would commonly be expected in relation toa contract of this type’. 136 An example of a term implied by law into an employment contract is to be found in Malik v BCCI .137 The employee had worked for the Bank of Credit and Commerce International which collapsed in 1991, amidst allegations that thebank had operated in a corrupt and dishonest manner. The employee claimed thathaving worked for BCCI had adversely affected his future employment prospects.On a trial of a preliminary issue as to whether the employee had any cause ofaction, it was confirmed by the House of Lords that there should be impliedinto contracts of employment a mutual obligation of ‘trust and confidence’. Thisobligation can be excluded or modified by the parties, but otherwise will operateas a ‘default’ clause in all contracts of employment. In this case, the implied termhad not been amended by the parties, and was held to include the obligation thatthe employer should not: 138 Without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trustbetween employer and employee. Thus, the employee did have the basis for a cause of action against his former employer for the damage caused by the way it was alleged the business had beenrun. The possibility of implying a term in law was also raised in Ashmore v Corp of Lloyd’s (No 2) 139 as an alternative to implication in fact. The plaintiff argued that there were many contracts in identical terms between ‘names’ and Lloyd’s,and that therefore this was an appropriate situation in which to use the Liverpool City Council v Irwin approach. Gatehouse J disagreed. What was important was not the number of contracts; rather, there needed to be a broad category or typeof relationship, even though within that type the detailed terms might vary onparticular points. The fact that in this case each contract was in identical terms didnot create a category, or genus, of contracts for which typical terms could befound. The plaintiff’s attempt to imply a term by this means failed once again. 136 Such an approach is likely to be most useful in respect of ‘relational’ contracts – see Macneil, 1978, and Chapter 1, 1.6. 137 [1998] AC 20; [1997] 3 All ER 1. 138 Ibid, p 34.139 [1992] 2 Lloyd’s Rep 620.The Contents of the Contract 275
7.7.8 TERMS IMPLIED BY STATUTE There are two reasons why it may be appropriate for Parliament to enact thatcertain provisions should be implied into all contracts of a particular type. Onerelates to efficiency. If it is virtually universal practice for certain terms to be usedin particular contractual relationships, there is no need for the parties to statethem specifically every time. In terms of economic analysis, there is a saving in‘transaction costs’. Rather than having to agree an appropriate wording on eachoccasion, the parties can rely on the statutory formulation as representing theirobligations. In such a situation, however, there should be the possibility of theparties being able to agree to depart from the statutory wording, if they so wish. The second reason why terms might need to be implied by statute is for the protection of one of the parties. It may be thought that a particular type of con-tractual relationship is likely to involve inequality of bargaining power, so that,unless protective provisions are implied, the weaker party may be forced into avery disadvantageous bargain. If this is the reason for the implication, then it maywell be that the obligation to include the term should be absolute, without anypossibility of it being excluded or amended in particular contracts. Examples of both of these bases for implying terms by statute can be found in the history of the implied terms as to quality under the Sale of Goods Acts. Theoriginal Sale of Goods Act (SGA) 1893 was intended to represent a codification ofcurrent commercial law and practice. Thus, the implied terms as to quality, con-tained in ss 13–15, were those which merchants of the time would have expectedto appear in any contract for the sale of goods. This was an example of the firstground for implying terms, that is, business efficiency. In line with this approach,s 55 of the SGA 1893 allowed the parties to agree to different terms as to quality,or to exclude them altogether, if they so wished. By the time of the enactment ofthe revised version of the SGA in 1979, however, the atmosphere had changed.The provisions as to quality had come to be regarded as important elements in thelaw of consumer protection. Their role was therefore at least in part to provideprotection for the weaker party in a sale of goods contract. As a result, the UnfairContract Terms Act (UCTA) 1977 made it impossible in situations where thecontract is made between a business and consumer for the business to excludethe implied terms. 140 Even as between business parties, the exclusion will be subject to a test of ‘reasonableness’. The terms implied by the Supply of Goodsand Services Act 1982 also seem to be based on principles of protection, ratherthan the avoidance of transaction costs. A further example of a term implied on the grounds of protection is to be found in the Equal Pay Act 1970. Section 3 implies into every employment contract an‘equality clause’ which has the effect of ensuring that, as between men andwomen employed on ‘like work’, there is equal treatment in relation to all terms oftheir contracts. The implication of terms on this basis runs counter to the normal philosophy of classical English contract law, which is to make the intentions of the parties 140 See the UCTA 1977, s 6 – discussed further in Chapter 8, at 8.7.19.The Modern Law of Contract 276
paramount. Here, the clause is imposed on the parties, whether they like it or not. Even if they expressly agree that it is not to operate, the courts will still give effectto it. This is an area where there is clearly a tension between the ‘classical’ and‘modern’ law. 7.7.9 IMPLIED TERMS UNDER THE SALE OF GOODS ACT 141 Various terms are implied into all sale of goods contracts by virtue of ss 12–15 of the SGA 1979. Similar provisions are to be found in the Supply of Goods andServices Act 1982, but these are not discussed here. The implied terms under the SGA 1979 are all labelled as ‘conditions’ or ‘warranties’. Breach of a condition will generally give the innocent party theright to repudiate the contract as well as claiming damages, whereas breach ofwarranty will only give a right to damages. 142 7.7.10 TITLESection 12 of the SGA 1979 is concerned with ‘title’ in the sense of the ‘right tosell’. There is an implied condition in every sale of goods contract that the sellerhas this right ‘at the time when property is to pass’. The condition will be broken ifthe goods belong to someone else, or if they cannot be sold without infringinganother’s rights, for example, in a trade mark. 143 A breach of this condition will be regarded as constituting a ‘total failure of consideration’. This has the potential toallow the purchaser to recover any money paid, even though use has been madeof the goods transferred. In Rowland v Divall , 144 the plaintiff car dealer had bought a car from the defendant. The car had previously been stolen, but neither partywas aware of this at the time. The plaintiff resold the car to a third party, fromwhom it was reclaimed, some months later, by the true owner’s insurancecompany. The plaintiff had to repay the purchase price to the third party, andthen sought to recover what he had paid to the defendant. Despite the fact of thelapse of time, and the consequent reduction in the value of the car, which wasdemonstrated by the fact that the insurance company had in fact sold it back tothe plaintiff at much less than the original contract price, the plaintiff was allowedto recover what he had paid to the defendant in full, on the basis of a total failure ofconsideration. The use that the plaintiff had made of the car was irrelevant. Theessence of a sale of goods contract is not the use of the goods, but the transfer ofownership. The breach of s 12 meant that ownership had never been transferred,and the plaintiff was therefore entitled to recover all his money. InRowland v Divall , the plaintiff was a dealer who was primarily interested in the ability to resell the car. The same principle, however, applies to a privatepurchaser. In Butterworth v Kingsway Motors , 145 the plaintiff had bought a car which, unknown to him, was subject to a hire purchase agreement, and was 141 The discussion of these terms is in outline only. For a full treatment see, for example, Atiyah, Adams and MacQueen, 2005, or Bridge, 1998. 142 For further discussion of the distinction between ‘conditions’ and ‘warranties’, see Chapter 16, 16.4.3. 143 Niblett v Confectioners’ Materials [1921] 3 KB 387. 144 [1923] 2 KB 500.145 [1954] 1 WLR 1286.The Contents of the Contract 277
reclaimed by the finance company nearly a year later. The plaintiff was allowed to recover the full purchase price from the defendant, notwithstanding thefact that the defendant was equally ignorant of the defect in title. The plaintiffthus had almost a year’s free use of the car. This decision has been the subject ofconsiderable criticism, 146 but has not as yet been overruled. Section 12 also contains an implied warranty of quiet possession, and freedom from encumbrances. 7.7.11 DESCRIPTION Section 13 says that where goods are sold by description, there is an impliedcondition that they will match the description. The description may come from the seller or the buyer, and can apply to specific as well as generic goods. 147 Section 13(3) makes it clear that selection by the buyer, as in a self-service shop, does not prevent the sale being by description. Virtually all sales will, as a result, be sales bydescription, unless the buyer indicates a particular article which he or she wishesto buy, without describing it in any way, and the article itself has no label orpackaging containing a description. There must, however, be some reliance onthe description by the buyer in order for s 13 to apply. Harlingdon and Leinster Enterprises v Christopher Hull Fine Art Ltd 148 concerned the sale of a painting which turned out not to be by the artist to whom it was attributed in the catalogue.It was found as a matter of fact that the buyer had not relied on this attribution,and therefore this was not a sale by description. 149 It is important to distinguish statements as to quality from statements of description. To describe a car as ‘new’ is description; to say that it has ‘goodacceleration’ is a statement of quality, and not within s 13. Statements inadvertisements can, however, be regarded as part of the description, even ifthe goods have subsequently been inspected. In Beale v Taylor , 150 a car was advertised as a 1961 model. In fact, it was made of two halves welded together,only one of the halves dating from 1961. It was held that there was a breach ofs 13. Note that s 13 applies to private sales as well as those in the course of a business. 7.7.12 SATISFACTORY QUALITY Where a sale of goods contract is made in the course of business, s 14(2) impliesa term of ‘satisfactory quality’. The scope of the phrase ‘in the course ofbusiness’, which also applies to the implied term under s 14(3), was consideredby the Court of Appeal in Stevenson v Rogers . 151 The case concerned the sale by 146 For example, Atiyah, Adams and MacQueen, 2005, pp 114–19; Bridge, 1998, pp 395–97. 147 Varley v Whipp [1900] 1 QB 513. Where particular items are identified at the time of the contract (for example, ‘my Chippendale table’) they will be ‘specific goods’: SGA 1979, s 61. Where goods of a specified type are to be sold (for example, 10 tons of wheat), without any particular items being identified, they will be ‘generic goods’. 148 [1990] 1 All ER 737. 149 It was significant in this case that the seller professed no specialist knowledge, whereas the buyer was an ‘expert’ in paintings of the relevant type. 150 [1967] 3 All ER 253. See also 7.3.2, and note 18, above.151 [1999] 1 All ER 613.The Modern Law of Contract 278
a fisherman of his fishing boat. The court noted that the original wording of the relevant section in the Sale of Goods Act 1893 had limited liability to wherethe seller dealt ‘in goods of that description’. This limitation had been removed,however, and did not appear in s 14 of the 1979 Act. The fact, therefore, that thefisherman was not regularly in the business of selling fishing boats did not preventthis being a sale ‘in the course of business’, so that the implied term under s 14(2)applied. In coming to this conclusion, the court held that the narrower inter-pretation of ‘the course of a business’ used by the Court of Appeal in R and B Customs Brokers v UDT 152 in relation to the UCTA 1977 should not be used in this context.153 Where the requirement of ‘satisfactory quality’ applies, this means, according to s 14(2A), that the goods must: . . . meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all other relevantcircumstances. This test of satisfactory quality was substituted for the previous test of ‘merchant- able quality’ by the Sale and Supply of Goods Act 1994. The previous case law ons 14(2) is therefore only of limited assistance in the interpretation of this section.Section 14(2B), however, indicates some of the factors which will be relevant inapplying the new test. These include the state and condition of the goods, and inparticular their: (a) fitness for all the purposes for which goods of the kind in question are commonly supplied; (b) appearance and finish; (c) freedom from minor defects;(d) safety; and(e) durability. The test of ‘merchantable quality’ had centred on the issue now dealt with in (a) above. By virtue of the decision in Aswan Engineering Establishment Co v Lupdine Ltd , 154 however, goods which were fit for just one of the purposes for which they were commonly used would be merchantable. The new wording con-tained in (a) above means that the fitness of the goods for all such purposes will be relevant to the test of whether they are of satisfactory quality. The test refers to the expectations of a ‘reasonable person’ as to the quality of the goods. This was considered in Bramhill v Edwards . 155 The contract was for the purchase of a motor home that had been imported from the USA. The particularvehicle, which the buyer had inspected before purchase, was two inches widerthan the maximum prescribed in the relevant United Kingdom regulations. There 152 [1988] 1 All ER 847. 153 For discussion of this case, see Chapter 8, 8.7.3.154 [1987] 1 WLR 1.155 [2004] 2 Lloyd’s Rep 653The Contents of the Contract 279
