Contents of a Contract PDF

3 Contents of a Contract LEARNING OUTCOMES When you have completed this chapter, you should be able to: understand the difference between express and implied terms, how they are classified and the link with remedies for breach of contract; explain the ways in which terms may be implied into a contract with particular emphasis on terms implied by the Sale of Goods Act 1979, the Supply of Goods and Services Act 1982 and the Consumer Rights Act 2015; explain and discuss in depth the role of common law and statute in regulating exemption clauses in both business and consumer contracts; use a structured and analytical approach to advise a client on the effect of an exemption clause. In Chapters 1 and 2 you looked at the elements needed to form a contract: agreement, consideration and contractual intention. In this chapter, we are going to look at the contents of the contract. The contents of a contract are its terms. The terms determine the extent of the parties’ obligations. Knowing the extent of the parties’ obligations is important if things start to go wrong. For example, suppose you want to arrange a short holiday in Cornwall. You find a suitable hotel and book five nights’ accommodation. The hotel confirms your booking, but when you arrive you are told that the hotel has been overbooked and there is only a room available for two nights. To make matters worse, you had booked a room with a sea view but are given a room facing a busy main road with no hint of the sea in sight. The hotel will have broken terms of the contract (to provide you with five nights’ accommodation and a room with a sea view). You will probably try to resolve the situation by negotiating with the hotel, but if this fails you can sue for breach of contract. The usual remedy is monetary compensation, which lawyers call damages. We will look at remedies for breach of contract in detail in Chapter 4. In this chapter, we are going to consider the following: express terms; implied terms; exemption clauses (ie contract terms which exclude or restrict a party’s liability for breach of contract or in some way limit the rights and remedies available to a party). 53 Contract 3.1 Identifying the express terms of the contract The express terms of the contract are terms specifically agreed by the parties. They may be in writing or oral, but clearly it would be better to have all the terms included in a written contract for evidential reasons. In general, parties are free to agree to any terms they choose, although there are some restrictions which we will consider later. Example Ashtons Ltd (a company of painters and decorators) enters into a contract with Jaswinder to paint her café for the sum of £2,000. Ashtons Ltd will supply the paint in ice blue for the doors and white for all other woodwork. Ashtons states that it will use a base coat followed by two topcoats. The express terms are: (a) Ashtons Ltd will paint Jaswinder’s café (b) Price £2,000 (c) Ashtons Ltd to supply paint (d) Paint to be ice blue for doors and white for all other woodwork (e) Ashtons Ltd will use a base coat and two topcoats. In the above case, it was reasonably easy to identify the express terms. Sometimes, however, there can be difficulty establishing what the parties have agreed. For example, the parties may disagree about whether statements made during negotiations are terms of the contract or representations. We shall be looking at the difference between terms and representations, and at the guidelines used by the court to determine whether a particular statement is a term or representation, in Chapter 6. Also, in order to be terms, statements (whether oral or in writing) must be incorporated into the contract. We shall be looking at how statements can be incorporated later in this chapter when we deal with exemption clauses. 3.2 Implied terms Implied terms are not expressly created by the parties but are implied (ie read) into the contract. Sometimes this may be done by a court in the course of litigation and sometimes it may be done by particular pieces of legislation. We shall look at the various ways in which terms are implied into contracts in a moment. First of all, though, why do you think terms may be implied into a contract? One reason is that the parties may not expressly agree all the terms of their contract, maybe because they share the same background (eg they both work in the same line of business) and, because of this common background, they make certain assumptions which they do not bother to spell out in their contract because these points seem so obvious to them. Also, if the parties have had previous consistent dealings, they may assume that their latest contract will contain the same provisions. We shall look at these possibilities in detail later on in this chapter. 54 Contents of a Contract It could be that the parties have not considered a particular point at all. However, a court will not imply a term into a contract just because the parties have been careless and forgot to deal with it. Lastly, a term may be implied in order to protect one of the parties. This sort of term is usually implied by statute. For example, if you buy a tin of beans from a supermarket, you will not have a discussion with the supermarket about the quality of the beans. You will not have agreed on an express term about the quality of the beans. However, it would seem only fair that you should have some rights against the supermarket if you opened the tin and found the contents were mouldy. Therefore, a term is implied into the contract by statute that the goods are of satisfactory quality. If they are not, then the supermarket will be in breach of contract. We shall look at a number of statutory implied terms later in this chapter. We will now consider situations where terms may be implied, starting with terms implied by the courts and then going on to terms implied by statute. 3.2.1 Terms implied by the courts 3.2.1.1 Terms implied by local custom or trade usage We have seen one reason why the parties may not expressly agree all the terms of their contract, which is because they form the contract against a background of common assumptions based on what usually happens in that locality or in that line of business. Certain points seem so obvious that the parties do not bother to make express provision. If there is a disagreement about the provisions of the contract, a court may imply a term based on local custom or trade usage. For example, in Hutton v Warren (1836) 1 M & W 466 an outgoing tenant farmer was entitled to an allowance for seed used and work done in the last year of the tenancy even though the lease was silent on this point. This term was implied into the contract because it was customary in the locality for this allowance to be given and there was nothing in the lease to suggest that this custom should not be followed. However, it would not have been possible to imply the term into the lease if the lease had contained a provision which contradicted the custom. The court would consider that the parties had thought about the local custom but decided to do something different. The approach would be the same if the court was asked to imply a term based on trade usage. It would not do so if there was a provision in the contract which contradicted the trade usage. 3.2.1.2 Terms implied by a previous course of dealings between the parties This is illustrated by the case of Spurling J Ltd v Bradshaw 1 WLR 461, CA, which involved an exemption clause. (We shall be dealing with exemption clauses in detail later in this chapter. However, as you might expect from the name, an exemption clause is a clause in a contract which is designed to exclude or restrict liability if the contract is broken.) In Spurling v Bradshaw, Bradshaw delivered barrels of juice to the claimants for storage. As on all of the many previous occasions when they had had dealings, Bradshaw was later sent a receipt for the barrels and the receipt included an exemption clause. When Bradshaw collected the barrels, they were empty. Bradshaw consequently refused to pay the storage charges and was sued. He counter-claimed for negligence and the claimants relied on the exemption clause as a defence. The court held that although the exemption clause was included in a post-contractual document (ie a receipt), it was nevertheless a term of the contract. It was incorporated in the contract by the parties’ previous consistent course of dealing. 55 Contract This principle is not confined to exemption clauses. It could be used to imply other terms where the parties have had previous consistent dealings. 