bits of law
CONTRACT | Formation
Exemption Clauses:
Unfair Terms
Revision Note | Degree
27 FEBRUARY 2013
Introduction
• unfair exemption clauses restricted by Unfair Contract Terms Act 1977 (UCTA 1977)
• Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999) restricts all unfair terms, including
exemption
Unfair Contract Terms Act 1977: main provisions
• applies to any clause excluding, limiting or restricting liability & can render an exemption clause void or
subject it to a reasonableness test
• Schedule 1 outlines contracts which the key provisions do not apply, including insurance or those relating to
an interest in land
• key provisions apply to business liability
UNFAIR CONTRACT TERMS ACT 1977
• S1(3) defines business liability : obligations arising from things done or to be done by a person in
the course of a business (own business or another's)
Sections 6 and 7: statutory implied terms relating to goods
• S6 & S7 apply to clauses which exempt liability for breaches of statutory implied terms relating to goods
UNFAIR CONTRACT TERMS ACT 1977
S6 Sale and hire purchase
• S6(2): exemption clause void if person dealing as consumer & breach of obligations arising from
(a) S13, 14, or 15 Sale of Goods Act 1979 (SGA 1979)
• S6(3): if buyer business exemption clause only effective if satisfies reasonableness test
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• Section 6(2)(a) UCTA 1977: applies if clause attempts to exempt liability for breaches of terms implied by
SGA 1979 S13 (goods will fit description) & S14 (goods of satisfactory quality & reasonably fit for purpose
made known to seller)
• under S6 UCTA 1977 seller cannot restrict liability for breach of terms implied by S13 or S14 SGA 1979 when
buyer is 'dealing as a consumer'
UNFAIR CONTRACT TERMS ACT 1977
S12 Dealing as a consumer
• S12(1): 'deals as consumer' if (a) not make contract in course of business & (b) other party
makes contract in course business & (c) goods type ordinarily supplied for private use or
consumption
• under S6 UCTA 1977, if buyer not dealing as consumer, seller only restrict liability for breach of implied terms
if exemption clause satisfies reasonableness test
• S7 UCTA 1977 deals with attempts to exempt liability for breach of terms implied by S3 & S4 Supply of
Goods and Services Act 1982 (SGSA 1982)
UNFAIR CONTRACT TERMS ACT 1977
S7 Miscellaneous contracts under which goods pass
• S7(2): exemption clause void if person dealing as consumer & goods not correspondence with
description, or not satisfactory quality or fit for particular purpose
• S7(3): if buyer business exemption clause only effective if satisfies reasonableness test
• S7 voids exemption clause if breach of S3 SGSA 1982 (implies condition goods transferred fit description) &
S4 (implies condition goods transferred satisfactory quality & reasonably fit for any purpose made known), if
buyer ocnsumer
• if buyer business & breach of S3 or S4 SGSA 1982 exemption clause must satisfy reasonableness test
Section 2: negligence
• S2 UCTA 1977 applies to clauses which exempt liability for negligence, including breach of term implied by
S13 SGSA 1982 (service exercised with reasonable care & skill)
UNFAIR CONTRACT TERMS ACT 1977
S2 Negligence liability
• S2(1): no clause can restrict liability for death or personal injury resulting from negligence
• S2(2): clause must satisfy reasonableness test to restrict other loss or damage
• S2 does not distinguish between consumers & businesses, but is distinction between nature of loss or
damage suffered as result of negligence
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Section 3: express terms
• in practice, S3 UCTA 1977 applies to clauses which exempt liability for breaches of an express term
UNFAIR CONTRACT TERMS ACT 1977
S3 Liability arising in contract
• S3(1): applies if one party deals as consumer or one deals on other's written standard terms of
business
• S3(2): exemption clause must satisfy reasonableness test to restrict liability for breach of express
term
Unfair Contract Terms Act 1977: reasonableness test
• reasonableness test used to evaluate exemption clause, under UCTA 1977: S6 & S7 if party not a consumer,
S2 if loss or damage caused by negligence & if S3 applies
• test defined in S11 UCTA 1977
UNFAIR CONTRACT TERMS ACT 1977
S11 The 'reasonableness' test
• S11(1): whether fair and reasonable to include term, taking account of the circumstances known
(or that ought to have been known) to the parties or within their contemplation, when contract
formed
• S11(2): court may take account of factors in Schedule 2 to help detrmine reasonableness, but
not limited to these factors
• S11(5): burden of proof lies with party seeking to rely on exemption clause
Guidelines
• Schedule 2 lists some factors to consider when applying reasonableness test, expresly applies to test S6(3),
S7(3) & S7(4) but in practice considered more generally
UNFAIR CONTRACT TERMS ACT 1977
Sch 2 'Guidelines' for Application of Reasonableness Test
• (a): relative strength of bargaining positions of parties
• (b): whether customer received an inducement to agree to exemption clause or an opportunity to
enter similar contract with another party but without exemption clause
• (c): whether customer knew or ought reasonably to have known of existence & extent of
exemption clause (including custom of trade or previous course of dealing between parties)
• (d): if exemption clause applies to condition, whether reasonable at time contract made, to expect
compliance with that condition would be practicable
• (e): whether goods were manufactured or adapted to special order of customer
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• S11(4) UCTA 1977 sets out factors to consider and applies to limitation clauses only
UNFAIR CONTRACT TERMS ACT 1977
• S11(4): (a) resources which defendant could expect to be available for purpose of meeting liability
should it arise & (b) how far was open to defendant to cover himself by insurance
Scope
• if defendant seeks rely on part of exemption clause: should court consider whole exemption clause under
reasonableness test or just relevant part?