was evidence that the licensing authorities and insurers were ‘turning a blind eye’ to this issue, and that it was not causing significant problems for owners of suchvehicles, many of which had been imported. The trial judge held that a reasonableperson would have found the vehicle unsatisfactory. The Court of Appeal dis-agreed. The reasonable person should be taken to be aware of the relevant back-ground facts – in this case, the significant number of imports, and the tolerantattitude of the authorities. On this basis, there was no breach of s 14(2). Defects which have been brought to the buyer’s attention prior to the contract, or which should have been revealed by any inspection actually undertaken bythe buyer, will not make the goods of unsatisfactory quality (s 14(2C)). (This was afurther basis on which the seller in Bramhill v Edwards succeeded.) There seems no reason to doubt that the new test will, like the test of merchantability, include the containers in which the goods are supplied, and mayalso include instructions for use. If the goods are supplied in bulk, extraneousitems which are concealed within them may render the goods unsatisfactory. InWilson v Rickett Cockerell Co , 156 the presence of detonators in a bag of coal was held to make the coal unmerchantable. If the buyer is a consumer, then, as a result of additions made by the Sale and Supply of Goods to Consumers Regulations 2002,157 an additional circumstance needs to be taken into account in relation to the test of satisfactory quality.Section 14(2D) states that: . . . if the buyer deals as consumer . . . the relevant circumstances mentioned in subsection (2A) above include any public statements on the specific characteristicsof the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling. This means that, for the first time, statements made in national advertising and emanating from the manufacturer (‘producer’) rather than the seller can affect theseller’s obligation to sell goods of ‘satisfactory quality’. There is some protectionfor the seller in the new s 14(2E) in relation to statements of which the seller wasnot aware, which have been withdrawn or corrected, or which could not haveinfluenced the consumer’s decision to buy the goods. The scope of ‘satisfactoryquality’ in consumer contracts is nevertheless significantly expanded by thisamendment. Finally, it is important to note that the test of satisfactory quality does not relate to the particular use that the buyer has in mind (for which see s 14(3), below) but tothe general standard of the goods. This is confirmed by the recent Court of Appealdecision in Jewson Ltd v Boyhan , 158 which is discussed below (see 7.7.14). 156 [1954] 1 QB 598. 157 SI 2002/3045 – the Regulations came into force on 31 March 2003. They were intended to give effect to the European Directive on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees (1999/ 44/EC). In addition to amending the definition of satisfactory quality, as indicated in the text, the Regulationsprovide for additional remedies for consumers, including a right to demand free repair, or a reduction in pricefor goods which are unsatisfactory. 158 [2003] EWCA Civ 1930.The Modern Law of Contract 280
7.7.13 FITNESS FOR A PARTICULAR PURPOSE If the buyer wants the goods for a particular purpose, and the seller is aware ofthis, then by virtue of s 14(3) there will, in all sales in the course of a business, bean implied term that the goods will be reasonably fit for that purpose, unless: . . . the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely on the skill and judgment of the seller. The section can apply even though the goods only have one purpose, in which case the seller will be taken to have notice of it,159 but it will usually be more appropriate to use s 14(2) in such circumstances. Section 14(3) may need to berelied on, however, if there is something special about the circumstances in whichthe goods are to be used. In Griffiths v Peter Conway , 160 the plaintiff contracted dermatitis from wearing a Harris Tweed coat. This was brought about by the factthat the plaintiff had an unusually sensitive skin. On the facts, this was not some-thing which the seller knew, and so the claim under s 14(3) failed. If the seller hadbeen aware, however, then the action under this section would have been theappropriate one, despite the fact that the coat had only one ‘purpose’, that is, tobe worn. FOR THOUGHT For thought: Would it have made any difference if a sig- nificant proportion of people were sensitive to Harris Tweedand the seller of the coat was aware of that fact? The same approach was used by the House of Lords in Slater v Finning Ltd .161 A camshaft supplied by the defendant failed when used in an engine fitted to the plaintiff’s fishing boat. Replacement camshafts supplied by the defendantalso failed. The plaintiff sold the engine, with its latest replacement camshaft,and it was fitted to another fishing boat in which it was apparently used withoutproblem. The judge found that the problem of the failure of the camshafts musthave been caused by some unexplained idiosyncrasy of the plaintiff’s fishingboat. There was therefore no breach of the implied condition of fitness forpurpose. This conclusion was confirmed by the House of Lords, which also madeclear that where the problem arose from an abnormal or unusual situation not 159 Priest v Last [1903] 2 KB 148. 160 [1939] 1 All ER 685. 161 [1996] 3 All ER 398.The Contents of the Contract 281
known to the seller, it was irrelevant for the purposes of s 14(3) whether or not this situation was known to the buyer. A claim will not succeed under s 14(3) where the problems arise from the buyer’s misunderstanding of instructions supplied with the goods. This was theview taken in Wormell v RHM Agriculture (East) Ltd . 162 This decision appears to accept, however, that defective instructions could lead to goods being found tobe not fit for a particular purpose. Once it is clear that the seller knew of the particular purpose, the burden is on the seller to show that there was no, or unreasonable, reliance. This is a hard testto satisfy, since the courts tend to favour the buyer, and have made it clear thatpartial reliance is sufficient to found an action. 163 7.7.14 RELATIONSHIP BETWEEN S 14(2) AND S 14(3)InJewson Ltd v Boyhan , 164 the Court of Appeal emphasised the need to dis- tinguish carefully between s 14(2) (satisfactory quality) and s 14(3) (fitness fora particular purpose). The defendant had supplied electric boilers for a flat con-version project. The boilers had the effect of reducing the energy efficiency ratingof the flats and therefore made the flats more difficult to sell. The trial judge foundthe defendants in breach of both s 14(2) and s 14(3). In allowing the defendant’s appeal, the Court of Appeal held that s 14(2) was concerned with the intrinsic quality of what was supplied. Here the question unders 14(2) was whether the boilers were satisfactory as boilers for flats, ignoring theparticular circumstances which gave rise to the problems in this case. The answerwas ‘yes’, so there was no breach of s 14(2). As regards s 14(3), the importantissue was whether the claimant had reasonably relied on the defendant’s skill andjudgment in supplying the boilers. The answer was yes, as regards the intrinsicquality of the boilers for heating flats, but no as regards their suitability for theseparticular flats. On this issue, the defendant had insufficient information for it to bereasonable for the claimant to rely on them for this purpose. The defendant wastherefore not liable under s 14(3) either. 7.7.15 SALE BY SAMPLE Where there is a sale by sample there is an implied condition, by virtue of s 15: (a) that the bulk will correspond with the sample in quality; (b) [repealed];(c) that the goods will be free from any defect, making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample. This section does not seem to have given rise to any serious difficulties in application. 162 [1987] 3 All ER 75. 163 Ashington Piggeries v Christopher Hill [1972] AC 441. 164 [2003] EWCA Civ 1930.The Modern Law of Contract 282
7.8 STATUTORY CONTROLS As we have seen, the contents of the contract may be subject to statutory control, in that terms may be implied, and exclusion of such terms may be prohibited, bystatute (for example, the SGA 1979; the UCTA 1977). There is now, however, abroader control of the contents of certain types of consumer contract, whichresults from the Unfair Terms in Consumer Contracts Regulations 1999. 166 These Regulations prohibit a wider range of contractual clauses than simply theexclusion clauses affected by the UCTA 1977. The Regulations thus represent afurther inroad into the traditional common law principle that the intention of theparties is paramount. Since, however, they relate most closely to the type ofcontrol contained in the UCTA 1977, and overlap to a considerable extent withthat Act, full discussion of these Regulations is left to Chapter 8. It is important toremember, however, that all clauses in consumer contracts, other than thosewhich are ‘individually negotiated’, or relate either to the definition of the mainsubject matter of the contract or to the question of price or remuneration, 167 are subject to a test of ‘fairness’. They will be regarded as ‘unfair’ if they ‘cause asignificant imbalance in the parties’ rights and obligations arising under the con-tract, to the detriment of the consumer’. 168 This constitutes a very powerful control over the contents of consumer contracts. It enables the courts to abandon almostentirely any pretence that regulation is based on the intentions of the parties.What is ‘fair’ to the consumer will be the test, which may well be decided byconsidering the consumer’s reasonable expectations. This statutory frameworkmeans that the divide between the construction of contracts betweenbusinesses, and those between consumers, which has always existed, has grownconsiderably. Depending on how the Regulations are applied, and what furthercontrols may be introduced, in future it may be necessary to deal with the con-tents of consumer and non-consumer contracts entirely separately. Indeed, if the Law Commission’s proposals to replace the Regulations with a broadly based Unfair Contract Terms Act are accepted, 169 most terms in contracts entered into by small businesses (that is, those with under 10 employees) withother businesses, as well as those made by consumers, will be subject to a test of‘reasonableness’. This will further erode the idea that the substance of the agree-ment is for the parties to determine, and that the courts simply aim to give effectto their intentions. These proposals are discussed in more detail in Chapter 8,at 8.10. 166 SI 1999/2083. 167 Ibid, reg 6.168 Ibid, reg 5(1). 169 See Law Commission, Unfair Terms in Contracts , Law Com No 292, Scot Law Com No 199, Cm 6464, 2005.The Modern Law of Contract 284
7.9 SUMMARY OF KEY POINTS The distinction between representations and terms is important because different remedies are available in relation to breach of a term as opposed toa misrepresentation. In deciding whether a pre-contractual statement has become part of thecontract the courts will look at: the importance of the issue; whether the contract was put into writing; the relevant skill and knowledge of the parties; the lapse of time between the statement and the contract. Express terms must be incorporated. Specific notice may need to be givenof very unusual terms. Where a contract is in writing, the courts will be reluctant to receiveevidence that some other provision was intended to be included – the ‘parolevidence’ rule. Exceptions relate to the importance of the alleged term,custom, and ambiguous terms. In interpreting terms courts will not necessarily follow their literal meaning.They will be prepared to take into account the factual context. In commercialcontracts a ‘purposive’ or ‘commercial’ approach to interpretation will beused. Terms may be implied by custom, as question of fact, or as a matter of law. Terms will only be implied as a question of fact where they are necessary forthe contract, or by using the ‘officious bystander’ test. Terms will be implied by law by the courts where a contract of a commontype (e.g. a lease, contract of employment) is incomplete. The courts willimply a term that would reasonably be expected to be found in such acontract. Terms may be implied by statute – e.g. Sale of Goods Act 1979.The Contents of the Contract 285
Test your understanding of the chapter’s key terms by using the Flashcard glossary Explore Contents of the Contract further by accessing a series of web linksThe Contents of the Contract 287
8 Clauses Excluding or Limiting Liability Contents 8.1 Overview 2898.2 Introduction 2908.3 Common law rules 2928.4 Incorporation 293 8.5 Construction 3008.6 Statutory controls 3108.7 Unfair Contract Terms Act 1977 3118.8 Unfair Terms in Consumer Contracts Regulations 1999 332 8.9 Proposals for reform 3388.10 Principles of European Contract Law 3408.11 Summary of key points 3418.12 Further reading 342 8.1 OVERVIEW This chapter deals with the situations where parties attempt to exclude or limit their liability for breach of contract by including exclusion or exemption clauses in