3.2.1.3 Terms implied by the courts to reflect the presumed intention of the parties There are two tests that have been devised by the courts to imply terms into a contract based on the presumed intentions of the parties. These tests are known as the ‘business efficacy’ and ‘officious bystander’ tests. The ‘business efficacy’ test was established in The Moorcock (1889) 14 PD 64, CA. The defendant owned a wharf on the River Thames and agreed to allow the claimants to moor their ship at the wharf. Both parties knew that the Thames was a tidal river and that the ship would rest on the riverbed at low tide. The ship was damaged due to a ridge of hard ground beneath the mud of the riverbed. There was no express term of the contract dealing with this. However, the Court of Appeal felt that the parties must have contracted on the basis that the wharf owner had taken reasonable care to see whether the berth was safe and implied a term into the contract on this basis. The reason for this is that it was necessary to give business efficacy to the contract (ie so that the contract made business sense). The court would not imply a term making an absolute guarantee that the berth was safe as that would be wider than necessary to give business efficacy to the contract. The idea behind the decision in The Moorcock is that the court should consider whether a term is necessary to make the contract work commercially. It is not enough that the term would be a reasonable one to imply in the sense that it would improve the contract. The fact that the business efficacy test was supposed to be a stringent one was emphasised by the court in Shirlaw v Southern Foundries Ltd 2 KB 206, CA. In this case MacKinnon LJ explored the principle on which the decision in The Moorcock rests. He suggested that a term could only be implied if the point was so obvious that it went without saying that was what the parties intended. He described this as an ‘officious bystander test’. Suppose the parties are negotiating their agreement and a bystander suggests a term to include, then, if the response of both parties would be a common, ‘Oh, of course’, the test would be passed and the court would imply the term into the contract. There are not many situations where both parties would react in this way. Very often, one of the parties would have reservations about the proposed term because it would impose additional obligations on them. 3.2.1.4 Terms implied by the courts because of the type of contract Where a contract is of a kind which frequently occurs, the court may identify provisions which are typical of that kind of contract and say that these provisions will be implied terms unless the parties make contrary provision. Examples of contracts which frequently occur include tenancy agreements and employment contracts. (Also, contracts for the sale of goods are very common contracts but terms are implied into sale of goods contracts by statute rather than the common law. We shall look at statutory implied terms later on in this chapter.) The case of Liverpool City Council v Irwin and Another AC 239, HL involved a tenancy agreement of flats in a tower block owned by the local authority. Owing to vandalism, the lifts were regularly out of action, the stairs were often unlit and the rubbish chutes were often blocked. The tenants withheld rent in protest. The agreement did not 56 Contents of a Contract contain any provision about repair and maintenance of the lifts, stairs or rubbish chutes. The House of Lords had to decide whether there was any implied duty on the landlord to repair and maintain these common parts Lord Wilberforce said that a test of necessity should be applied bearing in mind the nature of this particular contract. Accordingly, the House of Lords did not imply an absolute obligation to repair as Lord Wilberforce said that this would go beyond what was necessary in the circumstances. Instead, a term was implied that the landlord should take reasonable care to keep the common parts in reasonable repair. The House of Lords went on to find that the landlord was not in breach of the term implied as reasonable care had been taken. Implied terms –summary We have now considered the various grounds the court can use to imply terms into contracts. We have seen that terms may be implied: by custom or trade usage; by a previous course of dealings between the parties; for business efficacy; because of the type of contract. We shall now go on to consider some terms that have been implied into contracts by statute. 3.2.2 Terms implied by statute We are going to look at terms implied by the Sale of Goods Act (SGA) 1979, the Supply of Goods and Services Act (SGSA) 1982 and the Consumer Rights Act (CRA) 2015. These Acts cover contracts for the sale of goods and contracts for the supply of services and work and materials. The SGA 1979 and the SGSA 1982 have been amended on a number of occasions, most recently by the CRA 2015. 3.2.2.1 The Sale of Goods Act 1979 As the name of the Sale of Goods Act 1979 suggests, this statute implies terms into contracts for the sale of goods, but not into all contracts for the sale of goods. Since the CRA 2015 came into force, the SGA 1979 no longer applies to contracts for the sale of goods made between a trader and a consumer. In CRA 2015, a ‘trader’ is defined as ‘a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf’. A ‘consumer’ is defined as ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’. So the SGA 1979 now only applies to contracts for the sale of goods which are made business-to-business, consumer-to-consumer or consumer-to-business. Terms implied by the Sale of Goods Act 1979 If you look at Reading 3 of the Appendix you will see that the SGA 1979 says that some of the implied terms are conditions. A condition is a major term of the contract, as opposed to a warranty which is a minor term. The distinction is important for the remedies which will be available to the innocent party if the term is broken. We will be looking at the classification of terms later in this chapter. 57 Contract For the moment, please read the extracts from ss 13 and 14 of the SGA 1979 set out in Reading 3 in the Appendix and then consider the example below. Example The owner of a public house, Gary, is on the internet looking to buy a large smart screen TV to mount on a wall in the bar so that customers can watch live sports coverage. He finds a suitable TV on the Supatelly company website. It is priced at £1,200. There is a description underneath the picture of the TV, stating its screen size and resolution, the inputs it can take and other details. Gary likes what he reads and orders one. He clicks on the ‘I agree to Supatelly’s terms and conditions’ button, puts in his credit card details and in due course the new TV arrives. So let’s see what Gary agreed (expressly and impliedly) with Supatelly. The express terms will be for the sale of the specified TV at the price of £1,200; together with the standard Supatelly terms and conditions to which Gary gave his agreement online. What about the terms that will be implied into his contract by the SGA 1979? Section 13(1) implies a term commonly referred to as ‘correspondence with description’. The idea here is that if the TV has been sold ‘by description’ –as is likely to be the case here where the goods are described as having certain characteristics and specifications –then the buyer is entitled to something that corresponds with that description. Section 14 implies two further terms into Gary’s contract with Supatelly: s 14(2) implies a term that the goods will be of satisfactory quality, and s 14(3) implies a term that the goods will be fit for purpose. Having seen how the terms implied by ss 13 and 14 of the SGA 1979 work, we shall now consider them in more detail. Section 14 –Satisfactory quality and reasonable fitness for purpose We will look first at s 14 and begin by drawing together some of the points which arose. The implied terms of satisfactory quality (s 14(2)) and reasonable fitness for the buyer’s purpose (s 14(3)) apply only if the seller sells in the course of a business to a commercial buyer. Section 14(3) refers to the buyer’s purpose being made known to the seller expressly or by implication. If you intend to use goods just for their normal purpose, you do not have to tell the seller what this is. It is made known by implication. Therefore, in the example above, Gary did not have to tell Supatelly the intended purpose for the TV. However, if you have a special or unusual purpose in mind, then to get the benefit of s 14(3) you should tell the seller what this is. Remember, though, that it must be reasonable for the buyer to rely on the seller’s skill and judgement. It is important to note that liability for breach of s 14(2) and 14(3) is strict, ie the buyer does not have to prove that the seller is at fault. This means, for example, that it is no defence for the seller to say that the seller did not know and could not have known that the goods were defective. 