Overview of the Unfair Contract Terms Act

A basic concept that emerges in the area of the Law of Contract is the classical theory of freedom of contract, followed by the economic and political philosophy of ‘Laissez-faire’ [1] . The term, as evolved during the past few centuries in capitalist states, describes the policy of allowing events to take their own course, supporting that government’s intervention in society and the marketplace should be as minimized as possible. This doctrine also applies in the Law of Contract as freedom of contract enables freedom of commercial transactions. However, absolute freedom of contract is impossible to exist as that could lead to unrestrained consequences, both in the legal and practical field. When two parties form a contract, they show their intention to create legal relations between them and to undertake legal rights and obligations. To comply with these rights and obligations, they need to follow certain rules as to the content and the terms of the contract. The 20th century was marked by statutory control that reflected Parliament’s and Courts’ unwillingness to enforce ‘unfair’ contracts. This is mainly outlined in the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumers Contracts Regulations 1999 (UTCCR). These two current major pieces of legislation deal substantially with different grounds: the 1977 Act covers all business to business contracts, whereas the 1999 Regulations govern contracts that involve consumers. Nevertheless, certain contractual arrangements are caught by both UCTA and UTCCR so the two can be merged in order to give the answer to a certain legal issue. Other contractual arrangements may refer only to the one piece of legislation, or may also require additional examination under other legislative regimes, like the Sales of Goods Act 1979, Electronic Commerce (EC Directive) Regulations 2002 etc.

Re Greenways (Chris)

The enactment of the Unfair Contract Terms Act 1977 (UCTA) was a key point to English Contract Law. UCTA enabled courts to regulate unfair exclusion and limitation clauses by rendering some ineffective and by subjecting others to the reasonableness test. The principle sections of the 1977 Act only apply to ‘business liability’, defined in s.1 (3) as arising ‘from things done or to be done by a person in the course of a business’ [2] . Therefor, UCTA is the main statute that should be used for the present case which concerns a business to business contract. The contract between Greenways (Chris) and Southern Copiers (Tim) for the purchase of a copier was formed when Chris signed. The legal issue emerged when Chris wanted to return the copier for a refund because the machine broke down several times in a short period of time. Southern Copiers refused, relying on a term that excludes the latter’s liability for any defects in its photocopiers.

Before seeking UCTA’s protection, Chris must examine if -and how- the case is affected by terms implied in contracts by statutes like the Sale of Goods Act 1979 (SOGA). The SOGA makes provision for the sale of goods by implying important terms in contracts made in the course of the seller’s business. Under SOGA, Chris can find two grounds for question.

First, under s.14 (2), it is implied that goods sold ‘in the course of business…are of satisfactory quality’. The definition of ‘satisfactory quality’ is given in s.14 (2A): ‘goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory’. As further explained in s.14 (2B), aspects of the quality of the goods are, among others, the ‘freedom from minor defects’ [3] and ‘durability’ [4] . For Chris to rely on these terms, the quality of the copier must be examined. The question is whether a new machine breaking down eight times in the first two months of use meets the standards of a reasonable person according to quality.

Secondly, under s.14 (3) when goods are sold in the course of business and the buyer ‘makes known to the seller…any particular purpose for which the goods are being bought, there is an implied [term] that the goods supplied…are reasonably fit for that purpose…’ [5] Chris had expressly made known to Tim that she wants the copier to be able to reproduce high quality, colour images and cope with a heavy workload. The question here is whether the supplied copier turned out to be as suitable for its purpose as a reasonable person would expect it to be.

When the question of reasonableness in business to business sale of goods contracts emerges into a case, SOGA 1979 comes under s.6 of UCTA. Though s.6 (2) (a) of the 1977 Act does not allow SOGA sections 13, 14 and 15 to be ‘excluded or restricted’ [6] for liability, s.6 (3) allows exclusion or restriction of a contract term ‘but only in so far as the term satisfies the requirement of reasonableness’. In order to examine the reasonableness of a contract term, s.11 (2) instructs courts to regard Schedule 2. At the same time UCTA gives the court flexibility on its decision [7] .