the contract. It is an area governed by both common law and statute. The statutory provisions were developed in the latter half of the twentieth century andtend to have a consumer focus. The common law rules were developed earlier todeal with imbalances in bargaining power between the parties. The common lawis looked at first, here, followed by the statutory rules: Common law Rule of incorporation. Was the clause part of the contract? Wasappropriate notice of it given to the other party? Rule of construction. Does the wording of the clause make it clear thatit covers the breach that has occurred? Statute Unfair Contract Terms Act (UCTA) 1977. The statute makes someexclusion clauses void (for example, clauses which attempt to excludeliability for death or personal injury caused by negligence). Many otherclauses are subject to a test of ‘reasonableness’. Case law on the Acthas tended to allow businesses more freedom to exclude liability whencontracting with each other than in contracts with consumers. Unfair Terms in Consumer Contracts Regulations (UTCCR) 1999.These regulations derive from a European directive. They impose arequirement of ‘fairness’ on most terms in consumer contracts. ‘Goodfaith’ is part of the test of fairness. There is overlap between UCTA and UTCCR which at times makes itdifficult to determine which should apply. Principles of European Contract Law. These contain provisions which largelyadopt a similar approach to that of the UTCCR. Proposals for reform. The Law Commission has recommended that the lawshould be simplified by combining the UCTA and the UTCCR into onestatute. Principles of European Contract Law. These contain provisions that largelyadopt a similar approach to the UTCCR. 8.2 INTRODUCTION It will very often be the case that a contract will include a clause excluding orlimiting the liability of one of the parties in the event of certain types of breach. Theexclusion may be total, or may limit the party’s liability to a specified sum ofmoney. There is nothing inherently objectionable about a clause of this kind.Provided that it has been included as a result of a clear voluntary agreementbetween the parties, it may simply indicate their decision as to where certainrisks involved in the transaction should fall. If the contract involves the carriageof goods, for example, it may have been agreed that the owner should beThe Modern Law of Contract 290
contracts,6 the courts clearly viewed exclusion clauses as a particular type of clause needing special treatment. This separation of exclusion clauses from the general run of contractual provisions, and in particular the distinction drawnbetween clauses which exclude liability and those that define obligations, isunderstandable in the context of a general approach based on ‘freedom of con-tract’. If the courts were saying on the one hand that parties should be free todetermine their own contractual obligations, and that the question of whetherthe obligations undertaken were ‘fair’ or ‘reasonable’ was generally irrelevant, itwould cause problems if, on the other hand, they were seen to be interfering inthis contractual freedom. By treating exclusion clauses as distinct from clausesdefining obligations, such interference could be seen as limited and designed totackle a particular type of situation tangential to the central issue of the freedom ofthe parties to determine their obligations towards each other. In the twentieth century, the fact that contracts at times needed regulation to achieve ‘fairness’ was acknowledged more directly and, moreover, Parliamentintervened to add a statutory layer of controls on top of the common law rules(that is, the Unfair Contract Terms Act (UCTA) 1977 and the Unfair Terms in Con-sumer Contracts Regulations (UTCCR) 1999). 7 These controls are not limited to clauses which are stated as excluding liability, but do extend to some extent toprovisions which purport to define obligations. It may be that we are thereforemoving towards a situation where the law of contract controls ‘unfair’ terms ofwhatever type, rather than having special rules for exclusion clauses. At themoment, however, the body of case law directed at exclusion clauses is stillof sufficient importance to merit separate treatment. Despite the statutory inter-ventions, the common law remains very important, not least because its rulesapply to all contracts, whereas the UCTA 1977 and the UTCCR 1999 apply only incertain situations. 8.3 COMMON LAW RULES The approach of the courts to exclusion clauses has not traditionally been toassess them on their merits. In other words, they have not said ‘we think thisclause is unreasonable in its scope, or unfair in its operation, and therefore wewill not give effect to it’. As has been noted above, such an approach would haverun too directly counter to the general ideas of ‘freedom of contract’ which wereparticularly important to the courts of the nineteenth century. So, instead, thecourts developed and adapted formal rules relating to the determination of thecontents of the contract, and the scope of the clauses contained in it, which wereused to limit the scope of exclusion clauses. The main rules which are used arethose of ‘incorporation’ and ‘construction’, though we will also need to note theso-called ‘doctrine of fundamental breach’. 6 In particular, the rules relating to ‘incorporation’ and ‘construction’. The doctrine of fundamental breach, while it lasted, was a technique developed more particularly to deal with exclusion clauses. 7 Below, 8.7 and 8.8.The Modern Law of Contract 292
8.4 INCORPORATION A clause cannot be effective to exclude liability if it is not part of the contract. The ways in which the courts determine the contents of a contract have beenconsidered in the previous chapter. The rules discussed there, including the parolevidence rule and its exceptions, are also relevant to the decision as to whetheran exclusion clause is part of the contract. It will almost always be the case that anexclusion clause will be in writing – though there is no principle which preventsa party stating an exclusion orally, as with any other contractual term. The firstquestion will be, therefore, whether that written term can be regarded as partof the contract. The courts have generally been concerned to limit the effect ofexclusion clauses (particularly as regards consumers), and they have, therefore, inthis context applied fairly strict rules as to the incorporation of terms. The rules arebased on the general principle that a party must have had reasonable notice ofthe exclusion clause at the time of the contract in order for it to be effective. If,however, the contract containing the clause has been signed by the claimant,there will be little that the courts can do. In L’Estrange v Graucob , 8 for example, the clause was in small print, and very difficult to read, but because the contracthad been signed, the clause was held to have been incorporated. Scrutton LJmade it clear that in such cases questions of ‘notice’ were irrelevant: In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to havebeen aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or n o t... This rule has been applied strictly by English courts.9 The main exceptions relate to the situations referred to by Scrutton LJ in the above quotation – that is, where the signature has been induced by fraud or misrepresentation.10 An example of the application of this principle is to be found in Curtis v Chemical Cleaning and Dyeing Co Ltd .11 The plaintiff had taken a dress for cleaning. She was asked to sign a receipt containing a widely-worded exemption clause. On querying this,she was told by the assistant that the clause meant that the defendants would not 8 [1934] 2 KB 394. 9 It has been strongly criticised by Spencer, who has argued that the rule was based on a misapplication of the parol evidence rule (see 7.3.1) and the defence of non est factum (see 11.9): Spencer, 1973. He suggests that the claimant should not be bound by the clause where ‘he did not mean to consent to the disputed term, and although he appeared to consent to it, the other party either caused or connived at his mistake’: ibid, p 121. The Ontario Court of Appeal took a less strict view than the English courts in Tilden Rent-a-Car Co v Clendenning (1978) 83 DLR (3d) 400, refusing to apply L’Estrange v Graucob where the contract was made in a ‘hurried, informal manner’ and it was clear to the other party that the signatory had not read the contract.See also Trigg v MI Movers International Transport Services Ltd (1991) 84 DLR (4th) 504, applying the Tilden decision without reference to L’Estrange v Graucob . 10 For the law relating to the general effect of these on contractual obligations, see Chapter 9.11 [1951] 1 KB 805.Clauses Excluding or Limiting Liability 293
8.4.1 RELEVANCE OF TIME If a contract containing the clause has not been signed, then the time at which it is put forward will be important. If it is not put forward until after the contract hasbeen made, then it clearly cannot be incorporated. All the main terms of thecontract must be settled at the time of acceptance. This is, in effect, the same ruleas was applied in Roscorla v Thomas , 14 preventing a promise made after the agreement from being enforced, because no fresh consideration was given for it.In the same way, the promise by one party to give the other the benefit of anexclusion clause will be unenforceable if made after the formation of the contract.Thus, in Olley v Marlborough Court Hotel , 15 the plaintiff made the contract for the use of a hotel room at the reception desk. A clause purporting to exclude liabilityfor lost luggage was displayed in the room itself. It was held that this came too lateto be incorporated into the contract. 16 The position might have been different if the plaintiff had been a regular user of the hotel, and therefore as a result of a long andconsistent ‘course of dealing’ could be said to have had prior notice of theclause. 17 The defendant might then be entitled to assume that the plaintiff had previously read the clause even if this was not in fact the case. Incorporation by a ‘course of dealing’ was considered in Kendall (Henry) & Sons v Lillico (William) & Sons Ltd .18 Here the contract was between buyers and sellers of animal feed. They had regularly contracted with each other on three orfour occasions each month over a period of three years. On each occasion, a‘sold note’ had been issued by the seller, which put responsibility for latentdefects in the feed on the buyer. The buyer tried to argue that it did not know ofthis clause in the sold note. However, the House of Lords held that it was bound.A reasonable seller would assume that the buyer, having received more than100 of these notes containing the clause, and having raised no objection to it, wasagreeing to contract on the basis that it was part of the contract. Regularity isimportant, however, and Kendall v Lillico was distinguished in Hollier v Rambler Motors , 19 where there had only been three or four contracts over a period of five years. It was held that an exclusion clause contained in an invoice given tothe plaintiff after the conclusion of an oral contract for car repairs was notincorporated into the contract. Inconsistency of procedure may also preventincorporation. In McCutcheon v MacBrayne , 20 the plaintiff’s agent had regularly shipped goods on the defendant’s ship. On some occasions, he was required tosign a ‘risk note’ containing an exclusion clause, on other occasions the contractwas purely oral. The agent arranged for the carriage of the plaintiff’s car which 14 (1842) 3 QB 234 – see above, 3.8. 15 [1949] 1 KB 532. Note that the liability of a hotel owner for the loss of guests’ property is now affected by the Hotel Proprietors Act 1956. 16 Cf also Thornton v Shoe Lane Parking [1971] 2 QB 163; [1971] 1 All 686 – ticket from a machine – below, 8.4.3; andChapelton v Barry UDC [1940] 1 KB 532; [1940] 1 All ER 356 – below, 8.4.4. 17 Cf in a non-exclusion clause context, British Crane and Hire Corp Ltd v Ipswich Plant Hire Ltd [1975] QB 303 – discussed in Chapter 7, 7.7.2. 18 [1969] 2 AC 31 – on appeal from Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association . 19 [1972] 2 QB 71; [1972] 1 All ER 399. 20 [1964] 1 WLR 125.Clauses Excluding or Limiting Liability 295
was lost as a result of the negligent navigation of the ship. No risk note had been signed, and the House of Lords refused to accept that the exclusion clause couldbe incorporated from the agent’s previous dealings. There was no consistentcourse of conduct sufficient to allow such an argument to succeed. 8.4.2 REQUIREMENT OF ‘REASONABLE NOTICE’ More commonly, the clause will be presented as part of a set of standard terms,which the other party will be given or referred to at the time of making thecontract. In that situation, the test is whether ‘reasonable notice’ of the clause hasbeen given. Key Case: Parker v South Eastern Railway21 (1877) The plaintiff had deposited a bag at a railway cloakroom. He was given a Facts:ticket in exchange. The front of the ticket, which contained a number and date,also said ‘See back’. On the other side of the ticket were various clauses,including one excluding liability for goods exceeding the value of £10. Theplaintiff’s bag, worth £24.50, was lost. The jury found that the plaintiff hadnot read the ticket, nor was he under any obligation to do so. On that basis,the judge had directed that judgment should be given for the plaintiff. Thedefendant appealed. The Court of Appeal ordered a new trial, on the basis that the proper test Held:was whether the defendants had given reasonable notice of the conditionscontained on the ticket. The relevant principle was stated by Mellish LJ in thefollowing terms: 22 I am of the opinion, therefore, that the proper direction to leave to the juryin these cases is that if the person receiving the ticket did not see or knowthat there was any writing on the ticket, he is not bound by the conditions;that if he knew there was writing, and knew or believed that the writingcontained conditions, then he is bound by the conditions; that if he knewthere was writing on the ticket, but did not know or believe that the writingcontained conditions, nevertheless he would be bound, if the deliveringof the ticket to him in such a manner that he could see there was writingupon it, was, in the opinion of the jury, reasonable notice that the writingcontained conditions. The test is therefore whether ‘reasonable notice’ of the clause has been given.The question of what constitutes reasonable notice is a question of fact. Thestandard to be applied is what is reasonable as regards the ordinary adult 21 (1877) 2 CPD 416. 22 (1877) 2 CPD 416, p 423. The principle is stated in terms of the correct direction to a jury, since at that time it was common for civil cases to be heard before a jury.The Modern Law of Contract 296