58 Contents of a Contract Suppose a shop buys goods from a wholesaler and then discovers that they are faulty due to a manufacturing defect. The wholesaler may well be in breach of both s 14(2) and s 14(3) of the SGA 1979 even though it was not in any way at fault. The wholesaler will have bought the goods from the manufacturer and the same terms will have been implied into that contract. So the wholesaler will, in turn, be able to sue the manufacturer for breach of the terms implied by s 14(2) and s 14(3). Section 13 –Sale of goods by description The second implied term that we need to consider in a little more detail is the term implied by s 13 of the SGA 1979. Section 13 says that where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with that description. This term will be implied whether the seller is a business or a private individual, unlike the terms implied by s 14(2) and 14(3) where the seller must sell in the course of a business. The question is: when will a contract for the sale of goods be a sale by description? In the case of Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd 1 QB 564 the Court of Appeal made it clear that in order for s 13 to apply, the buyer must rely on the description. Therefore, in order to identify a sale by description, you should ask whether the buyer relied on the seller’s description and whether this was reasonable. There will clearly be a sale by description where the buyer does not see the goods but relies on a description, eg on a website as in the Example above. There can also be a sale by description even where the buyer has seen the goods and examined them, provided the buyer has reasonably relied on the description. For example, in the case of Beale v Taylor 3 All ER 253, the defendant advertised a car for sale, describing it as a 1961 model. In fact, the car was made up of two halves of different cars welded together. One half dated from 1961, the other was older. The court decided that there had been a sale by description even though the buyer had inspected the car. Liability for breach of the term implied by s 13 is strict, ie the buyer does not have to prove that the seller is at fault. Having considered the terms implied by s 13 and s 14 of the SGA 1979, we shall now have a look at some of the remedies which may be available if one of these terms is broken. Remedies for breach of terms implied by s 13 and s 14 of the Sale of Goods Act 1979 Remedies for breach of contract generally (including breach of implied terms) will be considered in detail in Chapter 4. However, the SGA 1979 (as amended) provides some basic rights and remedies which apply if there is a breach of one of the terms implied by the Act. So we are going to consider these basic rights and remedies now, as you will probably find it more convenient to deal with all issues arising under the Act in one place. We shall also come back to this later in Chapter 4, so you should not worry about the detail at this stage. If one of the terms implied by s 13 or s 14 is broken then normally the buyer can terminate the contract and reject the goods even if the breach is minor. This means that the buyer is not obliged to perform any further obligations under the contract and can recover money paid, but the buyer must return the goods to the seller. The buyer can also sue for damages if there is any further loss. Alternatively, the buyer may affirm the contract, keep the goods and just sue for damages for any loss suffered. By way of example, imagine Tom, a decorator, buys a van for his business from a dealer. The van turns out to be defective. If the van is not of satisfactory quality, the dealer will have 59 Contract broken the term implied by s 14(2) of the SGA 1979. Potentially, Tom could terminate the contract, return the van to the dealer and get his money back. Tom could also claim damages if he has suffered other loss. The right to terminate the contract and reject the goods will be lost in the following circumstances: First of all, the right to reject the goods is lost where the buyer has accepted the goods. This is covered by s 11(4) and s 35 of the 1979 Act. Section 11(4) provides that the buyer cannot reject the goods if the buyer has accepted them. Section 35 sets out situations when the buyer will be deemed to have accepted the goods. The most common situation where the buyer is deemed to have accepted the goods is where the buyer retains the goods beyond a reasonable time without intimating rejection. What is a reasonable time is a question of fact in each case. In deciding this, the court must consider whether the buyer has had a reasonable opportunity in commercial terms to examine the goods to see whether they are in conformity with the contract. The nature of the goods and their complexity will be relevant. It seems that time starts to run from the date of delivery. The buyer is allowed a reasonable time to try out the goods in general terms. Secondly, the right to reject the goods for breach of s 13 and s 14 will be lost if the breach is so slight that it would be unreasonable for the buyer to reject them (SGA 1979, 15A). So, for example, if you buy something for your business and the goods are usable but very slightly defective, you will not be able to reject the goods for breach of s 14(2) and s 14(3). Your remedy will be restricted to damages. It is up to the seller to show that the breach is so slight that rejection of the goods would be unreasonable. SGA 1979 implied terms –summary We have now considered the terms implied into a sale of goods contract by ss 13 and 14(2) and (3) of the Sale of Goods Act 1979, and the remedies available if one of these implied terms is broken. Section 13 Where there is a contract for the sale of goods by description, s 13 implies a condition that the goods will correspond with their description. Section 14(2) Where the seller is selling in the course of a business, s 14(2) implies a condition that the goods supplied will be of satisfactory quality. Section 14(3) Where the seller is selling in the course of a business and the buyer expressly or by implication makes known any particular purpose for which the goods are being bought, s 14(3) implies a condition that the goods supplied are reasonably fit for that purpose (except where it is not reasonable of the buyer to rely on the seller’s skill or judgement). Remedies (a) Reject goods and recover money. Not available if: (i) breach is so slight it would be unreasonable to reject; or (ii) the buyer has accepted goods, eg by keeping the goods beyond a reasonable time without intimating rejection. (b) The buyer may also be able to claim damages. The remedy of damages is dealt with in Chapter 4. We shall now go on to consider terms implied by the Supply of Goods and Services Act 1982. 60 Contents of a Contract 3.2.2.2 Supply of Goods and Services Act 1982 In broad terms, the Supply of Goods and Services Act (SGSA) 1982 implies terms into contracts for services, and contracts for work and materials that are not made between a trader and consumer. Terms are now implied into contracts between traders and consumers by the Consumer Rights Act 2015. A service contract is one where the supplier is simply contracting to provide a service. Examples of service contracts governed by the SGSA 1982 are commercial cleaning contracts and commercial courier services. Work and materials contracts are contracts which are predominantly for work, but which necessarily involve the supply of goods. Examples of work and materials contracts governed by the SGSA 1982 are contracts to build office blocks or a sports stadium and contracts for garages to service commercial vehicles. The SGSA 1982 implies terms into these contracts in relation to both the work carried out and the materials (goods) supplied (see Reading 4 in the Appendix). Table 3.1 Supply of Goods and Services Act 1982 implied terms Sale of Goods and Services Act 1982 Type of business-to- Condition Innominate term business contract 2(1) In a contract for the transfer of goods, Work and materials √ there is an implied condition on the part of the transferor that he has a right to transfer the property [ownership] in the goods. 3 Where there is a supply of goods by Work and materials √ description, there is an implied term that the goods will correspond with that description. 4(2) Where goods are supplied in the course of Work and materials √ a business, it is an implied term that the goods will be of satisfactory quality. 4(5) Where goods are supplied in the course Work and materials √ of a business, and the buyer makes known to the supplier the buyer’s purpose for the goods (either expressly or impliedly) and reasonably relies on the supplier’s skill/knowledge, there is an implied term that the goods will be fit for that purpose. 13 Where work or a service is done in the Work and materials √ course of a business, there is an implied term and service contracts that it will be carried out with reasonable care and skill. 14 Where work or a service is done in Work and materials √ the course of a business and no time for and service contracts performance has been agreed, it is implied that the work will be done within a reasonable time. 15 If a price for work or a service has not been Work and materials √ fixed, there is an implied term that a reasonable and service contracts sum will be charged. 61 Contract Note Section 4(2) and s 4(5) only apply where goods are supplied in the course of a business. The terms implied by ss 3 and 4 are described as conditions. Sections 13–15 do not impose strict liability and are innominate terms. The terms implied by ss 14 and 15 only apply in the absence of express agreement to the contrary. If the contract is just for the supply of a service, only ss 13, 14 and 15 need to be considered. Where the contract is to supply both goods and services, you have to consider ss 13, 14 and 15 for the service and also ss 3 and 4 for the goods. Examples Situation Application of 1982 Act 1. Srinath has just had a new conservatory built Section 15 will not help Srinath with his claim on the back of his wine bar by ‘Glasshouses’. He that he has been overcharged as s 15 only has paid the firm £15,000, which is the price they implies a term that a reasonable price will agreed. He now thinks he has been overcharged. be paid if the contract is silent and here the Will s 15 of the SGSA 1982 help him? parties had agreed a price. 