• traditionally treated exemption clause as a whole
STEWART GILL LTD V HORATIO MYER & CO LTD [1992] QB 600
• Court of Appeal held whole clause should be considered, Lord Donaldson MR: '.. The issue is
whether the term [the whole term and nothing but the term] shall have been a fair and
reasonable one to be included...'
• recently, more liberal approach taken in some cases
WATFORD ELECTRONICS LTD V SANDERSON CFL LTD [2001] EWCA CIV 317
• Court of Appeal held exemption clause could be split into two parts & reasonableness test could
be applied to each distinct part
Case law
• case law shows application of guidelines & additional factors that have been considered under
reasonableness test
SMITH V ERIC BUSH [1990] 1 AC 831 HL
• Lord Griffiths suggested difficulty of the task & practical impact of court's decision could be
considered, alongside guidelines in Schedule 2 UCTA 1977
ST ALBANS DISTRICT COUNCIL V INTERNATIONAL COMPUTERS LTD [1995] FSR 686
FACTS:
• plaintiff (P) used software supplied by defendant (D) to calculate appropriate local community
charge but software contained an error & miscalculated population
• P lost £484 000 in receipts & suffered further losses & claimed £1 314 846 damages, D sought to
rely on limitation clause, limiting their liability to £100 000
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ISSUE:
• could D rely on the limitation clause?
HELD:
• Scott Baker J (first instance) found D in breach express term, applied S3 UCTA 1977 &
reasonableness test
• limitation clause failed test, using Schedule 2 guidelines: D strong baragining position only few
companies supplied software, large company could afford liability, had sufficient insurance & not
shown why it was reasonable to limit their liability
• also practical consideration in favour of finding clause unreasonable: if clause was reasonable
would have meant local citizens suffered through increased tax or reduced services (Smith v
Eric Bush [1990])
• Court of Appeal agreed term failed reasonableness test, but lowered damages awarded P (P was
aware of limitation clause & common practice in computer software trade)
Third parties
• general rule: exemption clause cannot protect a third party (privity of contract)
ADLER V DICKSON [1955] 1 QB 158
FACTS:
• P was injured boarding a ship, P had contract with a Shipping Company, who were protected by
an exemption clause
• therefore P sued Ds (the ship master & boatswain) who sought to rely on the exemption clause
ISSUE:
• could Ds (a third party) rely on the exemption clause?
HELD:
• Ds could not rely on exemption clause becuase not parties to the contract
• there is a statutory exception to this rule
CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
S1 Right of third party to enforce contractual term
• S1(1): a third party may enforce a term if (a) the contract expressly provides that he may or (b)
the term purports to confer a benefit on him
• S1(3): third party must be expressly identified in the contract by name or as a member of a class
or answering a particular description
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• S1(6): applies to exemption clauses
Unfair Terms in Consumer Contracts Regulations 1999
• UTCCR 1999 implement EU Unfair Consumer Contract Terms Directive
• narrower than UCTA 1977 as only applies to consumers but wider as applies to all contract terms, not
individually negotiated
UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999
Reg 5 Unfair Terms
• 5(1): defines an unfair term as: contrary to requirement of good faith, it causes a significant
imbalance in the parties' rights & obligations, to detriment of consumer
Reg 8 Effect of unfair term
• 8(1): an unfair term is not binding on a consumer
• for exemption clauses, unfairness test means outcome under UTCCR 1999 likely to be same as under UCTA
1977
• similarly, not necessary to consider UTCCR if exemption clause is void under UCTA
This article can be found online at www.bitsoflaw.org/contract/formation/revision-note/degree/exemption-clauses-unfair-terms where links to
further resources are available.
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