individual, capable of reading English.23 Thus, in Thompson v London, Midland and Scottish Railway ,24 the fact that the plaintiff was illiterate did not help her. The position might be different, however, if the defendant had actual knowledge of the plaintiff’s inability to read the terms and conditions. In such a case, the giving ofreasonable notice might require rather more of the party wishing to rely on theclause. In Thompson , the Court of Appeal in addition held that stating on a ticket ‘Issued subject to the conditions and regulations in the company’s timetables andnotices’ was sufficient to draw the other party’s attention to the existence of theterms, and thereby to incorporate them into the contract. This was so eventhough the timetable containing the relevant clause was not available for free,but had to be purchased from the company. This is perhaps at the limits of whatcould amount to reasonable notice, 25 but the principle remains that the con- tractual document itself does not need to set out the exclusion clause if it givesreasonable notice of the existence of the clause, and indicates where it can beread. What is reasonable will, of course, depend on all the circumstances. InThompson , for example, the court placed some stress on the fact that the ticket was for a specially advertised excursion, at a particularly low price, and not for aregular service. There is some suggestion in the judgments, though the point isnot made very clearly, that a different standard of notice might be required inrelation to full-priced regular services. The point seems to be that special con-ditions, including the possibility of limited liability, were reasonably to be expectedin relation to a cheap excursion, whereas there would not be the same level ofexpectation in relation to regular services. FOR THOUGHT Do you think the outcome of Thompson would (should) have been the same if the plaintiff had been blind, and carried a white stick? 8.4.3 INCORPORATION AND UNUSUAL EXCLUSIONS TheThompson decision is clearly helpful to the defendant. More recently, the courts have adopted an approach which requires an assessment of the natureof the clause alongside the amount of notice given. Thus, the more unusual ormore onerous the exclusion clause, the greater the notice that will be expected tobe given. In Spurling v Bradshaw , 26 for example, Lord Denning commented that:27 23 (1877) 2 CPD 416, p 423. 24 [1930] 1 KB 41.25 Indeed, Treitel (2007, p 242) suggests that the notice might not nowadays be regarded as sufficient. 26 [1956] 2 All ER 121. 27 Ibid, p 125.Clauses Excluding or Limiting Liability 297
Some exclusion clauses I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to besufficient. InThornton v Shoe Lane Parking Ltd ,28 this approach was applied, so that a clause displayed on a notice inside a car park, containing extensive exclusions, was held not to be incorporated into a contract which was made by the purchaseof a ticket from a machine. The Court of Appeal did not decide definitively thepoint at which the contract was made, but it was probably when the customeraccepted the car park owner’s offer by driving up to the barrier, thus causing themachine to issue a ticket. If that was the case, then, applying the same principleas in Olley v Marlborough Court Hotel , 29 any conditions or reference to conditions contained on the ticket came too late – the contract was already made. It was notfeasible, as would (at least theoretically) be possible if dealing with a human ‘ticketissuer’, for the recipient to inquire further about the conditions, or to reject theticket. Even if the ticket could be a valid means of giving notice, however, or ifthe customer could be required to be put on inquiry by a notice at the entrancestating ‘All cars parked at owner’s risk’, there was an issue about the degree ofnotice required. The exclusion clause in this case was very widely drawn, andpurported to cover negligently caused personal injuries (which the plaintiff had infact suffered). As a result, the court felt that the defendant needed to take morespecific action to bring it to the attention of customers. In the view of Megaw LJ: 30 . . . before it can be said that a condition of that sort, restrictive of statutory rights [that is, under the Occupiers’ Liability Act 1957], has been fairly excluded there mustbe some clear indication which would lead an ordinary sensible person to realise, at or before the time of making the contract, that a term of that sort, relating to personal injury, was sought to be included. In cases such as this, therefore, the nature and scope of the attempted exclusion becomes a relevant factor in relation to incorporation. The issue is not solelyprocedural, but is affected by the substance of the clause. We have seen thatthe same approach may be used in relation to other types of clause. Thus, inChapter 7, it was noted that the same rule operated in Interfoto Picture Library v Stiletto Visual Programmes 31 to prevent the incorporation of a clause which was not an exclusion clause, but which was nevertheless exceptional, and unusuallyonerous. Bradgate has argued that these cases, together with the Court of Appealdecision in AEG (UK) Ltd v Logic Resource Ltd , 32 have, in effect, created a com- mon law test of the ‘reasonableness’ of exclusion clauses.33 It is not clear, how- ever, that they do go that far. If the person relying on the clause in each case hadspecifically drawn the other party’s attention to it, so that actual notice was given, 28 [1971] 2 QB 163; [1971] 1 All ER 686. 29 [1949] 1 KB 532; [1949] 1 All ER 127 – above, 8.4.1. 30 [1971] 2 QB 163, p 173; [1971] 1 All ER 686, p 692.31 [1988] QB 433; [1988] 1 All ER 348 – see 7.6.1.32 [1996] CLC 265.33 Bradgate, 1997.The Modern Law of Contract 298
it seems likely that the courts would have held it to be incorporated and enforce- able. The same would be likely to be true if the contract containing the clause hadbeen signed. 34 It is only where there is reliance on ‘reasonable notice’, rather than actual knowledge, that the courts feel the need to consider the nature of theclause, and whether it is unusual. It is then still the reasonableness of the notice,rather than the reasonableness of the clause itself, that is the issue. The need for acommon law test of substantive reasonableness is also unclear (as Bradgaterecognises) given the statutory tests contained in the UCTA 1977, and the UTCCR1999. 35 In the AEG case, for example, the Court of Appeal also held the clause to be unreasonable under the 1977 Act. The existence of these statutory protectionsfor the ‘vulnerable’ contracting party makes it less likely that the courts willexpand the approach taken in Thornton , etc., into a more general test of the reasonableness of exclusion clauses. 8.4.4 NEED FOR A ‘CONTRACTUAL’ DOCUMENT In order to be effectively incorporated, the exclusion clause must generally becontained, or referred to, in something which can be regarded as a contractualdocument. This is the aspect of the rule that reasonable notice must be given.Notice is unlikely to be regarded as reasonable if the clause appears in somethingwhich would not be expected to contain contractual terms. Key Case Chapelton v Barry UDC36 (1940) The plaintiff wished to hire a deckchair. He took a chair from a pile near a Facts:notice indicating the price and duration of hire, and requesting hirers to obtaina ticket from the attendant. The plaintiff obtained a ticket, but when he usedthe chair it collapsed, causing him injury. It was accepted that the collapse ofthe chair was due to the negligence of the defendant (Barry UDC), but thecouncil argued that it was protected by a statement on the ticket that ‘Thecouncil will not be liable for any accident or damage arising from hire of chair’. The Court of Appeal held that the ticket was a mere receipt. It was not a Held:document on which the customer would expect to find contractual terms, andthe exclusion clause printed on it was therefore not incorporated. The purposeof the ticket was simply to provide evidence for the hirer that he had dischargedhis obligation to pay for the chair. It was, the court felt, distinguishable from,for example, a railway ticket ‘which contains upon it the terms upon which arailway company agrees to carry the passenger’. The plaintiff was entitled to recover for the council’s breach of contract. The test ofwhether a document is deemed to be contractual or not will, presumably, dependon what information, terms, etc., the court thinks that a reasonable person would 34 On the basis of L’Estrange v Graucob [1934] 2 KB 394 – above, 8.4. 35 Both of which are discussed below, 8.7 and 8.8. 36 [1940] 1 KB 532; [1940] 1 All ER 356.Clauses Excluding or Limiting Liability 299
expect to find on it. In fact, in this case, the ticket was in any case provided too late, as it was held that the contract was formed when the deckchair was firsttaken for use, whereas the ticket was not handed over until after this had beendone. 37 8.5 CONSTRUCTION Once it has been decided that a clause has been incorporated into the contract,the next issue is whether it covers the breach that has occurred. In other words,the wording of the clause must be examined to see if it is apt to apply to thesituation which has arisen. This is called the rule of ‘construction’, but mightequally well be called the rule of ‘interpretation’. The clause is being ‘constructed’or ‘interpreted’ to determine its scope. 8.5.1 CONTRA PROFERENTEM RULE The rules of construction, like the rules for incorporation, are of general applica- tion, and can be used in relation to all clauses within a contract, not just exclusionclauses. The more general issues have been discussed in Chapter 7. 38 There has been much case law, however, involving the proper interpretation of exclusionclauses. In this context, the courts have traditionally taken a stricter approach toconstruction than elsewhere. The rule of construction has been used as a meansof limiting the effect of exclusion clauses, and a person wishing to avoid liabilityhas been required to be very precise in the use of language to achieve that aim.One aspect of this is the contra proferentem rule, whereby an exclusion clause is interpreted against the person putting it forward. Thus, in Andrews v Singer, 39 a clause excluding liability in relation to implied terms was ruled ineffective toexclude liability for breach of an express term. Similarly, in Wallis, Son and Wells v Pratt, 40 it was held that a clause stating that the suppliers of goods gave no ‘warranty’ in relation to them did not protect them from being liable for a breach of‘condition’. 41 Moreover, if there is ambiguity in the language used, this will be construed in the claimant’s favour. Thus, it has been held that a reference in aninsurance contract to excess ‘loads’ did not apply where a car was carrying morepassengers than the number which it was constructed to carry. 42 It has also been held that the phrase ‘consequential losses’ does not cover direct losses flowingnaturally from the breach, such as lost profits. 43 37 Thus applying the same principle as in Olley v Marlborough Court Hotel [1949] 1 KB 532; [1949] 1 All ER 127 – above, 8.4.1. 38 Above, 7.6.2. 39 [1934] 1 KB 17. 40 [1910] 2 KB 1003. 41 For the distinction between warranties and conditions, see 7.6.5.42Houghton v Trafalgar Insurance [1954] 1 QB 247. 43Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] 1 All ER Comm 750, CA. This was in the context of a clause referring to ‘indirect and consequential’ losses. The court recognised that in other con-texts ‘consequential’ loss could be interpreted to cover direct losses: here, however, it should be interpretedtogether with ‘indirect’ and taken to refer only to losses falling within the second limb of the remoteness ruleinHadley v Baxendale (1854) 9 Exch 341; 156 ER 145 – for which see Chapter 17, 17.5.2.The Modern Law of Contract 300
