Contract law - Unfair terms.
Contract law -- Unfair terms
It is commonplace for a party drawing up a contract to seek to minimise the amount of liability that may be incurred in the performance of that contract. Contractual clauses that have this effect are usually called `exclusion clauses' or `limitation clauses'. There is a whole academic debate about the doctrinal significance of these clauses in the law of contract. This debate centres on whether they are `defensive' or `obligation defining' in nature. This is of little practical significance, because the courts and, more recently, the legislature have come down in favour of the `defensive' interpretation. Arguably, this `defensive' view is more prevalent in the UK than the European Community (EC), and this may account for some of the problems that are described in this article. Exclusion clauses often attempt to exclude or limit liability for losses arising out of breach of contract, or for extra-contractual liabilities. Extra-contractual liabilities will often include losses for misrepresentation, or negligence in performing the contract.
In practice, most peoples' exposure to the sharp end of an exclusion clause is as a consumer in a sales or services transaction. For example, may of us who use public transport have experienced entering into contracts in which the service provider excludes liability for being unable to run a tolerably useful service. Generally we don't find this out until it is too late, and even if we found out there wouldn't be much we could do. In a given region, the choice of transport providers is limited.
Of course, from a business perspective this limitation of liability makes good sense. It could even be argued that it makes sense for the consumer as well. If the service provider has to pay compensation for all the losses that arise from running a poor service, that cost will simply be passed on to the consumer. Whatever the merits of this argument, there are clearly exclusions that perpetuate an injustice so great that they can't be tolerated in a decent society. The archetypal case of this sort is Thompson v London Midland and Scottish Railway (1930). In this case, an elderly, illiterate woman bought a railway ticket which contained a reference to the railway company's standard terms and conditions. These included - on page 552 - a statement that the railway would not accept liability for negligence. When the train pulled up at the station, it turned out that it was too long for the platform, and there was a long drop from the end carriage to the ground. As a result of this mis-operation, the unfortunate Mrs Thompson fell and broke her leg. When she sued the railway in negligence, the exclusion clause was upheld, to the amazement of almost everybody. Mrs Thompson was an adult of full capacity, despite being unable to read, and had the notional freedom to either enter the contact or refrain. Although the courts had begun to develop common-law principles by which exclusion clauses could be brought under control, cases like Thompson made it clear that some form of statutory control was desirable.
The problem with allowing statute law to get to work on exclusion clauses is that this conflicts with a long-established principle of English law. This principle is that of `freedom of contract'; it says that adults of full capacity who make contracts with each other should expect to abide by them, including those terms that are unwelcome. The moral is: if you don't like the small print, don't sign on the dotted line. So when the Unfair Contract Terms Act (1977) (`UCTA') was drafted, it tried to balance freedom of contract against the need to prevent egregious injustice. ...
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The problem with allowing statute law to get to work on exclusion clauses is that this conflicts with a long-established principle of English law. This principle is that of `freedom of contract'; it says that adults of full capacity who make contracts with each other should expect to abide by them, including those terms that are unwelcome. The moral is: if you don't like the small print, don't sign on the dotted line. So when the Unfair Contract Terms Act (1977) (`UCTA') was drafted, it tried to balance freedom of contract against the need to prevent egregious injustice. As a result, UCTA deals with a limited set of highly specialised types of exclusion (table 1). For example, it strikes out any attempt disclaim liability for death or injury, and this would probably have allowed Mrs Thompson to win her case against the LMS Railway. Attempts to disclaim liability for losses caused by negligence will be struck out if they don't pass the test of `reasonableness' (of which, more later). UTCA also restricts the ability to exclude liability for selling poor-quality, defective goods, or goods that the seller doesn't have a right to sell (because, for example, they actually belong to someone else at the time). Finally, it makes attempts to exclude liability for misrepresentation subject to a test of reasonableness. Many of these types of exclusion are treated differently depending on whether the party affected is a business or is `dealing as consumer'. As a result (and as should be clear from table 1) the provisions of UCTA are complex, and a number of key terms are left undefined.
For example, the definition of `consumer' leaves a lot to the interpretation of the courts. Notoriously, in the case of R and B Customs Brokers v UDT the Court of Appeal held that a family firm that bought a car, partly for work and partly for social use, was a consumer for the purposes of UCTA. To be fair, it isn't necessarily obvious what a consumer is, in a number of borderline situations.