2. John runs a central heating business and he (a) If the boiler supplied by John was installs a new central heating system in an office defective then, as he supplied it in the course building owned by Wakeford plc. Two weeks later of his business, he will be in breach of s the boiler explodes. What term(s) implied by the 4(2), as it will not be of satisfactory quality, SGSA 1982 will have been broken in the following and s 4(5), as it will not be reasonably fit for circumstances? Wakeford plc’s purpose. (a) The boiler was defective. (b) If the boiler was not defective but was (b) The boiler was not defective but John had not not installed properly, then John will be in installed it properly. breach of s 13 as he will have provided a service in the course of his business without reasonable care and skill. 3.2.2.3 Consumer Rights Act 2015 One of the main aims of the Consumer Rights Act (CRA) 2015 was to consolidate and clarify the law relating to the rights of consumers and protection of their interests. Part 1 of the Act deals with ‘Consumer contracts for goods, digital content and services’. Here, we will be focusing on: some of the main terms implied into consumer contracts for the supply of goods and contracts for services; and the consumer’s rights to enforce those terms. Later in the chapter, we shall be looking at the extent to which liability for breach of the relevant implied terms may be excluded or restricted. Sales contracts The CRA 2015 applies only to ‘sales contracts’ made between a trader and consumer (s 5). ‘Sales contracts’ not only include straightforward contracts for the sale of goods but also 62 Contents of a Contract any contract where goods are supplied and paid for as part of the contract, eg a work and materials contract (such as a building contract). The CRA 2015 defines a ‘trader’ as ‘a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf’, and a ‘consumer’ is defined as ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’ (s 2). Terms implied into sales contracts If you look at Reading 2 in the Appendix, you will see that the CRA 2015 implies terms into sales contracts which largely reflect those implied by ss 13 and 14 of the SGA 1979 and ss 3 and 4 of the SGSA 1982. Section 9 of the CRA 2015 implies a term that goods will be of satisfactory quality, s 10 implies a term that goods will be reasonably fit for their particular purpose, and s 11 implies a term that goods will be as described. Note, however, that the CRA 2015 does not pre-classify these terms as ‘conditions’; instead it presents them as ‘statutory rights’ –statutory rights which are of fundamental importance to the consumer. On that basis, it should be the case that these terms are conditions. You will be looking at the significance of terms being ‘conditions’ of the contract later in this chapter. Consumer’s rights to enforce terms about goods These are set out in s 19 of the CRA 2015, and, broadly speaking, if the goods do not conform to the contract because of a breach of ss 9–11, the consumer’s rights are as follows: (a) the short-term right to reject and get a full refund (ss 20 and 22); (b) the right to repair or replacement (if appropriate) (s 23); and (c) the right to a price reduction or the final right to reject and get a partial refund to reflect the consumer’s use of the goods (ss 20 and 24). Basically, this is a pecking order of remedies. If the short-term right to reject has been lost, then consider whether it is appropriate/reasonable to get the goods repaired or replaced; if not, then the consumer may be entitled to an appropriate price reduction or to reject the goods and get a partial refund of the price. Unless the parties have expressly agreed otherwise, the time limit for the short-term right to reject non-perishable goods is 30 days after they have been bought, delivered and, where appropriate, installed. With perishable goods, the time limit is no longer than the goods could reasonably be expected to last. For the purposes of the other rights, if goods do not conform to the contract at any time within six months of the date of delivery, they will be taken as not having conformed to the contract on that day. The only exceptions to this are in relation to perishable goods and where it can be proved that the goods did conform with the contract on the day (but this may be very difficult to establish). Services contracts The CRA 2015 basically applies to any contract for a trader to supply a service/work to a consumer. So it will cover straightforward service contracts (eg a dry cleaning contract) and also work and materials contracts. Terms implied into services contracts If you look at Reading 2 in the Appendix, you will see that the terms implied by ss 49, 51 and 52 are very similar to the terms implied by ss 13–15 of the SGSA 1982: s 49 implies a term that the service/work will be carried out with reasonable care and skill; 63 Contract s 51 implies a term, where no price has been fixed, that a reasonable price will be paid for the service/work; and s 52 implies a term, where no time for performance has been fixed, that the service/work will be performed within a reasonable time. As with the terms implied in relation to goods, these terms are again presented by the CRA 2015 as ‘statutory rights’, although, as you will see later, there is some (albeit limited) scope to restrict the trader’s liability. Consumer’s rights to enforce terms about services Very simply, s 54 of the CRA 2015 provides that where a service/work does not conform to the contract because of either breach of an express term relating to the performance of the service/work or breach of the implied term to exercise reasonable care and skill (s 49), the consumer has the right to require repeat performance (where reasonable) or to a price reduction. In relation to a breach of the implied term as to performance within a reasonable time (s 52), the consumer simply has the right to an appropriate price reduction. Examples Situation Term broken Remedy/remedies Jenny decided to have a This is a goods and services Exercise short-term right conservatory built at the back of contract within the CRA 2015 as to reject the faulty window her house and contracted with made between a trader and panels but might be Windows Ltd for them to consumer. more practical to go for build it. There is a breach by Windows replacement window Two days after the conservatory Ltd of the implied terms as panels. was completed, it became to satisfactory quality and Repair or a price reduction apparent that some of the fitness for purpose –ss 9 and would not seem to be double-glazed window panels 10. Liability is strict, so it is no appropriate or desirable. were defective and were getting excuse that the fault is due to a misted up. When she pointed manufacturing defect. this out to Windows Ltd, they said it was not their fault as it was a manufacturing defect. Patrick employed John, a local This is also a goods and Exercise the short-term right builder, to supply and lay a grey services contract governed by to reject but again might Indian stone patio at the back the CRA 2015. be more appropriate to of his house. In the event John Brown instead of grey stone claim replacement stones laid brown Indian stone and did is breach of an express term that conform to the contract not lay it properly as the surface and also s 11 of the CRA 2015 description. was not level. (the implied term that goods Patrick could require repeat will correspond with their performance in preference description). In practice it would to a price reduction (which is be better to sue for breach of s unlikely to be desirable). 11 (a statutory right). Not laying the patio properly would be breach of s 49 of the CRA 2015 –the implied term to exercise reasonable care and skill. 64 Contents of a Contract Figure 3.1 Contract terms Terms implied by custom Terms Express implied in terms fact CONTRACT Terms Terms implied by implied in CRA law Terms implied by SGA/SGSA 3.3 Classification of terms We are now going to look at how terms of a contract are classified and the importance of that classification. All terms which impose contractual obligations on a party, whether express or implied, will be conditions, warranties or innominate terms. As you will see, the distinction between conditions, warranties and innominate terms is important because of the link with remedies. Essentially, breach of any term gives the other party the right to claim damages, whereas breach of some terms normally gives the other party the right to terminate the future performance of the contract, ie the non-defaulting party does not have to perform future obligations or accept any further performance from the party in breach. In addition to this, the party terminating can claim damages if there is additional loss. We shall look at remedies in detail in Chapter 4. We shall first consider the difference between conditions and warranties. 3.3.1 Conditions and warranties: the traditional approach Traditionally, the court would classify a term as either a condition or a warranty. 