Particular difficulty can arise where the defendant seeks to exclude liability for negligence in the performance of a contract. The principles to be applied here were set out by the Privy Council in Canada Steamship Lines Ltd v The King.44 The court was dealing with Canadian law, but the principles have been taken as applying to English law as well.45 They were stated by Lord Morton as follows: (1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens ’) from the consequence of the negligence of his own servants, effect must be given to that provisio n... (2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens ... (3) If the words used are wide enough for the above purpose, the court must then consider whether the ‘head of damage may be based on some ground other than negligence’ . . . The ‘other’ ground must not be so fanciful or remote thattheproferens cannot be supposed to have desired protection against it; but subject to this qualification . . . the existence of a possible head of damageother than negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants. This approach is stated in terms of excluding liability for the acts of the defendant’s ‘servants’ (that is, employees), but it will apply equally to the situationwhere the defendant is potentially directly liable for negligence. As the first principle makes clear, if the drafter of a contract wishes to ensure that negligence liability is covered, the safest way is to say so explicitly. The use ofthe word ‘negligence’ is obviously sufficient, but synonyms may also be enough.InMonarch Airlines Ltd v London Luton Airport Ltd , 46 for example, it was held that the phrase ‘act, omission, neglect or default’ was clearly intended to covernegligence. This is relatively straightforward. It is when the drafter of the contract decides to use general words such as ‘any loss howsoever caused’ that difficulties start toarise. 47 In that situation, the second and third principles stated by Lord Morton come into play. A distinction then needs to be drawn between the situationswhere the defendant is liable only for negligence and where there is some otherpossible basis for liability. In the latter situation, the defendant will need to usewords which specifically cover negligence in order to avoid liability. Generalwords which purport to cover ‘all liabilities’ may well not be enough. If, forexample, a bailee is strictly liable for the safety of the bailor’s goods, a general 44 [1952] AC 192, p 208. 45 For recent confirmation of this, see, for example, EE Caledonia Ltd v Orbit Valve plc [1994] 1 WLR 1515; Shell Chemical v P & O Tankers [1995] 1 Lloyd’s Rep 297; Toomey v Eagle Star Insurance [1995] 2 Lloyd’s Rep 88 andMonarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698. 46 [1997] CLC 698. 47 It is not clear why the drafters of contracts do not explicitly refer to negligence. Maybe there is a feeling that the other party might be put off by such an explicit recognition of the possibility that their proposedcontracting partner will not take reasonable care in the performance of the contract.Clauses Excluding or Limiting Liability 301
clause excluding liability will be taken to attach to the strict liability, and not to liability for negligence. Similarly, in White v John Warwick ,48 in a contract for the hire of a bicycle, a clause exempting the owners from liability for personal injurieswas held to cover only breach of strict contractual liability as to the condition ofthe bicycle, and not injuries resulting from negligence in the fitting of the saddle. 49 The position is different, however, if the only basis of liability which exists is negligence liability. Then the implication of Lord Morton’s second principle is thatgeneral words may be sufficient. 50 In Alderslade v Hendon Laundry ,51 the plaintiff had not received certain handkerchiefs which he had left with the defendantlaundry. A clause in the contract stated ‘The maximum amount allowed for lost ordamaged articles is 20 times the charge made for laundering’. Lord Greene MRtook the view that as regards loss (as opposed to damage), the laundry could notbe regarded as undertaking a strict obligation, but only to take reasonable careof items (that is, not to be negligent). On that basis, the clause was apt to covernegligence liability. Salmon LJ in Hollier v Rambler Motors , 52 however, in dis- cussing this case, took the view that it was the perception of the customer that wasimportant: 53 I think that the ordinary sensible housewife, or indeed anyone else who sends washing to the laundry, who saw that clause must have appreciated that almostalways goods are lost or damaged because of the laundry’s negligence, and, there- fore, this clause could apply only to limit the liability of the laundry, when they were in fault or negligent. This must be regarded as having modified the approach taken by the Court of Appeal in Alderslade itself. The position thus now seems to be that where the reasonable claimant would read a clause as covering negligence, the courts willbe prepared to allow exclusion without any specific reference to negligence, orthe use of a general phrase clearly including negligence. 54 In the end, it is a matter of attempting to assess the intentions and reasonable expectations of the parties. Key Case Hollier v Rambler Motors55 (1972) The plaintiff’s car was at the defendant’s premises when it was damaged Facts:by fire, caused by the defendant’s negligence. There was a clause in thecontract which stated ‘The company is not responsible for damage caused byfire to customers’ cars on the premises’. 48 [1953] 2 All ER 1021. 49 Excluding liability for negligence giving rise to personal injury is now in any case prohibited by s 2 of the UCTA 1977: below, 8.7.5. 50Joseph Travers & Sons Ltd v Cooper [1915] KB 73. 51 [1945] KB 189; [1945] 1 All ER 244. 52 [1972] 2 QB 71; [1972] 1 All ER 399. This case has been criticised by Barendt, 1972.53 Ibid, p 79; p 405. 54 Cf Rutter v Palmer [1922] 2 KB 87 – garage in possession of the plaintiff’s car with a view to selling it; clause stating ‘Customers’ cars are driven by your staff at customers’ sole risk’ was wide enough to cover neg- ligence by the driver. 55 [1972] 2 QB 71; [1972] 1 All ER 399. Note that this case has been criticised by Barendt, 1972.The Modern Law of Contract 302
The Court of Appeal took the view that customers would assume that Held: this clause related to fires that arose without negligence on the part of thedefendant (though as a matter of law there would in fact be no liability in sucha case). The clause was not, in effect, an exclusion of liability, but simplya ‘warning’ that the defendant was not, as a matter of law, liable fornon-negligent fire damage. If the defendant wanted to exclude liability fornegligence, this should have been done explicitly. As the case shows, even where the only possible liability is for negligence, it is stillbetter to use specific rather than general words. The position as regards exclusion of liability for negligence was significantly affected by the UCTA 1977, 56 and this may mean that, at least as far as consumers are concerned, the above rules will be of less significance. Clauses purportingto exclude negligence are either void (if relating to death or personal injury) orsubject to a requirement of ‘reasonableness’. In the consumer context the courtsmay well be reluctant to find that attempts to exclude liability for failing to takereasonable care in the performance of a contract are ‘reasonable’, even where thenegligence is the fault of the defendant’s employee rather than the defendantpersonally. In the commercial sphere, however, as has been indicated above, thecourts still make regular reference to Lord Morton’s principles in the Canada Steamship case. 57 8.5.2 RELAXATION OF THE RULE OF CONSTRUCTIONMore generally, the existence of stricter statutory controls over exclusion clauseshas encouraged the courts to take the line that there is no need for the rule ofconstruction to be used in an artificial way to limit their scope. The consumer andthe standard form contract are dealt with by the UCTA 1977 (and now also by theUTCCR 1999). 58 Businesses negotiating at arm’s length should be expected to look after themselves. If they enter into contracts containing exclusion clauses,they must be presumed to know what they are doing. On three occasions sincethe passage of the UCTA 1977, the House of Lords has criticised an approach tothe interpretation of exclusion clauses in commercial contracts, which involvesstraining their plain meaning in order to limit their effect. In Photo Production Ltd v Securicor Transport Ltd , 59 Lord Wilberforce commented that in the light of parlia- mentary intervention to protect consumers (by means of the UCTA 1977):60 . . . in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for 56 Below, 8.7.5. 57 See, for example, EE Caledonia Ltd v Orbit Valve plc [1994] 1 WLR 1515; Shell Chemical v P & O Tankers [1995] 1 Lloyd’s Rep 297; Toomey v Eagle Star Insurance [1995] 2 Lloyd’s Rep 88; and Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698. 58 Below, 8.7 and 8.8.59 [1980] AC 827; [1980] 1 All ER 556.60 Ibid, p 843; p 561.Clauses Excluding or Limiting Liability 303
That this is the correct approach was confirmed by the Court of Appeal in Keele University v Price Waterhouse .69 FOR THOUGHT Is it right that all commercial agreements should be approached in this way? Doesn’t the fact that the partiesto a business contract may be of very different bargaining strength mean that in some circumstances a strict approach to interpretation would be justified? 8.5.3 FUNDAMENTAL BREACH At one time, the view was taken by some courts, and in particular the Court ofAppeal, that some breaches of contract are so serious that no exclusion clausecan cover them. This was expressed in the so-called doctrine of fundamentalbreach. This doctrine found its origins in shipping law, where there is strongauthority that if a ship ‘deviates’ from its agreed route, there can be no exclusionof liability in relation to events which occur after the deviation, even though thedeviation was not the cause of any loss which occurs. 70 Applied more generally to the law of contract, it took two forms. One was that there are certain terms withinthe contract which are so fundamental that there cannot be exclusion for breachof them. Such would be the situation where the contract stipulated for the supplyof peas, and beans were provided instead. 71 The supplier in such a case has departed so far from the basic contractual obligation that some courts felt that itcould not be justifiable to allow him to exclude liability. To do so would appear tomake a mockery of the whole idea of a contractual obligation. If, for example, aperson who has contracted to sell potatoes supplies the same weight of coal, itsurely ought not to be permissible to allow reliance on a broadly written exclusionclause which states ‘the supplier may substitute any other goods for thosespecified in the contract’. The rules of incorporation and construction do not haveany necessary effect on such a clause. The answer appeared to be to treat thepromise to supply potatoes as a ‘fundamental term’. Any breach of this termwould provide a remedy to the other party irrespective of an exclusion clause. Stated in this form the doctrine had close links with the ‘deviation’ principle in shipping law, which similarly is concerned with the breach of a specific obligationregarded as being central to the contract. The second form of the doctrine of 69 [2004] EWCA Civ 583; [2004] PNLR 43. This case is also an example of the court deciding not to consider the ‘reasonableness’ test under the UCTA 1977 because, on its true construction, the clause did not cover the loss for which the claimant sought to recover. 70 See, for example, Joseph Thorley Ltd v Orchis SS Co Ltd [1907] 1 KB 41. 71Chanter v Hopkins (1838) 3 M & W 252. See also The Bow Cedar [1980] 2 Lloyd’s Rep 601 – contract for ground nut oil; goods supplied 50 per cent ground nut oil, 50 per cent soya bean oil.Clauses Excluding or Limiting Liability 305
fundamental breach was different in that it looked not at the particular term which had been broken, but at the overall effects of the breach which had occurred. Ifthe breach was so serious that it could be said to have destroyed the wholecontract, then again, exclusion of liability should not be possible. Two casesillustrate these two aspects of the doctrine: Karsales v Wallis 72 and Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd .73 In Karsales v Wallis , the contract was for the supply of a Buick car, which the plaintiff had inspected and found to bein good condition. When delivered (late at night), however, it had to be towed,because it was incapable of self-propulsion. Amongst other things, the cylinderhead had been removed, the valves had been burnt out, and two of the pistonshad been broken. The defendant purported to rely on a clause of the agreementwhich stated: No condition or warranty that the vehicle is roadworthy, or as to its age, condition or fitness for purpose is given by the owner or implied herein. The county judge held for the defendant, but the Court of Appeal reversed this. The majority of the court (Lord Denning reached the same conclusion, but onslightly different grounds) held that what had been delivered was not, in effect, a‘car’. The defendant’s ‘performance’ was totally different from that which hadbeen contemplated by the contract (that is, the supply of a motor vehicle inworking order). There was, therefore, a breach of a fundamental term of theagreement, and the exclusion clause had no application. InHarbutt’s Plasticine , the contract involved the supply of pipework in the plaintiff’s factory. The type of piping used was unsuitable, and resulted in a firewhich destroyed the whole of the plaintiff’s factory. The obligation to supplypiping that was fit for its purpose could clearly have been broken in various ways,not all of which would have led to serious damage to the plaintiff’s premises.In this case, however, the consequences of the defendant’s failure to meet itsobligation in this respect were so serious that the Court of Appeal regarded it as a‘fundamental breach’ of the contract, precluding any reliance on an exclusionclause. These two Court of Appeal decisions illustrate that a ‘fundamental breach’ could occur either through the breach of a particularly important term, or througha breach which had the consequences of destroying the whole basis of thecontract. In arriving at its decision in Harbutt’s Plasticine , however, the Court of Appeal had to deal with the views expressed by the House of Lords in Suisse Atlantique Société d’Armemente SA v Rotterdamsche Kolen Centrale NV . 74 The case con- cerned a charter which included provisions whereby, if there were delays, thecharterers’ liability was limited to paying $1,000 per day ‘demurrage’. The ownersattempted to argue that the charterers’ breach was so serious that the demurrageclause should not apply, and that they should be able to recover their full losses. 72 [1956] 2 All ER 866. 73 [1970] 1 QB 447; [1970] 1 All ER 225.74 [1967] 1 AC 361; [1966] 2 All ER 61.The Modern Law of Contract 306
