Exemption Clauses and Unfair Terms

As technology has changed and advanced so much over the recent years the law needs to be in a position to cope with these changes. Therefore contract law in the United Kingdom has undergone significant change. Courts have sought to restrict the use of exclusion and protect against unfair contract terms, and in addition to common-law regulations that govern this area, there are also official laws in place.  The question remains, however, if the protection afforded by the law is adequate or clear.

An exclusion clause “aims to exclude and to limit one’s liability for breach of contract or negligence.” [1] It must be correctly incorporated into the contract. This is done by signing the contract (known as signature), having reasonable notice of the clause (known as notice) and by having a course of dealings i.e. previous consistent dealing based on the same terms.  Ignorance or misunderstanding of the term does not stop someone from being bound by the term [2] but misrepresenting the effect of this term can render part or the whole of the agreement ineffective.  An unfair term is “contrary to the requirement of good faith as it causes a significant imbalance in the parties’ rights and obligations under the contract…” [3]   That is, it gives one party an unfair advantage.

At present there are two pieces of legislation which control unfair contract terms, and exclusion clauses under English Law. These are the Unfair Contract Terms Act 1977 (U.C.T.A) and the Unfair Terms in Consumer Contracts Regulations 1999 (U.T.C.C.R). The U.C.T.A 1977 focuses mainly on exemption clauses; it applies to contracts between businesses and consumers, between one business and another and, to a limited extent, even to “private” contracts where neither party is acting in the course of a business. The majority of terms purporting to exclude or restrict liability are likely to be subject to it. The U.T.C.C.R on the other hand establishes controls over a broad range of contract terms but apply only to consumer contracts. [4] It is clear therefore that the overlap with the U.T.C.C.R relates exclusively to contracts between businesses and consumers. The problem is that both pieces of legislation will apply containing inconsistent and overlapping provisions, using different language and concepts to produce similar but not identical effects. [5]

The Unfair Contract Terms Act 1977 has the following effects relating to contracts between businesses and consumers. Any attempt by a contractual term to exclude liability for death or personal injury arising from negligence will be void (s 2(1); “…a person cannot exclude or restrict his liability for negligence” unless it, “satisfies the requirement of reasonableness” (s 2(2). Section 6 (1) and (2) outline the fact that any contract term claiming to exclude liability for breach of obligations arising from sections 12, 13,14 or 15 of the Sale of Goods Act 1979 or sections 8, 9, 10 , or 11 of the Supply of Goods (Implied Terms) Act 1973 will be void. Section 7 which deals with, “miscellaneous contracts under which goods pass” also outlines the fact that any term claiming to exclude liability for a statutory implied term for the supply of goods will also be void. If the term does not fall within sections 2, 6 or 7 then the terms will be subject to the requirement of reasonableness (s 3).

It is evident that the notion of, “consumer” is important to the scope of the U.C.T.A. Section 12 of the Act imposes a test designed to single out those cases where the exclusion is likely to be particularly objectionable and where there is most likely to have been an abuse of a superior bargaining position. [6] Section 12 (1)(a) of the Act states; “ A party to a contract “deals as consumer” in relation to another party if he neither makes the contract in the course of a business nor holds himself out as doing so.” This part of the act was given a surprising interpretation relating to the phrase, “dealing as consumer” in the case of R&B Custom Brokers Co ltd v United Dominion Trust Ltd. [7] In this case a private company bought a faulty car which it sought to reject because it was unfit for its purpose. The Court of Appeal in this case established the legal principle that, “Where an activity is merely incidental to the carrying on of a business, a degree of regularity has to be established before it can be said that the activity is an integral part of the business and therefore carried on in the course of business.” [8] This means that the company in this case was not buying in the course of a business for the purposes of s12 of the U.C.T.A and therefore could be treated as a consumer subsequently giving them the protection against exclusion clauses provided by s6 (2)(a) of the U.C.T.A.

Understandably the decision in R&B Customs was viewed with some scepticism by the Court of Appeal in the case of Stevenson v Rogers. [9] The case concerned the interpretation of “selling in the course of a business” for the purposes of s.14 of the Sale of Goods Act 1979. The Court of Appeal in Stevenson held that any sale by a business was done in the course of a business and that the R&B test did not apply in this context. [10] In Feldarol Foundry plc v Hermes Leasing (London) Ltd [11] however the Court of Appeal insinuated that the decision in R&B Customs had been wrongly decided and also attempted to advance a policy argument that a company could never deal as a consumer for the purposes of s12 of the U.C.T.A. [12] However after further review Tuckey L.J. with whom Kay L.J. and Kennedy L.J. agreed held that R&B Customs was binding on the court. One of the arguments in Feldarol Foundry was that the case was distinguishable on the facts on the basis that the company was a public company and had declared that the car would be used for businesses purposes. This was rejected; the reason being that the use to which the car was to be put had no bearing on the capacity in which the buyer was acting. This, of course, is the inevitable consequence of the R & B approach–a car may be bought for business use, yet the business may be doing so as a consumer. [13] Since the decision in Stevenson was not met with unanimous approval the court in Feldarol Foundry felt bound by the decision in R&B Customs. R&B Customs therefore is still good law as far as the definition of, “dealing as consumer” is concerned. It is evident therefore that the U.C.T.A uses quite a broad definition of, “consumer”