3.3.1.1 Difference between a condition and a warranty A condition is a major term or, as some writers say, a term going to the root of the contract. A warranty is a minor, less important, term. To decide whether a term in a contract is a condition or a warranty, the court applies an objective test. Would a reasonable person think the parties intended the term to be a condition or a warranty? In applying this test, the court will look at the circumstances surrounding the making of the contract, the contract as a whole, and it will take into account whether the parties have described the term as a condition or a warranty in the contract. The emphasis, therefore, is on deciding the importance of the term which has been broken at the time the contract was made, rather than looking at the effects of the breach and the loss or damage which has resulted from the breach. 65 Contract 3.3.1.2 Effect if term is a condition or a warranty If the court decides that the term is a condition, and the contract has not been fully performed, the innocent party will usually have the option of terminating the future performance of the contract, as well as obtaining damages for any additional loss suffered. This is so, even if they have only suffered minor loss or damage. If the court decides the term is a warranty, the innocent party cannot terminate the contract but can only sue for damages for loss suffered. This applies even if the innocent party has suffered serious loss or damage. You may find this surprising, and you will see later on in this chapter that this approach has been criticised. As we said above, the court will take into account whether the parties have described a particular term as a condition or a warranty. The use of the word ‘condition’ raises a presumption that it is used in the legal sense, but this may be rebutted from evidence of the contract as a whole. In the case of Schuler v Wickman Machine Tool Sales Ltd AC 235, HL, the parties had described a particular term as a ‘condition’, but the House of Lords decided that the parties had not intended to use the word in its strict legal sense. The term the court was considering stated that, over a long period, one of two named representatives from Wickman would visit six other firms every week. There was no provision to substitute other representatives to cover illness, and neither was there provision for the six firms saying a visit was not convenient. If the term was a condition, failure to make a single visit would entitle Schuler to terminate the contract. The court thought this was such an unreasonable result that it was unlikely to be what the parties had intended, despite the fact that the term was called a condition in the contract. 3.3.1.3 Advantages and disadvantages of classifying terms as conditions and warranties The advantage of the traditional classification into conditions and warranties is that it helps to promote certainty. If a term is clearly a condition, both parties know from the outset that if the term is broken and the contract has not been fully performed, the innocent party may terminate. Conversely, if the term is a warranty, both parties know from the outset that if the term is broken the innocent party cannot terminate. (There are special rules in the SGA 1979 and CRA 2015 which apply to sale of goods contracts. You considered these earlier in this chapter and we shall be reviewing them later in Chapter 4.) However, classifying terms as either conditions or warranties can lead to unfairness. A party may use a breach of condition as an excuse to end the contract even where the breach is fairly minor. It also means that if a term is a warranty, the innocent party cannot terminate even if the breach is major: the only remedy will be damages. Therefore, classifying terms without looking at the consequences of the breach can lead to unfairness and lacks flexibility. For these reasons, another approach to the classification of contractual terms has developed. We shall look at this next. 3.3.2 Innominate terms: a more recent approach Instead of classifying all terms of the contract as conditions or warranties, a second approach to classification is to say that a term is innominate, ie neither a condition nor a warranty. You may also see innominate terms referred to as intermediate terms. 66 Contents of a Contract These terms were first recognised by Diplock LJ in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd 2 QB 26, CA. The defendants agreed to hire a ship from the claimants for 24 months. A term of the contract provided that the ship was ‘fitted in every way for ordinary cargo service’, ie that the ship was seaworthy. In fact the engines were old and the engine room staff inefficient, with the result that the ship was in port for repairs for 20 weeks. The defendants terminated the contract, ie refused to carry on with it. The claimants sued, claiming that the defendants were in breach of contract. The judge at first instance found that the ship was unseaworthy but that the defendants were not entitled to terminate the contract. The defendants appealed to the Court of Appeal. Diplock LJ suggested that the test which should be used to decide whether the innocent party could terminate the contract was to ask whether the event which had occurred, ie the breach of contract, had deprived the innocent party of substantially the whole benefit of the contract. This meant that you would look at the effect of the breach to decide the remedies available to the innocent party. He did not think that the test he suggested should be used in all cases. He said that the parties might expressly agree when the innocent party could terminate, or the situation might be governed by statute. Also, he thought it was still appropriate to classify terms as conditions or warranties if the term was very simple, in the sense that you could say that breach of the term would always deprive the innocent party of substantially the whole benefit of the contract (a condition) or that the breach would never have this effect (a warranty). Diplock LJ thought that many terms were too complex to be classified as conditions or warranties. These terms were complex in the sense that some breaches would, and others would not, deprive the innocent party of substantially the whole benefit of the contract. You could not say in advance what the effect of the breach would be. You had to wait until the breach of contract occurred and then look at the effect of the breach. (Terms that are not classified as either conditions or warranties are referred to as innominate or intermediate terms.) In the Hong Kong Fir Shipping case, the defendants who had hired the ship were not entitled to terminate the contract. The time lost repairing the ship was not sufficient to deprive the defendants of substantially the whole benefit of the contract of hire. We have seen that in the Hong Kong Fir Shipping case, Diplock LJ suggested that not all terms should be classified as conditions or warranties. Some terms should be classified as innominate or intermediate terms, in which case it is necessary to wait until the breach of contract has occurred to decide whether the innocent party should be allowed to terminate the future performance of the contract. If the breach deprives the innocent party of substantially the whole benefit of the contract, they can terminate, but not otherwise. 3.3.3 Which approach should the court adopt? The two approaches to the classification of contractual terms exist side by side. This means that, subject to some restrictions (see below), it is up to the court to decide whether to adopt the traditional approach and classify terms as conditions or warranties, or to adopt the approach described by Lord Diplock LJ in the Hong Kong Fir Shipping case and classify terms as innominate. There are some restrictions on the court. For example, you have seen that the parties may make it clear in their contract that a particular term is a condition or a warranty. Also, a statute may express a particular term to be a condition or a warranty, eg the terms implied by s 13 and s 14 of the SGA 1979 are conditions; the term implied by s 13 of the SGSA 1982 is simply described as a term and so is treated as innominate. 67 Contract Figure 3.2 Classification of terms TERMS Condition Innominate Warranty Termination Damages 3.4 Exemption clauses 3.4.1 What are exemption clauses? Before we begin to study the rules which apply, we need to consider what exemption clauses are designed to do and when they might occur. An exemption clause is a clause which seeks to exclude liability completely or to limit liability if a breach of contract occurs or a tort is committed. Note that a clause which seeks to limit liability is often referred to as a limitation clause, eg a clause on a dry-cleaning ticket which says that liability for loss or damage is limited to the value of the garment. A clause which attempts to restrict or limit a party’s remedies for breach of contract is also an exemption clause, eg a sale of goods contract may provide that the seller will be liable only if the buyer notifies the seller of defects within two weeks of delivery. This is an exemption clause because it is saying that if the buyer does not notify the seller within the time limit, the seller will not be liable. In this textbook we use the phrase ‘exemption clauses’ to include ‘limitation clauses’. Have a look at the Specimen Conditions of Sale (Reading 1 in the Appendix) and see if you can spot the exemption clauses there. How many did you find? Clause 4.3 is purporting to exclude liability for non-delivery in certain circumstances. Clause 4.6 states that the seller will not be liable for any loss caused by delay in delivering goods, and it also restricts the buyer’s remedies if there is such delay. Clause 5 is also an exemption clause which excludes liability if goods are defective unless the buyer gives notice within a specified time. You will notice that clause 5.3 limits the buyer’s remedies. Finally, did you spot clause 8 which, although headed ‘Limitation of Liability’, is really a mixture of exclusion and limitation clauses. 