Under s.11 (5), the burden of proof is on the party seeking to rely on the clause. Therefor Southern Copiers must prove that the exclusion clause for defects they were seeking to impose was reasonable. A factor that Southern Copiers can rely on is the relative ‘strength of the bargaining positions of the parties’ [8] . Schedule 2 also considers ‘whether the customer knew or ought reasonably to have known of the existence and extend of the term’. [9] Greenways was a business too and could have asked for legal advice.

Under s.11 (2) (e), the reasonableness question emerges if the goods are not ‘adapted to the special order of the customer’ [10] . Chris will argue that the copier was not fit for the purpose she ordered it; Southern Copiers will reply that the formation of the contract was a result of the ‘battle of the forms’ [11] and Chris was bound by signature, as established in L’Estrange v Graucob Ltd (1934). [12] Chris on the other hand could prove the term unfair by vindicating that he ‘received an inducement to agree to…or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term’. [13]

The difficult question is set out under s.11 (2) (d) in ‘where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable…to expect that compliance with that condition would be practicable’. [14]

Case law on the subject does not favour or condemn either party of the present case. Even after UCTA, Courts faced difficulties deciding about exclusion clauses. In Photo Production Ltd v Securicor Transport Ltd (1980) [15] a security guard was responsible for a fire in Photo Production’s premises and the issue was whether Securicor could rely on an exclusion clause to escape liability for their employee’s conduct. The House of Lords, overturning Lord Denning’s decision in the Court of Appeal, held that Securicor could rely on the exclusion clause. The same did not happen however in George Mitchell (Chesterhall) v Finney Lock Seeds Ltd (1983) [16] where the supplier of defective winter cabbage seeds could not rely on a clause limiting their liability for loss or damage or consequential loss or damage from use of the seed if they were defective.

In conclusion, if the court finds the term to be unreasonable then Chris can rely on Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1989) [17] to argue that for such an onerous clause, her attention should had especially been drawn to it. As Southern Copiers did not point out the term, it should not be binding upon Greenways. As a result of not doing so Greenways is entitled to damages.

Re Ben

In the second case, both the facts and the legal issues between the two parties are distinguishable from the first one. The contract between Southern Copiers Ltd and Ben was formed the moment that Ben accepted the online ‘terms and conditions’ of the company which was offered in their website, and started his performance towards his obligations by paying the deposit of ₤4,000 for the photocopier he ordered. The problem arose seven days later, when Ben decided to cancel the order. Relying on an exclusion clause Southern Copiers refused to refund the paid deposit. The term also included that if Southern Copies wanted to cancel the order, the company was entitled to keep 50% of any sum paid as deposit by a customer.

For the contractual dispute between Ben and Southern Copiers Ltd, more relevant than the Unfair Contract Terms Act 1977, is the Unfair Terms in Consumers Contracts Regulations 1999 (UTCCR), passed to implement a European Directive. The reason the 1999 Regulations is used lies on two grounds. First, because when Ben is contracting with the company he is acting as ‘a consumer’. This concept is defined in reg.3 (1) as ‘any natural person who… is acting for purposes which are outside his trade, business or profession’ [18] and in reg.4 (1) which describes the contracts as ‘concluded between a seller or a supplier and a customer’. [19] Secondly, the UTCCR only applies to contracts and terms which had not been ‘individually negotiated’ [20] . As described in reg.5 (2), a term is ‘regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term.’ [21] The contract formed between the two parties in the present case comes under this category because the ‘terms and conditions’ was a pre-written electronic document available in Southern Copiers’ website. The ‘terms and conditions’ form offered online by companies is usually a link to another webpage and is the same for every customer, therefor cannot be considered as ‘individually negotiated’.

Considering the present contract, it should first be established that the term of dispute was a core term. The term in question included two clauses to cover the two possible scenarios of online orders. In the first scenario where a customer wanted to cancel the order, the term was excluding the company from returning the deposit. In the opposite scenario, where it was the company the party who wanted the cancellation, the term was limiting the company’s liability in paying back 50% of any paid deposit. Core terms are most of the times conditions which are not subject to question as their significance for the contract is substantive. Nevertheless, even core terms can be challenged for fairness if the language used is not plain and intelligible, as explained by the Court of Appeal in Bankers Insurance Company Ltd v South (2003) [22] , interrelating reg.6 (2) of the 1999 Regulations. Therefor, using reg.6 (2) Ben will argue that the term, which was a core term, can be evaluated as to its ‘fairness’ according to reg.5 (1). If the term is found to be unfair then according to reg.8 (1) it ‘shall not be binding on the consumer’ [23] .