The Unfair Terms in Consumer Contracts Regulations 1999 as stated above only deal with contracts constructed with consumers but not only apply to exclusion clauses but to most terms in those contracts. Compared to the U.C.T.A the U.T.C.C.R uses a much narrower definition of, “consumer.” Regulation 3 (1) of the U.T.C.C.R states that, “Consumer means any natural person, who in contracts … is acting for purposes which are outside his trade, business or profession.”This causes confusion because under this definition the claimants in R&B Customs and Fedarol could not be treated as consumers. This makes it extremely difficult for judges to interpret the law to the facts of the case, because on the same facts a claimant company may be treated as a consumer by the U.C.T.A but not the U.T.C.C.R.

Regulation (8)(1) of the U.T.C.C.R basically states that an unfair term shall not be binding on the consumer. Therefore it merely requires clauses to be, “fair.” Compare this to the U.C.T.A which makes specific categories of term automatically void. However Regulation 6 (2) outlines the fact that a term as long, “as it is in plain and intelligible language” shall not be subject to the test of fairness if it (a) defines, “the main subject matter of the contract” or (b) relates to the, “adequacy on the price or remuneration.” In relation to (a) it would be very difficult in some contracts to distinguish what, “the main subject matter” is. Another problem is that Recital 19 of the European Directive on Unfair Terms in Consumer Contracts [14] states inter alia that in insurance contracts, terms that, “clearly define” the insured risk or the insurers liability shall not be subject to the test of fairness because, “these are taken into account when calculating the premium paid by the consumer.” Even though this is not mentioned in the U.T.C.C.R it is very much implied since the European Directive is sovereign over parliament. This exposes the problem that the U.T.C.C.R does not fully protect the consumer. The recent developments over bank and credit card charges has brought more attention to the U.T.C.C.R in relation to this matter. The case of Office of Fair Trading v Abbey National plc and Others [15] highlighted these limitations. The case centred around whether these financial charges breach the UTCCR, therefore falling within the powers of the Office of Fair Trading (OFT) to examine their fairness. Although prior decisions by the courts ruled in favour of the OFT, the Supreme Court did not. The reasoning was that clauses dealing with overdraft fees were core terms relating to the remuneration (for providing services for overdrawn accounts) and fell outside the concern of the OFT. In effect, though the charges were deemed to be unfair, the OFT did not have the powers under legislation to do anything.

This raises a strong argument for the strengthening of the OFT’s powers. The OFT was set up to help regulate the economy by helping to enforce consumer protection. On its website, it describes its role as playing a “leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive” [16] through research and investigation. It makes recommendations based on its findings. These recommendations are not legally binding and therefore, in many cases, little or no action is carried out. Giving it some policing powers with the ability to punish would make businesses more likely to minimise any objectionable behaviour. Furthermore, section 6 (2)(b) of the UTCCR must be looked at again especially in the area of banking as being unable to examine the “to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.” This potentially opens the doors for organisations to charge excessively high prices for products and services.

Both pieces of legislation use the test of, “fairness,” however it is defined in different ways. U.T.C.C.R focuses on, “good faith” and, “the balance between the parties.” In Director General of Fair Trading v first National Bank plc [17] Lord Bingham established that, “good faith” implies, “good standards of commercial morality and practice” When considering, “imbalance” it was suggested that the contract as a whole must be examined to determine if this imbalance exists. [18]

Schedule 2 of the U.C.T.A for the test of reasonableness, is stated to apply when ss 6 and 7 are under consideration. However it sets a very general legislative framework, largely leaving it for the courts to develop both the direction and the details of the statutory discretion. [19] Much of establishing what reasonableness is has come from case law. In Stuart Gill Ltd v Horatio Myer & Co Ltd [20] it was established that reasonableness must be assessed when the contract is formed and in Levison v Patent Steam Carpet Cleaning Co Ltd [21] it was established that clarity and preciseness will demonstrate the reasonableness of a term. In both Photo Production Ltd v Securicor Transport Ltd [22] and George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [23] the House of Lords decided to make a general statement of policy with regard to the U.C.T.A. [24] The Court of Appeal also decided apply U.C.T.A more generally in the case of Overseas Medical Supplies Ltd v Orient Transport Services Ltd [25] The law must be changed in this area and a principle for what reasonableness is should be given to judges so they can use it as a reference point. Relying exclusively on case law can lead to uncertainty. Also it is possible that a term could be held to be unreasonable under the U.C.T.A but fair under the U.T.C.C.R or vice versa. This is evidently unacceptable however the Law Commission’s reform proposals do address some of these problems.

It is clear that the need for reform has been a concern for many as The Law Commission and The Scottish Law Commission were asked in 2001 by the Department of Trade and Industry to rewrite the law of unfair contract terms as a single regime in a clearer and more accessible style. [26]