3.4.2 Establishing liability For an exemption clause to be relevant, a breach of contract or a tort must have been committed. For example, imagine you have had an extension added to your house and it collapses. You want to sue the builder. The builder may be liable to you for breach of contract because the builder did not do the work with reasonable care and skill. This would be a breach of the term implied into the contract by s 49 of the CRA 2015 which we looked at earlier in this chapter. Suppose that there is an exemption clause in the contract which excludes the builder’s liability for defective work. In this situation it would be important to 68 Contents of a Contract know whether the builder can rely on the clause. If the builder can rely on it, you would not be able to obtain damages to compensate you for the loss you have suffered. There are both common law and statutory rules governing exemption clauses. We start by examining the common law. 3.4.3 Common law rules on exemption clauses 3.4.3.1 Incorporation into the contract We saw earlier in this chapter that in order to amount to a term, a provision must be part of the contract, ie it must be incorporated into the contract. There are three main ways in which a provision may be incorporated, namely: by signature; by notice; by consistent course of dealings between the parties. The rules on incorporation apply to all terms of a contract, but most of the case law on this concerns exemption clauses and so we are going to consider the rules of incorporation in the context of exemption clauses. Incorporation by signature The basic rule is that if you sign a contractual document then the clauses in that document will normally be incorporated as part of the contract. This is so even if you did not read the clauses. This principle is illustrated by L’Estrange v Graucob Ltd 2 KB 394. Here the exemption clause was in ‘regrettably small’ print but was legible, and the court therefore found that the clause was incorporated into the contract because the contract had been signed. Note that it is not necessary for the party relying on the clause to have signed the document. Only the claimant must have signed it. Note also that the document must be a contractual document, that is the sort of document which people in general might assume contained some terms of the contract, eg a holiday booking form. We shall look at this in more detail when we deal with the second method of incorporating an exemption clause into a contract. There are three situations where an exemption clause will not be incorporated into the contract even if the innocent party has signed the document containing the clause: (a) The exemption clause is illegible. We have seen in the L’Estrange v Graucob case that, although the print was ‘regrettably small’, it was still legible. (b) The exemption clause will not be incorporated if the effect of the clause has been described inaccurately (ie misrepresented) and the innocent party has reasonably relied on the inaccurate description in entering the contract. For example, in Curtis v Chemical Cleaning & Dyeing Co 1 KB 805, CA, the claimant took a wedding dress, trimmed with beads and sequins, to the defendant’s shop for cleaning. The assistant asked the claimant to sign a receipt. The claimant asked why, and the assistant said that the receipt exempted the defendant from liability for damage to the beads and sequins. The claimant signed. In fact, the receipt exempted the defendant from liability for any damage however caused. When the dress was returned, it was stained. The court held that the defendant could not rely on the clause as its effects had been misrepresented to the claimant. Please note that the subject of misrepresentation is a large area of law in its own right, and we look at this in full in Chapter 6. (c) The clause is unusual and onerous and is not fairly and reasonably drawn to the attention of the other party. 69 Contract In Blu-Sky Solutions Ltd v Be Caring Ltd EWHC 2619 (Comm), the Order Form stated ‘orders and contracts are subject to and incorporate our standard terms and conditions by signing this document I agree I have logged on to the Blu Sky website at www.blusk ysolutions.co.uk, have read agree and fully understand all terms and conditions regarding the contract … and am bound by the same’. Although Be Caring did not review the terms of the order form or log on to Blu-Sky’s website as indicated to read the terms and conditions, they did return a signed Order Form. The terms and conditions, which were not labelled as such on their face, totalled just over a page of detailed text in closely spaced small type and with no separate clause headings. Among the terms and conditions were some particularly onerous clauses relating to cancellation, and Blu-Sky sought to rely on those clauses when Be Caring purported to cancel. The court found that the relevant clauses had not been fairly and reasonably brought to Be Caring’s attention and therefore had not been incorporated and could not be relied upon. Although the Order Form did refer to Blu-Sky’s terms and conditions, it did not explain their purpose or give any warning that they imposed potentially substantial obligations. Blu-Sky had made no attempt to highlight the relevant clauses; instead they were concealed in the middle of a myriad of small print. Incorporation by notice So far, we have looked at incorporation by signature. However, not all exemption clauses are contained in signed documents. We now go on to consider the conditions which must be satisfied in order for a clause contained in an unsigned document (eg a ticket) or on a notice (eg a notice in a car park) to be incorporated. The document containing the clause must be contractual in nature The first thing to bear in mind is that the document containing the clause must be contractual in nature. The question you could ask yourself is whether it is the sort of document which a reasonable person might expect to contain some terms of the contract. In Chapelton v Barry Urban District Council 1 KB 532, the court decided that a deck chair ticket was not contractual in nature as a reasonable person would regard it as a mere receipt to show that the claimant had paid for the chair. It was not regarded as a document which might contain terms on which the claimant had hired the chair. Note that this case does not prevent all tickets from being contractual documents: it depends on whether a reasonable person would expect a particular kind of ticket to include terms of a contract. Many tickets, for example railway tickets, would normally be regarded as contractual in nature. The innocent party must either know of the clause, or the party relying on the clause must have taken reasonable steps to bring it to the other’s notice before the contract is finalised This point was made in Parker v South Eastern Railway (1877) 2 CPD 416, CA. Here the Court of Appeal said that it was not necessary for the innocent party to know about the clause provided that the party seeking to rely on it had taken reasonable steps to draw the clause to the other’s attention. What factors do you think a court might take into account when deciding whether reasonable steps have been taken? A court will take into account factors such as: (a) the position of the clause on the document (eg if it is on the back, are there words on the front, such as ‘For conditions see over’ or ‘Please turn over’, drawing attention to the back?); 70 Contents of a Contract (b) the prominence of the clause on the document; and (c) the type and nature of clause, eg is the clause particularly unusual or onerous? In cases where certain exemption clauses are expected, simply handing the document over will be enough to amount to reasonable steps. In fact the document itself may not contain the exemption clause. The document may simply refer to another document where the clause can be found. For example, a railway ticket usually just says ‘Subject to the current National Rail Conditions of Carriage’ and goes on to say that these are available at ticket offices. Usual exemption clauses that you might expect to find in a rail travel contract would probably be regarded as validly incorporated. However, some exemption clauses may be regarded as particularly onerous or unusual in which case they need to be drawn to the other party’s attention in the most explicit way. In Spurling Ltd v Bradshaw 1 WLR 461, CA, Lord Denning MR said that in order to give sufficient notice of an onerous or unusual clause, it would be necessary for the clause to be ‘printed in red ink with a red hand pointing to it or something equally startling’. You can see, therefore, that what constitutes reasonable steps will depend on the nature of the clause. More needs to be done to draw an unusual or