Before applying the fairness test proposed by the Regulations it must first be assessed whether the language used for ‘terms and conditions’ was written in plain and intelligible language. However, the facts given are not enough to assess whether or not the exclusion clause was in plain and intelligible description. If it was, Southern Copiers Ltd is excluded from any liability as to the issue of consumers not understanding the core terms offered in a contract. If it was not, Ben can benefit from reg.7 (2) which gives the interpretation ‘which is most favorable to the consumer’ [24] in case where there is doubt about the meaning of a written term.

It should now be considered the fact that Ben did not read the company’s ‘terms and conditions’ because he was unable to do so. Whether that was caused by problems with Ben’s web browser or it was the company’s website that was experiencing technical difficulties, is irrelevant to the legal issue of the case. L’Estrange v Graucob Ltd (1934) [25] established the principle that, unless formation of a contract is vitiated by misrepresentation or fraud, parties are always bound by their signature and cannot seek for evasion of the terms of a contract on the grounds that they did not read or understand the term, even for exclusion clauses. Equally, a click in a box or an electronic signature amount to signature and acceptance of the offer. Especially for online transactions, no room for doubt can exist for consumer’s intention to be bound, since the process is usually long, includes fill of personal details, and disclosure of confidential information (bank accounts). Therefor, by clicking the box of acceptance, Ben indicated that he adopted the contents of the contract and he was therefor bound.

Southern Copiers can also rely on the decision of the Court of Appeal in Thompson v London Midland & Scottish Railway Co (1930) [26] where the railway company was held not liable for a passenger’s injury because limitation of liability was stated in the ticket. The inability of the passenger to read the ticket and therefor her unawareness of the clause was irrelevant. Furthermore, Southern Copies did not incorporate the clause after Ben’s signature, but before. This distinguishes the case from Olley v Marlborough Court (1949) [27] where the hotel exempted itself from liability for stolen or lost items with a notice in rooms. The Court held that the contract between the hotel and the customer is formed at the moment of booking in at reception and no other term can be incorporated afterwards. Therefor, Ben can not, in any case, rely on the fact that he had not read the terms.

For Ben now to rely on reg.8 (1), the ‘unfairness’ of the clause must be examined under Schedule 2 of the 1999 Regulations which lists terms that may be regarded as unfair. This is done considering at the same time the requirement of ‘good faith’, an element assessed to establish whether the business’ acts were made with intention to deceive. According to reg.5 (5) (1) (c), a term is considered unfair if an agreement is binding on the consumer but ‘provision of services by the seller or supplier is subject to a condition whose realisation depends on his own will alone’ [28] . In Ben’s contract, the term was giving Southern Copiers the right to cancel the order and keep the money whereas Ben had no right of challenging such a decision.

Furthermore, reg.5 (5) (1) (f) lists as possibly unfair a term that permits the seller to ‘retain the sums for services not yet supplied’ [29] where it is the seller that dissolves the contract. Reg.5 (5) (1) (d) does not permit the seller or supplier to ‘retain sums paid by the consumer where the latter decides not to conclude or perform the contract’ [30] when there is no provision that the consumer will ‘receive compensation of an equivalent amount from the seller where the latter is the party cancelling the contract’ [31] . Similarly, the provisions of the exclusion clause gave Southern Copiers the right to keep sums paid by customers but did not give a proportional right to Ben. Also, if Southern Copiers had intentionally made the ‘terns and conditions’ unavailable to view, reg.5 (5) (1) (i) [32] can apply.

Concluding, when the present case comes in front of the court, the judge will direct the jury as to the fairness test of UTCCR in order to decide if the term was fair and based on good faith. If the term is found to be unfair, Ben has the right to cancel the contract he formed with Southern Copiers and get a refund of the amount he paid in advance for the photocopier.