The House of Lords rejected this and, in so doing, expressed strong disapproval of the argument that there was a substantive rule of law which meant that certaintypes of breach automatically prevented reliance on an exclusion clause. AsViscount Dilhorne commented: 75 In my view, it is not right to say that the law prohibits and nullifies a clause exempting or limiting liability for a fundamental breach or breach of a fundamental term. Such arule of law would involve a restriction on freedom of contract and in the older cases I can find no trace of it. As this quotation illustrates, the House was of the opinion that the parties should generally be allowed to determine their obligations and the effect of exclusionclauses in their contract. If there was a breach which appeared fundamental, thenit was a question of trying to determine the parties’ intentions as to whether sucha breach was intended to be covered by any exclusion clause. Of course, as LordWilberforce noted, 76 ‘the courts are entitled to insist, as they do, that the more radical the breach, the clearer must be the language if it is to be covered’, but thequestion is one of the proper construction of the clause, and not a rule of law. InHarbutt’s Plasticine , the Court of Appeal attempted to distinguish Suisse Atlantique on the basis that in that case the parties had continued with the charter even after the alleged fundamental breach. The Court of Appeal therefore arguedthat the principles outlined by the House of Lords in Suisse Atlantique should apply only where there was an affirmation of the contract by the parties followingthe breach, and not where the breach itself brought the contract to an end. In thelatter type of situation, there should be no possibility of reliance on an exclusionclause. The difficulty with this argument was that it is a well-established principlein contract law that a breach never in itself brings a contract to an end. 77 The party not in breach always has the option (if the breach is a serious one) of eitheraccepting the breach and terminating the contract or affirming the contract andsimply suing for damages. Suppose, for example, there is a contract for the saleof components which are to be supplied with certain fixing holes drilled in them.If, when delivered, the fixing holes are not there, this will amount to a breachof ‘condition’ by virtue of s 13 of the Sale of Goods Act 1978. 78 The buyer will have the right to accept the breach, reject the goods and sue for damages.Alternatively, however, the buyer may affirm the contract, accept the goods, andsimply sue for the cost of having the holes drilled, and any other consequentiallosses. The Court of Appeal in Harbutt’s Plasticine took the view that this did not apply to certain fundamental breaches of contract, which themselves broughtthe contract to an end, without the need for acceptance by the party not inbreach. This view, was, however, firmly rejected by the House of Lords in Photo Production Ltd v Securicor Transport Ltd , 79 which overruled Harbutt’s Plasticine , 75 [1967] 1 AC 361, p 392; [1966] 2 All ER 61, p 67. 76 [1967] 1 AC 361, p 432; [1966] 2 All ER 61, p 92. 77 This rule is discussed further in Chapter 16, 16.6.1.78 See 7.7.11.79 [1980] AC 827; [1980] 1 All ER 556.Clauses Excluding or Limiting Liability 307
and finally disposed of the argument that certain types of fundamental breach could never be covered by an exclusion clause.80 Key Case Photo Production Ltd v Securicor Transport Ltd (1980) The plaintiffs owned a factory, and engaged the defendants to provide Facts:security services, which included a night patrol. Unfortunately, one of theguards employed by the defendants to carry out these duties started a fire onthe premises which got out of control, and destroyed the entire factory. Thus,rather than protecting the plaintiffs’ property as they had been contracted todo, the defendants could be said to have achieved the exact opposite. Thecontract, however, contained a very broadly-worded exclusion clause, which,on its face, seemed to cover even the very serious breach of the agreementwhich had occurred. The Court of Appeal took the view that this could notprotect the defendants. There had been a fundamental breach, and theexclusion clause was ineffective. The House of Lords took this opportunity to state its position with no Held:possible ambiguity. It ruled that there was no rule of law that a fundamentalbreach of contract prevented an exclusion clause from being effective. Theso-called doctrine of fundamental breach was in fact no more than an aspect ofthe doctrine of construction. Of course, it was the case that the more seriousthe breach of contract, the clearer the words would need to be which wouldexclude liability for it. But, if two businesses had negotiated an agreementcontaining a clause which on its plain wording covered such a breach, therewas no reason why the courts should not give effect to it. In the present case,the House, while noting the breadth of the exclusion clause, also noted that theplaintiffs were paying a very low rate for the defendants’ services. It was there-fore not unreasonable that the defendants should have a low level of liability.Theratio of the case was not, however, that the clause such as that under consideration could be enforced because it was reasonable in all the circum-stances, but because on its true construction it covered the breach. The decision in Photo Productions is a strong affirmation of the ‘freedom of con- tract’ approach to commercial agreements, and a rejection of an ‘interventionist’role for the courts. 8.5.4 THE CURRENT POSITION The demise of the doctrine of fundamental breach as a rule of law (and there hasbeen no attempt to revive it since the Photo Production decision) has to some extent simplified the law in this area. It may still be difficult to decide in particularcases, however, what to do where a breach effectively negates the whole purpose 80 See also s 9 of the UCTA 1977, which confirms the position that exclusion clauses always survive a breach of contract, and can be given effect (subject to the other restrictions contained in the Act) whether or not the contract has been terminated as result of the breach.The Modern Law of Contract 308
of the contract. It is a matter of looking at the precise wording of the exclusion clause and trying to determine the intentions of the parties in relation to it. Thelikelihood of exclusion being effective will decrease with the seriousness ofthe breach, but it is now always a question of balance, rather than the applicationof a firm rule. In considering where the balance is likely to be struck, some of the older case law may still be relevant in indicating the types of situation where the courts willrequire considerable convincing that the parties really did intend that a seriousbreach was intended to be covered by the exclusion clause. Some of the casesreferred to above, such as Karsales v Wallis 81 and Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd ,82 may be relevant in this context. A decision to similar effect is Pinnock Bros v Lewis and Peat Ltd ,83 where the contract was for the supply of copra cake to be used as cattle feed. The cake was contaminatedwith castor beans, and the cattle became ill. There was an exclusion clauseexpressed to cover liabilities for ‘defects’ in the goods. The court refused to applythe clause, holding that what was supplied was so contaminated that it could notbe called ‘copra cake’ at all. On its proper construction, therefore, the clausereferring to ‘defects’ was not apt to cover the situation. 84 In Glynn v Margetson & Co,85 a bill of lading relating to a contract for the carriage of a cargo of oranges from Malaga to Liverpool contained a clause allowing considerable freedom(referring to most of Europe and the ‘the coasts of Africa’) in the route which couldbe taken ‘for the purposes of delivering . . . cargo . . . or for any other purposeswhatsoever’. The ship, having loaded the oranges, went to a port some 350 milesin the opposite direction from Liverpool to collect another load before proceedingto Liverpool. The oranges had deteriorated on arrival as a result of the prolongedvoyage. The detour made here was strictly within the terms of the bill of lading, 86 but the House of Lords nevertheless held the carrier liable. It took the view that theclause in the bill of lading could not have been intended to allow the carrier to actin a way which was inconsistent with the ‘main purpose’ of the contract, that is,to deliver the cargo from Malaga to Liverpool. Finally, in Gibaud v Great Eastern Railway Co , 87 the contract was for the storage of a bicycle in the cloakroom at a railway station. It was in fact left in the booking hall, from which it was stolen. Theowner had been given a ticket which limited the railway’s liability to £5. The Courtof Appeal considered the argument that the defendant could not rely on theclause because the bicycle had not been kept in the cloakroom. It accepted,following Lilley v Doubleday , 88 that where the bailee of goods had undertaken to store them in a particular warehouse but in fact stored them elsewhere, the benefitof an exclusion clause would be lost. The principle was that: 89 81 [1956] 2 All ER 866. 82 [1970] 1 QB 447; [1970] 1 All ER 225. 83 [1923] 1 KB 690.84 Note that the facts of this case would now fall within the scope of s 6 of the UCTA 1977 – see below, 8.7.19. 85 [1893] AC 351. 86 So this was not a ‘deviation’ case in the strict sense – see above, 8.5.3.87 [1921] 2 KB 426.88 (1881) 7 QBD 510.89 [1921] 2 KB 426, p 435.Clauses Excluding or Limiting Liability 309
. . . if you undertake to do a thing in a certain way, or to keep a thing in a certain place, with certain conditions protecting it, and have broken the contract by notdoing the thing contracted for in the way contracted for, or not keeping the article in the place where you have contracted to keep it, you cannot rely on the conditions which were only intended to protect you if you carried out the contract in the way in which you had contracted to do it. On the facts, however, it was held that there was no binding obligation to store the bicycle in the cloakroom, so that the railway company was able to take the benefitof the clause. The courts are also likely to be reluctant to find that a clause allows a defendant to escape liability where there has been a deliberate breach of contract. Thus, inSze Hai Tong Bank Ltd v Rambler Cycle Co Ltd , 90 the carrier delivered goods to a person who was known to have no authority to receive them,91 and this resulted in a loss to the owner. The carrier attempted to rely on a clause in the bill of ladingwhich stated that its liability ended once the goods were ‘discharged’ from theship. The Privy Council held, however, that the clause could not have beenintended to cover the carrier if the goods had simply been handed over to apasser-by. It must have been intended only to cover an authorised discharge, andnot a deliberate delivery to an unauthorised recipient. 92 8.6 STATUTORY CONTROLS In many situations, the common law controls discussed in the previous sectionshave effectively been superseded by statutory controls contained in the UnfairContract Terms Act (UCTA) 1977 and the Unfair Terms in Consumer ContractsRegulations (UTCCR) 1998. 93 Although the issues of incorporation and construc- tion may still be important, it is likely that the statutory provisions will determinethe outcome of the case where the clause (a) is contained in a consumer contract,or (b) forms part of the defendant’s written standard terms, or (c) purports toexclude liability for the defendant’s negligence. Despite the fact that, strictlyspeaking, the common law rules are logically prior to any consideration of thestatutory provisions – so that if a clause is not incorporated or does not coverthe breach it can have no effect at all, and the statutory provisions are irrelevant –in practice, they will often be considered first. That this is not necessarily the case, however, is demonstrated by the Court of Appeal decision in Keele University v Price Waterhouse , 94 where, having interpreted an exclusion clause in a way that meant that it did not cover theloss for which the claimant was seeking compensation, the court declined to 90 [1959] AC 576. 91 The person was in fact the buyer of the goods, but the seller had not authorised delivery as was required by the contract. The buyer defaulted on payment for the goods. 92 The court also felt that the interpretation contended for by the carrier would fall foul of the ‘main purpose’ rule, as applied in Glynn v Margetson & Co [1893] AC 351, above. 93 SI 1999/2083. 94 [2004] EWCA Civ 583; [2004] PNLR 43.The Modern Law of Contract 310