The next problem is that of `reasonableness'. UCTA does not define what it means to be reasonable, but it does give some guidance. The courts are to have regard for, among other things, the relative bargaining positions of the parties, whether the contract is negotiated or in standard form, and whether the party affected by the exclusion clause was offered an incentive to contract on particular terms. This approach allows the courts a lot of flexibility, and some surprisingly draconian exclusion clauses have been upheld. For example, in SAM Business Systems v Hedley and Co a software supplier was allowed to rely on an exclusion clause that allowed it to supply a thoroughly inadequate product. The Technology and Construction Court decided that the parties were of roughly equal bargaining power, and the purchasers could have attempted to negotiate better terms. The court also recognised that such clauses are ubiquitous in the computing industry. Had the purchaser been a consumer, the reasonableness test would not have applied; the exclusion clause would simply have been struck out, because it attempted to disclaim liability for supplying goods that are not suitable for their purpose.
The other problem with UCTA, which results from the delicate balancing act it has to perform, is that it only deals with exclusion clauses, and these are only one type of onerous contractual clause that causes problems. Consider the infamous case of Interfoto v Stiletto (1987). Here an advertising agency asked a photographic service to produce photographs for a presentation. The photographic service sent 47 transparencies to the agency for inspection, along with a contractual letter which had in its small print the statement that transparencies were to be returned within 14 days. If they were not, the service would levy a charge of £5 per negative per day. The agency forgot about the transparencies for a couple of weeks, and were rather surprised to receive a bill for £3,783. The Court of Appeal held that a term as onerous as this would have to be made very clear if it were to be enforced, and the claimants had not done anything to bring it to the defendant's attention. As a result, the claim failed. This process of striking out a clause on the grounds of incomplete `incorporation' was one of the ways that the courts had sought to control exclusion clauses in the pre-UCTA days. While the Interfoto case showed that the courts were prepared to go through the whole process again for other types of onerous clause, this was hardly satisfactory.
As it turned out, the EC had also been considering legislation to control onerous clauses, and a Directive was issued to that effect in 1993. This became the Unfair Terms in Consumer Contracts Regulations (1994) (`UTCCR'; later superseded by the 1999 version). There were, and are, a number of important differences between UCTA and UTCCR (summarised in table 2).
First, UTCCR deals only with contracts between businesses and consumers. For UTCCR purposes, a consumer is any `natural person' acting outside the course of his business. The phrase `natural person' implies that only individuals, not businesses, may benefit from UTCCR. Thus the claimants in R and B Customs Brokers (above) would be excluded, unless they claimed as private individuals. There is, therefore, a difference between a `consumer' for UCTA purposes and for UTCCR purposes. There would, no doubt, be a large number of cases in which whether a person was a `consumer' or not would be decided the same way for both UCTA and UTCCR; but there are cases where it wouldn't. For example, in UCTA a person who buys at auction is, buy definition, not a consumer. However, there is nothing in UTCCR that prevents a private individual buying at auction being a consumer.
Second, UTCCR deals not only with exclusion clauses, but any `unfair' term. An unfair term is any that imbalances rights and obligations significantly to the detriment of the consumer. Like UCTA's notion of `reasonableness', `unfair' is not defined, but there is guidance. For example, a clause might be unfair if it allows the business to terminate the contract at its discretion, without extending the same freedom to the consumer. Another example is a term allowing the business to vary the contract without the consent of the consumer. It should be clear that this notion of `unfairness' goes much further than UCTA's `unreasonableness'. UCTA does not prevent a contract containing terms that allow one party to vary its obligations, for example. However, UTCCR does nothing to control onerous terms in non-consumer contracts. This means that the defendants in the Interfoto case would not be able to rely on UTCCR to escape their huge bill. It still falls to the courts to handle situations like this on a case-by-case basis.
Third, UTCCR applies only to terms that have not been individually negotiated between the parties. A term that has been influenced by the consumer is, by definition, fair. Under UCTA, the test of reasonableness does allow for consideration of whether the term was negotiated, but this is only advisory. A negotiated term can still be deemed unreasonable.
Fourth the explanation of `unfairness' in UTCCR includes the phrase `contrary to the requirements of good faith'. This seems to imply that the draughtsman of a consumer contract has an obligation to contract in good faith, a relatively alien idea in English law. Of course, UTCCR comes from the EC, and the idea of contractual good faith is less unusual in other parts of Europe. There is little case law which considers what `good faith' is in terms of consumer contracts, so it may be that this phrase adds little to our understanding of unfairness.