onerous clause to the attention of the other party. This approach is not restricted to exemption clauses but applies to other clauses which are onerous or unusual, as illustrated by Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd QB 433, CA. The claimants ran a photographic transparency lending library. The defendants asked if the claimants had any transparencies of the 1950s. The claimants delivered 47 transparencies together with a delivery note containing various conditions. Condition 2 stated that all transparencies had to be returned by March 19, and if not there would be a fine of £5 per transparency per day plus VAT. The defendants did not notice this. The defendants returned the transparencies 14 days late. The claimants claimed £3,783. The Court of Appeal first decided that the contract had been formed after the transparencies and delivery note were delivered. The court then went on to consider whether the claimants had taken reasonable steps to bring the clause in the delivery note to the defendants’ attention. Dillon LJ held as follows: Condition 2 of these conditions is in my judgment a very onerous clause. The defendants could not conceivably have known if their attention was not drawn to the clause that the plaintiffs were proposing to charge a ‘holding fee’ for the retention of the transparencies at such a very high and exorbitant rate. At the time of the ticket cases in the last century it was notorious that people hardly ever troubled to read printed conditions on a ticket or delivery note or similar document. That remains the case now. In the intervening years the printed conditions have tended to become more and more complicated and more and more one-sided in favour of the party who is imposing them, but the other parties, if they notice that there are printed conditions at all, generally still tend to assume that such conditions are only concerned with ancillary matters of form and are not of importance. In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties’ attention to the printed conditions or they would not be part of the contract. It is, in my judgment, a logical development of the common law into modern conditions that it should be held, 71 Contract as it was in Thornton v Shoe Lane Parking Ltd, that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party. In the present case, nothing whatever was done by the plaintiffs to draw the defendants’ attention particularly to condition 2; it was merely one of four columns’ width of conditions printed across the foot of the delivery note. Consequently condition 2 never, in my judgment, became part of the contract between the parties. The Interfoto decision can be criticised on the basis that the defendants were in business and should have been capable of reading the conditions at the foot of the delivery note. It can be argued that if they did not do so, they should be taken as accepting the risk that the conditions might be disadvantageous to them. The timing of reasonable steps We have seen that the party seeking to rely on the exemption clause must have taken reasonable steps to bring it to the attention of the other party. Generally, these steps must be taken before the contract is finalised. This is because a party should have the opportunity of seeing all the terms of the contract before entering into it. This is illustrated by the case of Olley v Marlborough Court Ltd 1 KB 532. The claimant made a contract for the use of a hotel room at the reception desk. In the hotel bedroom there was a notice exempting the hotel from liability for any items which were lost or stolen. It was held that this came too late to be incorporated in the contract. The position might have been different if the claimant had been a regular user of the hotel, and therefore as a result of a previous consistent ‘course of dealing’ could be said to have prior notice of the clause. So far, we have seen that reasonable steps must be taken to draw the exemption clause to the other party’s attention before the contract is finalised. However, the exemption clause may still be incorporated even if the steps are only taken after the contract is finalised if there has been a consistent course of dealings between the parties. We consider this next. Incorporation by a previous consistent course of dealing In order for a clause to be incorporated on this basis, the dealings must be both consistent and amount to a ‘course’ of dealings, ie a sufficient number of regular dealings (as in Spurling v Bradshaw, which we looked at in 3.2.1.2 above). An exemption clause was also incorporated on this basis in Kendall (Henry) & Sons v Lillico & Sons Ltd AC 31, HL, where two businesses had dealt with each other three or four times a month for three years. After each contract was made, a ‘sold note’ would be sent to the buyer. The note contained exemption clauses. The court decided that the clauses were incorporated in the latest contract because of the previous consistent course of dealings. The recipient had had plenty of opportunity to read the clauses. By contrast, in the case of Hollier v Rambler Motors 2 QB 71, CA, the claimant had had a car serviced by the defendant’s garage only three or four times over five years. This did not amount to a course of dealing. Even if there is a course of dealings, a clause will not be incorporated unless the dealings are consistent. In the case of McCutcheon v David MacBrayne Ltd 1 WLR 125, HL, although the parties had dealt with each other many times, sometimes the document containing the exemption clause had been signed and sometimes it had not. The House of Lords decided that the exemption clause had not been incorporated as the dealings had not been consistent. 72 Contents of a Contract Incorporation –summary We have now looked at the first common law rule which applies to exemption clauses, that is the clause must be incorporated into the contract. As we have seen, a clause may be incorporated: by signature; by notice; or by consistent course of dealings between the parties. The other common law rule which applies to exemption clauses is the principle that the wording of the clause must cover the breach of contract and the loss or damage which has occurred. We consider this next. 3.4.3.2 Construction (or interpretation) of exemption clauses Even if an exemption clause is incorporated into a contract, the party in breach will not be able to rely on it unless, as a matter of construction, the clause covers the breach of contract and loss or damage which has occurred. For example, if you saw a notice in a hair salon stating that the salon would not be liable for damage to your clothing caused by products used on your hair, you would not expect the clause to protect the salon if the hair stylist dyed your hair the wrong colour, or if an assistant spilt coffee on your suit. The clause is not worded to cover these events. Before the Unfair Contract Terms Act 1977, the court had no power to declare a clause invalid on the basis that it was unreasonable. Provided the clause was incorporated into the contract and was properly worded to cover the breach and loss that had occurred then the clause would be valid. Because of this, the courts would very often adopt a strained and restrictive approach when interpreting an exemption clause in order to protect the weaker party. We shall now have a look at some of the principles which the court adopts when interpreting an exemption clause. The contra proferentem rule If a party tries to rely on a clause which is ambiguous or unclear, the court will interpret the clause against the defaulting party. This is known as the contra proferentem rule. The party seeking to rely on the clause is sometimes referred to as the proferens and the clause is construed against (contra) this person. The contra proferentem rule applies to any clause which is unclear or ambiguous, not just to an exemption clause. In Houghton v Trafalgar Insurance 1 QB 247, a five-seater car was involved in an accident whilst carrying six people. The insurance company wanted to rely on a clause in the insurance policy which exempted it from liability if the car was carrying an ‘excessive load’. The court decided that the clause did not cover a situation where the car was carrying too many people. The clause was ambiguous as the word ‘load’ is usually applied to goods, not to people, and so the insurance company could not rely on the exemption clause. Exemption clauses and negligence If an exemption clause is intended to cover liability for the tort of negligence or a negligent breach of contract, the clause must be carefully worded. The following guidelines were suggested in Canada Steamship Lines v The King AC 192: If the clause expressly exempts a party from liability for negligence (ie the word ‘negligence’ or a synonym is used) then it will be effective. If there is no express reference to negligence, the court must decide whether the words are wide enough to exclude liability for negligence, eg if a clause stated that a party 73 Contract would not be liable ‘for any damage howsoever caused’, the phrase ‘howsoever caused’ would normally include liability for negligence. Even if this is so, the defendant is still not necessarily entitled to rely on the clause. This is because the court must then ask if the clause could cover liability other than negligence, eg