consider the UCTA 1977, treating the question of reasonableness under that Act as ‘moot’.95 The Law Commission has put forward proposals which would result in the UCTA 1977 and the UTCCR 1999 being replaced by a new single piece oflegislation. 96 These proposals are discussed below, at 8.11. 8.7 UNFAIR CONTRACT TERMS ACT 1977 The UCTA 1977 has had a very significant effect on the law relating to exclusionclauses. Where it applies, it has to a large extent replaced the common law rules.It must be remembered, however, that the UCTA 1977 does not apply to all con-tracts. The first point for discussion here is therefore the precise scope of the Act. 8.7.1 SCOPE OF THE UCTA 1977 There are certain contracts, listed in Sched 1, which are not within the scope ofss 2–4 (which are the main protective provisions) at all. These include: 97 (a) contracts of insurance;(b) contracts concerning the creation or transfer of interests in land: this includes continuing covenants under a lease: Electricity Supply Nominees v IAF Group ; 98 (c) contracts concerning the creation or transfer of intellectual property rights (copyright, patent, etc); (d) contracts relating to the formation, dissolution, or constitution of a com- pany, partnership, or unincorporated association; (e) contracts relating to the creation or transfer of securities. The UCTA 1977 also has only limited application in relation to various types of shipping contract, including carriage of goods by sea.99 In relation to contracts of employment, s 2(1) and (2) (which deal with exclusion of liability for negligence)do not apply other than in favour of an employee. It was suggested in Brigden v American Express 100 that an employee could potentially use s 3 of the Act against terms put forward by an employer (though on the facts the claim failed). This wasspecifically disapproved by the Court of Appeal in Commerzbank AG v Keen . 101 The Court held that an employee did not contract with his or her employer ‘as aconsumer’, and that the terms of employment were not standard terms of theemployer’s business (which in this case was the business of banking). It is always advisable to check the provisions of Sched 1 in relation to contracts falling into the above categories. 95 [2004] EWCA Civ 583; [2004] PNLR 43, para 29. 96Unfair Terms in Contracts , Law Com No 292, Scot Law Com No 199, Cm 6464, 2005. 97 UCTA 1977, Sched 2, para 1. 98 [1993] 3 All ER 372. 99 Contracts of marine salvage or towage, any charterparty of a ship or hovercraft, and any contract for the carriage of goods by ship or hovercraft are subject to s 2(1) (which deals with death or personal injurycaused by negligence), but not to the other provisions of s 2, or ss 3, 4 or 7: UCTA 1977, Sched 1, para 2. 100 [2000] IRLR 94.101 [2006] EWCA Civ 1536; [2006] 2 CLC 844.Clauses Excluding or Limiting Liability 311
8.7.2 ‘BUSINESS’ LIABILITY The next limitation on the scope of the UCTA 1977 which must be noted appearsin s 1(3). This states that ss 2 to 7 apply only to: . . . business liability, that is, liability for breach of obligations or duties arising (a) from things done or to be done in the course of a business . . . or (b) from theoccupation of premises used for the business purposes of the occupier. 102Figure 8.2 102 But note that where access is obtained to premises for recreational or educational purposes, any liability for loss or damage from the dangerous state of the premises is not ‘business liability’ unless granting access for such purposes falls within the business purposes of the occupier: UCTA, s 1(3)(b) as amended by theOccupiers’ Liability Act 1984.The Modern Law of Contract 312
In general, therefore, the non-business contractor is free to include exclusion clauses, without their being controlled by the UCTA 1977.103 In many situations, the test of whether obligations arise in the course of a ‘business’ will not give riseto problems, but it is perhaps unfortunate that the Act does not contain a com-prehensive definition of what is meant by ‘business’. 8.7.3 MEANING OF ‘BUSINESS’ Section 14 states that ‘“business” includes a profession and the activities of anygovernment department or local or public authority’. This leaves open the positionof organisations such as charities or universities, which may engage in businessactivities, but might not be thought to be contracting ‘in the course of a busi-ness’. 104 The protective policy of the UCTA 1977 would suggest that such situ- ations ought to be covered. The phrase ‘in the course of a business’ has, however,been interpreted fairly restrictively in relation to its use in another context withinthe Act. Section 12 uses it as part of the definition of whether a person ‘deals as aconsumer’ for the purposes of buying goods, which is an important considerationin relation to the application of s 6. In R and B Customs Brokers v UDT , 105 the court had to consider whether a business that bought goods in which it did not usuallydeal was buying such goods ‘in the course of business’. If it were not, then itwould be dealing ‘as a consumer’, and would have more extensive protectionagainst exclusion clauses. Key Case R and B Customs Brokers v UDT (1998) The plaintiff was a private company involved in the export business. Facts:A car was bought by the company for the personal and business use of thedirectors. It was held by the Court of Appeal that the car was not bought ‘in the Held:course of a business’, because the plaintiff’s business was not that of buyingand selling cars. The business was buying the car ‘as a consumer’ for thepurposes of UCTA 1977. It is difficult to see, however, why the other contracting party should be any lessprotected in such a situation than if dealing with a commercial organisation, whichmight well be in no better position to meet financial liabilities, or to insure againstthem, than the university or charity. Some doubt about the correctness of the decision in R and B Customs Brokers was expressed by the Court of Appeal in Stevenson v Rogers 106 in considering whether a sale was ‘in the course of business’ for the purposes of s 14 of the Sale 103 Though the scope of s 6, which deals with sale of goods contracts, is wider – see 8.7.19, below. 104 Though a publicly funded University might be treated as a ‘public authority’, as it is in the Freedom of Information Act 2000 (and, probably, for the purposes of the Human Rights Act 1998). 105 [1998] 1 All ER 847. 106 [1999] 1 All ER 613 – discussed above, 7.7.12.Clauses Excluding or Limiting Liability 313
of Goods Act 1979. It was suggested there that the earlier decision should be confined to its particular facts, that is, the interpretation of s 12 of the UCTA 1977,and not necessarily applied elsewhere. The court therefore refused to apply thesame approach in interpreting the Sale of Goods Act 1979. It would be difficult(though not impossible), however, to argue that within one statute the samephrase has been used with different meanings. Moreover, in Feldarol Foundry plc v Hermes Leasing (London) Ltd , 107 which involved the purchase of a car by an aluminium foundry for the use of its managing director, the Court of Appeal, with-out much reluctance, held that it was bound by the approach taken in R and B Customs Brokers . It remains the case therefore that, pending a decision to the contrary by the House of Lords, the interpretation of ‘in the course of a business’,where that phrase is used in the UCTA 1977, should follow the approach taken inR and B Customs Brokers . 8.7.4 DISCLAIMERSThe final issue in relation to the scope of the UCTA 1977 concerns the types ofclause which are covered. As was noted at the start of this chapter, in drawing upa contract, it is possible to attempt to avoid liabilities in a number of ways. Themost obvious is by an exclusion clause which states that in the event of a breachthere will be no liability, or that it will be limited to a particular sum. It is alsopossible, however, to attempt to achieve the same objective by clauses whichdefine the obligations arising under the contract restrictively (‘disclaimers’), ormake the enforcement of a liability subject to restrictive conditions (for example,‘all claims must be made within 48 hours of the conclusion of the contract’).Section 13 makes it clear that all clauses of this kind which have the effect ofexcluding or restricting liability are generally caught by the Act’s provisions. Itstates: (1) To the extent that this Part of the Act prevents the exclusion or restriction of any liability, it also prevents: (a) making the liability or its enforcement subject to restrictive or onerous conditions; (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; (c) excluding or restricting rules of evidence and procedure; and (to that extent) ss 2 and 5–7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevantobligation or duty. (2) But an agreement in writing to submit present or future differences to arbitration is not to be treated under this Part of this Act as excluding orrestricting any liability. 107 [2004] EWCA Civ 747; (2004) 101 LSG 32.The Modern Law of Contract 314
It should be noted that the final words of s 13(1), which deal with avoiding liability by the definition of contractual obligations,108 do not apply to ss 3 or 4. As will be seen below, the terms of s 3, which is concerned primarily with non-negligentcontractual liability, are themselves wide enough to cover clauses which defineobligations. Section 4 is concerned with one particular type of clause, the indem-nity clause, so that there is probably no need for the provisions of s 13 to apply. InSmith v Eric S Bush , 109 the House of Lords confirmed that s 13 extends s 2 of the UCTA 1977 to a clause which is in the form of a disclaimer, which in this casewas given by a surveyor providing a valuation of a property to the plaintiff, via abuilding society. The valuation was stated to be given without any acceptance ofresponsibility as to its accuracy. This was held to be an ‘exclusion clause’ withinthe scope of the UCTA 1977, and to fall foul of its requirement of ‘reasonable-ness’. 110 Similarly, in Stewart Gill v Horatio Myer & Co Ltd ,111 the Court of Appeal held that a clause restricting a right of set-off or counterclaim could be regardedas an exclusion clause, and therefore within the scope of the UCTA 1977. 8.7.5 EXCLUSION OF NEGLIGENCE UNDER THE UCTA 1977 Section 2 of the UCTA 1977 is concerned with clauses which attempt to excludebusiness liability for ‘negligence’, which is defined for the purposes of the Act ins 1(1) to cover the breach: (a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract; (b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty); (c) of the common duty of care imposed by the Occupiers’ Liability Act 1957. Thus, it applies to negligent performance of a contract (sub-s (a)); the tort of negligence independent of any contract (sub-s (b)); and the statutory duty of careimposed on occupiers towards lawful visitors (sub-s (c)). Section 2 states: (1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence. (2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness. (3) Where a contract term or notice purports to exclude or restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of such a risk. 108 These words have been criticised by Yates (1982, pp 75–81) in relation to their application to s 6 of the UCTA 1977 (for which, see below, 8.7.19), and more generally in terms of logical inconsistency. 109 [1990] AC 831; [1989] 2 All ER 514. 110 For which see below, 8.7.10.111 [1992] 2 All ER 257.Clauses Excluding or Limiting Liability 315
The level of control imposed by s 2 thus depends on the consequences of the negligence. To the extent that the exclusion clause attempts to limit liability fordeath or personal injury resulting from negligence, it will be totally ineffective(s 2(1)). As regards any other types of loss or damage, the clause will be effectiveto the extent that the clause satisfies the ‘requirement of reasonableness’ set outin s 11 of the UCTA 1977. 112 It is not clear what the approach of the courts will be towards a clause which attempts to exclude or limit liability for all loss or damage(including death or personal injury) resulting from negligence by the use of ageneral phrase such as ‘no liability for any loss, injury or damage, howsoevercaused’. Clearly, the clause will not be effective in relation to death or personalinjuries resulting from negligence. However, this does not mean that the clause istotally without effect. The Act does not invalidate a clause altogether simplybecause it attempts to exclude liability for personal injuries. It may be arguable,however, that the overall breadth of the clause makes it unreasonable even inrelation to the other losses. The answer to this will depend on the precise inter-pretation of the requirement of reasonableness, and we will return to this issue inthe context of that discussion. 8.7.6 STANDARD TERMS AND CONSUMER CONTRACTS Whereas s 2 is only concerned with the exclusion of negligence liability, s 3covers all types of liability arising under a contract, including strict liability, but islimited in the types of contract which it affects. It states: (1) This section applies as between contracting parties where one of them deals as a consumer, or on the other’s written standard terms of business. (2) As against that party, the other cannot by reference to any contract term: (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or (b) claim to be entitled: (i) to render a contractual performance substantially different from that which was reasonably expected of him; or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in all of the cases mentioned above in this sub-section) the contract term satisfiesthe requirement of reasonableness. The section is thus directed at situations where there is inequality of bargaining power, and the claimant may have effectively been forced to accept a wide-ranging exclusion clause, which may appear to operate unfairly. The sectionoperates in relation to two types of contract. First, it covers contracts where theclaimant ‘deals as a consumer’. The definition of ‘dealing as a consumer’ is to befound in s 12. A party ‘deals as a consumer’ if: 112 This is discussed further, below, 8.7.10.The Modern Law of Contract 316