So, currently we have two major pieces of legislation that overlap, but not completely. Certain contractual arrangements are caught by both UCTA and UTCCR and handled the same. For example, both UCTA (certainly) and UTCCR (advisedly) would strike out a clause that attempted to disclaim liability for death or injury. Situations like this should not cause any problems. Then there are contractual arrangements that are handled by one piece of legislation and not the other. For example, UTCCR deals with onerous terms in consumer contracts, while these are beyond the remit of UCTA. Some contractual arrangements are within the scope of both UCTA and UTCCR, but are subject to different tests. For example, consider a term in a contract for supply of goods and services, that tried to disclaim liability for faulty goods where the manufacturers were to blame for the faults. Such a term would be void under UCTA if the purchaser were a consumer, void unless reasonable under UCTA if the purchaser were a business, void if `unfair' under UTCCR if the purchaser is a consumer, and unaffected by UTCCR if the purchaser is a business. Since `unfair' is not the same as `unreasonable', these complications are even more opaque. Finally, some contractual injustices that cry out for redress are handled neither by UCTA nor UTCCR. For example, a large, powerful business can still impose onerous terms on a small business, and there is no statutory protection against these terms.
Apart from the problems of determining which types of term in which types of contract are caught by which piece of legislation, there is the additional problem that UTCCR goes beyond striking out unfair terms: it also imposes obligations on the contract draughtsman, such as to write in clear language. This may be no bad thing, but there is no corresponding rule for business contracts.
In summary, the law on statutory control of exclusion clauses is in a lamentable state. The Law Commission has recently proposed the introduction of new legislation to unify UCTA and UTCCR. Among the proposed changes are plans to make the same rules apply to both businesses and consumers, and to replace the current `reasonableness' and `fairness' tests with a common test of `fair and reasonable' that would apply to all kinds of contract.
Source of liability
Definition of liability (where relevant)
Effect on consumer
Effect on non-consumer
Negligence leading to death or injury
void s.2(1) UCTA
void s.2(1) UCTA
Negligence leading to loss or damage
acceptable if reasonable s.2(1) UCTA
acceptable if reasonable s.2(1) UCTA
Sale of goods with defective title
s.12 Sale of Goods Act 1979
void (UCTA s.6(1))
void (UCTA s.6(1))
Sale of goods that do match their description
s.13 Sale of Goods Act 1979
void (UCTA s.6(2)a)
acceptable if reasonable (UCTA s.6(3))
Sale of goods that do match their sample
s.14 Sale of Goods Act 1979
void (UCTA s.6(2)a)
acceptable if reasonable (UCTA s.6(3))
Sale of goods that are of unsatisfactory quality
s.15 Sale of Goods Act 1979
void (UCTA s.6(2)a)
acceptable if reasonable (UCTA s.6(3))
Any other passage of goods where the goods are of unsatisfactory quality or do not match their sample or description
void (UCTA s.7(2))
acceptable if reasonable (UCTA s.7(2))
Breach of standard-form contract
acceptable if reasonable (UCTA s.3)
not affected
Misrepresentation
s.3 Misrepresentation Act 1967
acceptable if reasonable (UCTA s.8(1))
acceptable if reasonable (UCTA s.8(1))
Table 1: summary of the effect of UCTA on exclusion of liability
UCTA 1977
UTCCR 1999
Who can benefit?
Anyone, but consumers get greater protection
Only consumers
Definition of `consumer'
a person who ``neither makes the contract in the course of a business nor holds himself out as doing so; and the other party does make the contract in the course of a business ''
``any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession''
Scope of contractual terms affected
Exclusion and limitation clauses only
All terms that are not negotiated
Identification of affected terms
Certain terms are entirely void. Others must satisfy a test of `reasonableness'. Reasonableness is not defined, but there are guidelines
All `unfair' terms. Terms are unfair if they significantly imbalance rights and responsibilities against the consumer
Effect on draughting
None
Impose an obligation to write standard-form contracts in terms intelligible to the consumer
Introduce an element of `good faith' in contractual statements
No
Yes (see r.5(1))
Table 2: brief comparison between UCTA and UTCCR