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and (b) the other party does make the contract in the course of a business; and (c) in the case of a contract governed by the law of sale of goods or hire purchase, or by s 7 of this Act, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption. 8.7.7 MEANING OF ‘IN THE COURSE OF A BUSINESS’ The scope of the phrase ‘in the course of a business’ as defined in R and B Customs Brokers v UDT113 has been discussed above.114 As we have seen, it means that it is not simply the private individual who can claim to deal ‘as aconsumer’. Businesses will apparently be able to do so in relation to contractswhich do not form a regular part of their business. Despite the doubts as towhether this was what Parliament intended, and the refusal of the Court of Appealto follow this interpretation in relation to the same phrase where used in theSale of Goods Act 1979, 115 the R and B Customs Brokers approach remains the governing authority in relation to the UCTA 1977. Where the contract is concernedwith the supply of goods, however, a business will only be treated as dealing as aconsumer where the goods are of a type ‘ordinarily supplied for private use orconsumption’. In R and B Customs Brokers , this was satisfied because the sub- ject matter of the contract was a car. It will have the effect, however, of meaningthat many business purchases will not be considered ‘consumer contracts’ evenif the business does not generally deal in the goods concerned. A businessbuyer which purchases an industrial floor cleaner, for example, will not bedealing as a consumer, even though the buyer does not regularly buy and sell floorcleaners, and wants the machine simply to clean the office floors. If, however,the buyer is an individual, this restriction does not apply. This is a consequenceof the modification of s 12 of the UCTA 1977 by the Sale and Supply of Goods toConsumers Regulations 2002. 116 Regulation 14 inserted a new sub-s (1A) into s 12, the effect of which is that where the contract is one for the supply of goodsand the consumer is an individual, it is no longer necessary for the goods to be‘of a type ordinarily supplied for private use or consumption’ in order for theconsumer to obtain the full protection of ss 6 and 7 of the UCTA 1977. Whateverthe type of goods supplied, there will be no possibility of excluding liability forthe implied terms as to description and quality under ss 13–15 of the Sale ofGoods Act 1979, or the equivalent statutory implied terms in hire or hire pur-chase or other contracts involving the supply of goods. The owner of a largenumber of messy dogs who buys an industrial grade floor cleaner will now betreated as ‘dealing as a consumer’. There was no obvious reason why suchbuyers should not be treated as ‘dealing as a consumer’ and the change is to bewelcomed. 113 [1988] 1 All ER 847. 114 Above, 8.7.3.115 In Stevenson v Rogers [1999] 1 All ER 613 – discussed further above, 7.6.12. 116 SI 2002/3045. The Regulations came into force on 31 March 2003.Clauses Excluding or Limiting Liability 317
A person claiming to deal as a consumer does not have to prove this: the burden of proof is on the party claiming that a person is not dealing as a consumer.117 FOR THOUGHT Is a University which buys computers for the use of its staff or students buying ‘in the course of business’ or as a consumer? 8.7.8 STANDARD TERMS OF BUSINESS The second type of contract which is covered by s 3 is one which is made on thebasis of the defendant’s ‘written standard terms of business’. This phrase is notfurther defined, but it is to be assumed that the individual negotiation of some ofthe terms of the agreement will not prevent them from being ‘standard’. In St Albans City and District Council v International Computers Ltd , 118 the Court of Appeal rejected an argument that the terms were not ‘standard’ because thecontract had been preceded by negotiation. The exclusion clause itself will, how-ever, presumably have to be part of the standard package. Regularity of use willsuggest that terms are ‘standard’, but it is not necessary that they are always used by the party wishing to rely on them. 119 If the terms are those of a trade association which are simply adopted by the mutual agreement of both parties, then presum-ably these will still be treated as ‘standard terms’ if they are regularly used by theparty whom the clause concerned would benefit. It is important to remember that this provision is not concerned directly with inequalities in bargaining power. It is likely in practice (because of the way in whichthe requirement of reasonableness operates) to benefit the weaker party morefrequently, but there is no reason in theory why it should not be relied on by a largecorporation which happens to have made a contract on the basis of the standardterms of a much smaller and less powerful business. It is also important to notethat this category is unlikely to be needed to be used by the private individual,despite the fact that many contracts between individuals and businesses aremade on the standard terms of the business. The reason for this is, of course, thatthe private individual will contract ‘as a consumer’, and will therefore be within theother category covered by s 3. 8.7.9 EFFECT OF S 3 The effect of s 3 is that, in relation to any contract within its scope, any attempt toexclude or restrict liability by the non-consumer, or the party putting forward thestandard terms, will be subject to the requirement of reasonableness (s 3(2)(a)). 117 Section 12(3). 118 [1996] 4 All ER 481.119 Chester Grosvenor Hotel v Alfred McAlpine Management Ltd (1991) 56 BLR 115.The Modern Law of Contract 318
Moreover, s 3(2)(b) goes on to make it clear that this extends also to any con- tractual term by virtue of which such a party claims to be entitled: (i) to render a contractual performance substantially different from that which was reasonably to be expected of him; or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at al l... The point of the provisions in s 3(2)(b) is similar to that of s 13. It is trying toanticipate attempts to exclude liability indirectly by the use of clauses whichdefine a party’s obligations very restrictively. It would apply, for example, to aclause such as that used in Karsales v Wallis 120 purporting to allow the supplier of a ‘car’ to deliver something which was incapable of self-propulsion (though sucha clause would probably also fall foul of the special provisions relating to sale ofgoods contracts), or to a clause allowing a party who had agreed to provide acleaning service each month to miss several months in a row without penalty. 121 Such clauses are permissible, but only to the extent that they satisfy the require-ment of reasonableness. This enables a court to distinguish clauses which aregenuine and legitimate attempts to set out the parties’ contractual obligationsfrom those which are being used to escape any substantial liability at all. The testof legitimacy, as indicated by s 3(2)(b)(i) above, is likely to be the reasonableexpectation of the other party. The precise scope of s 3(2)(b) was considered by the Court of Appeal in Paragon Finance plc v Staunton . 122 The claimant argued that a clause allowing the provider of a mortgage complete freedom to vary the interest payable shouldbe regarded as subject to s 3(2)(b); in other words, if the clause could be usedto permit the lender to charge an unexpectedly high interest rate, this wouldconstitute ‘a contractual performance different from that which was reasonablyexpected of him’, and the clause could be declared ‘unreasonable’ under theUCTA 1977. The Court of Appeal rejected the claim, holding that the power to setthe interest rate was not ‘performance’ of the contract in the sense meant bys 3(2)(b). In reaching this conclusion, the court distinguished both Timeload Ltd v British Telecommunications plc 123 (power to terminate arbitrarily a contract for the use of a particular telephone number) and Zockoll Group Ltd v Mercury Com- munications Ltd124 (power to withdraw a particular telephone number without giving reasons), where the court had held that the terms concerned did potentiallyfall within the scope of s 3(2)(b). Both of those cases involved a positive obligationto provide something under the contract, which was not the case as regards thesetting of the interest rate in Paragon v Staunton . 120 [1956] 2 All ER 866 – see above, 8.5.3. 121 Cf Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317; [2001] 1 All ER Comm 696, where the Court of Appeal took the view that an ‘entire agreement’ clause, which constituted an ‘acknowledgment of non-reliance’ as regards pre-contractual representations was not caught by s 3. 122 [2002] 2 All ER 248. 123 [1995] EMLR 459.124 [1999] EMLR 385.Clauses Excluding or Limiting Liability 319
The overall effect of s 3 is that, because the vast majority of exclusion clauses will be in either a consumer contract or one which is on standard terms, there will be very few situations in which an exclusion clause is not at least subject tothe requirement of reasonableness. It gives the appeal courts the opportunity toindicate the acceptable limits of exclusion of liability, though as will be seen (see8.7.10 to 8.7.15 below), it is not one which they have shown any great willingnessto take. 8.7.10 THE REQUIREMENT OF REASONABLENESS The test to be applied to determine whether a clause meets the requirement ofreasonableness is set out in s 11 of the UCTA 1977. The central element of the testis stated in s 11(1) as being whether the clause was: ...a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. This very general test imposes no very significant restrictions on the exercise of a court’s discretion in relation to a clause, and therefore makes things difficult forthe parties in terms of contractual planning. It will be very difficult to predictwhether a particular clause is likely to fall foul of this test. A few guidelines to itsoperation can be found, however, both within the UCTA 1977 itself and from caselaw. 8.7.11 INTERPRETATION OF REASONABLENESS Starting with the wording of s 11, it is clear that the point at which the clauseshould be assessed is when the contract was created, and that the test is directedat the clause itself, not at any particular application of it. It is submitted that obiter statements to the contrary by the Court of Appeal in Overseas Medical Supplies Ltd v Orient Transport Services Ltd 125 (see 8.7.16 below) should be regarded with caution, as running against the clear wording of s 11. Thus, the issue should bewhether the clause is one which, at the time at which the parties made the con-tract, could be regarded as fair and reasonable. Subsequent events should not berelevant in deciding this issue. In particular, the actual breach which has occurredand for which the clause is claimed to provide exclusion or limitation of liabilityshould not, in theory, be considered. The strict reading of the section makes itclear that it is quite possible for a court to feel that it would be reasonable for thedefendant to have excluded liability for the particular breach which has occurred,but that the clause is too widely worded to be reasonable, and should thereforefail. This is in line with a policy which aims to discourage the use of unnecessarilywide clauses, rather than simply trying to provide a just solution to individualdisputes. The Court of Appeal in Stewart Gill Ltd v Horatio Myer & Co Ltd 126 confirmed that it is the reasonableness of a clause as a whole, rather than the part 125 [1999] 2 Lloyd’s Rep 273. 126 [1992] QB 600.The Modern Law of Contract 320
of it which is being relied on in the particular case, which must be considered. Where, however, a clause contains two separate exclusions or limitations, and inparticular if they are in two sub-clauses, it is appropriate to consider the reason-ableness of each sub-clause individually. 127 This has been confirmed recently by the Court of Appeal in Regus (UK) Ltd v Epcot Solutions .128 Where the clause is one which attempts to limit liability to a specific sum of money, rather than excluding it altogether, s 11(4) directs the court to take intoaccount, in assessing the reasonableness of the clause: (a) the resources which [the defendant] could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance. This recognises that it may be quite reasonable for a contracting party who isimpecunious, or is engaging in a particularly risky activity, to put a financial ceilingon liability. Finally, s 11(5) states that: It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does. This makes it clear that the burden of proof as regards reasonableness lies on the party seeking to rely on the clause. 8.7.12 GUIDELINES IN SCHED 2 The only other part of the UCTA 1977 which provides guidance on the operationof the reasonableness test is Sched 2. The role of the Schedule is indicated bys 11(2): In determining for the purposes of s 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the mattersspecified in Sched 2 to this Act; but this sub-section does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which pur- ports to exclude or restrict any relevant liability is not a term of the contract. Strictly speaking, therefore, the ‘guidelines’ which it contains are to be used only in relation to exclusion clauses which attempt to limit liability for breach of thestatutorily implied terms under sale of goods and hire purchase contracts. Inpractice, however, the considerations set out are likely to be regarded as relevantwhenever reasonableness is in issue. 129 There are five factors listed, covering the following areas: 127 Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317; [2001] 1 All ER Comm 696. 128 [2008] EWCA Civ 361. 129 See, for example, Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 2 Lloyd’s Rep 273 – discussed below, 8.7.16.Clauses Excluding or Limiting Liability 321
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