strict liability, where proof of fault is not required. If such liability does exist, then the court may well decide that the clause should be restricted to this other liability and does not cover negligence. However, it seems that in commercial cases the courts may take a more relaxed approach here. In Monarch Airlines Ltd v London Luton Airport Ltd CLC 698, the claimant’s aeroplane was damaged by a loose paving block at the defendant’s airport. A clause in the contract stated that the defendant would not be liable ‘for any damage to aircraft resulting from an omission, neglect or default …’. The court decided that those words were clear enough to cover negligence. The judge said that, when construing the clause, a court should not ask whether there is an alternative head of legal liability which the clause might cover and, if there is, immediately construe the clause as inapplicable to negligence. Instead, the court should look at the facts and realities of the situation at the time of the contract and ask what potential liability the parties had in mind. Exemption clauses and very serious breaches of contract In the past, courts were reluctant to allow a party to rely on exemption clauses where a very serious breach of contract had occurred. However, the case of Photo Productions Ltd v Securicor Transport Ltd AC 827, HL clarified the position and illustrates the modern approach in relation to exclusion of liability for a very serious breach of contract. In this case the House of Lords said that where there has been a very serious or deliberate breach of contract, it is simply a matter of construction whether the exemption clause covers the breach. If the clause is clearly worded, it may cover the breach which has occurred even if that breach is very serious or deliberate. Limitation clauses Although the rules of construction which we have considered above apply to both exclusion and limitation clauses, limitation clauses are sometimes less strictly construed than clauses completely excluding liability. The reason for this is that it is highly improbable that one party intended to release the other completely from all liability for breach, but a party might well agree to the other limiting liability in some way. However, it does depend on the limitation clause. Construction –summary We have now covered the main principles of construction. We have seen that: an unclear or ambiguous clause will be construed against the person seeking to rely on it under the contra proferentem rule (Houghton v Trafalgar Insurance); clear words are needed to exclude liability for negligence, but if the wording is clear, the word ‘negligence’ need not be used (Canada Steamship; Monarch Airlines Ltd); an exemption clause can cover a very serious or a deliberate breach of contract provided the clause is clearly worded (Photo Productions Ltd v Securicor). 3.4.4 Unfair Contract Terms Act 1977 Having looked at the common law rules governing exemption clauses, we now go on to consider the effect of the Unfair Contract Terms Act (UCTA) 1977. 74 Contents of a Contract 3.4.4.1 Scope of the Act UCTA 1977 does not apply to exemption clauses in contracts which are made trader-to- consumer as these are now governed by the CRA 2015. Subject to that, UCTA 1977 applies to any clause excluding, limiting or otherwise restricting liability, including a clause which makes liability or its enforcement subject to restrictive or onerous conditions, and a clause which subjects a person to any prejudice in consequence of pursuing a right or remedy (s 13). Most of the key provisions (except s 6) apply only to business liability, ie liability arising from things done by a person in the course of a business or from the occupation of business premises (s 1(3)). If UCTA 1977 does apply, it does one of two things: it either renders the exemption clause void or subjects it to a reasonableness test (the reasonableness test is dealt with in s 11 and Sch 2). Schedule 1 contains a number of contracts to which the key provisions of UCTA 1977 do not apply. These include contracts of insurance and any contract insofar as it relates to the creation, transfer or termination of an interest in land. Remember, too, that UCTA 1977 does not apply to contracts which are made trader-to-consumer. The 1977 Act has three main areas of operation (see Reading 6 in the Appendix): Sections 6 and 7 apply to clauses which exempt liability for breaches of the terms implied by the SGA 1979 and the SGSA 1982 in relation to goods. Table 3.2 Effect of ss 6 and 7 of UCTA 1977 SGA 1979 Effect of s 6 of UCTA 1977 s 13 –in a sale of goods by description, a condition is A seller can exclude or restrict liability implied that goods will fit the description. for breach of these terms provided s 14(2) and s 14(3) –where a seller sells goods in the the exemption clause satisfies the course of a business, a condition is implied that the goods reasonableness test. are of satisfactory quality and reasonably fit for any (You will be considering the reasonableness purpose made known to the seller. test at 3.4.4.2 below.) SGSA 1982 Effect of s 7 of UCTA 1977 s 3 –condition implied that goods transferred fit their Liability for breach of terms implied by description. ss 3 and 4 can be excluded or restricted s 4(2) and (5) –goods transferred in the course of provided the clause satisfies the a business: condition implied that the goods are of reasonableness test. satisfactory quality and reasonably fit for purpose. Section 2 applies to clauses which exempt liability for negligence or a negligent breach of contract. An example of a negligent breach of contract is breach of the term implied into business-to-business contracts by s 13 of the Supply of Goods and Services Act 1982 that the provider of a service must exercise reasonable care and skill. Section 2(1) provides that a business cannot exclude or restrict its liability for negligence where it causes death or personal injury. Section 2(2) provides that in relation to other loss or damage (eg physical damage or loss of profit) caused by negligence, a business can exclude or restrict its liability provided the exemption clause satisfies the reasonableness test. 75 Contract Section 3 basically applies to clauses in standard form contracts which exempt liability for breaches of express term(s). Although of much wider application, in practice, s 3 of UCTA 1977 only tends to be used where there has been breach of an express term of the contract (in relation to other breaches the 1977 Act provides equivalent or greater protection under ss 2, 6 and 7). Section 3 of the 1977 Act applies only where a party deals on the other party’s written standard terms of business (eg, the Specimen Standard Conditions of Sale, Reading 1 in the Appendix). So, if there has been breach of an express contractual term and the party in breach seeks to rely on an exemption clause, the first question is whether, or not, s 3 applies. It will do if the innocent party was dealing on the defaulting party’s written standard terms of business. The phrase ‘written standard terms of business’ is not defined in the Act. If s 3 does not apply, a clause purporting to exclude or restrict liability for breach of an express term will be upheld provided it is valid at common law (ie, it is incorporated in the contract and as a matter of construction covers the breach and damage alleged). Where s 3 does apply, a business can exclude or restrict its liability for breach only if the term satisfies the reasonableness test. Summary of ss 2, 3, 6 and 7 of UCTA 1977 Exemption clause excluding or limiting liability for: negligent breach of contract, eg breach of the term implied by s 13 of the SGSA 1982 that the supplier of a service in the course of a business will exercise reasonable care and skill Unfair Contract Terms Act 1977, s 2 If negligence causes If negligence causes other death/injury, loss/damage, exemption exemption clause clause valid if void (s 2(1)) reasonable (s 2(2)) breach of express term of contract Unfair Contract Terms Act 1977, s 3 (but s 3 only applies if the ‘innocent’ party is dealing on the other’s written standard terms of business) Exemption clause valid if reasonable 76 Contents of a Contract breach of terms implied by ss 13 and 14 of the Sale of Goods Act 1979 (goods sold in course of a business to fit description and be of satisfactory quality/fit for purpose) Unfair Contract Terms Act 1977, s 6 Exemption clause valid if reasonable breach of terms implied by ss 3 and 4 of the Supply of Goods and Services Act 1982 (goods supplied to fit description and goods supplied in course of business to be of satisfactory quality/fit for purpose) Unfair Contract Terms Act 1977, s 7 Exemption clause valid if reasonable 3.4.4.2 The reasonableness test Section 11 of UCTA 1977 sets out the reasonableness test. The exemption clause must have been a fair and reasonable one to include having regard to the circumstances which were (or ought reasonably to have been) known to the parties or within the contemplation of the parties when the contract was made (s 11(1)). The burden of proof is on the party seeking to rely on the exemption clause to show that it is reasonable (s 11(5)). You can see therefore that the court should ask whether the clause was a reasonable one to include taking into account factors known, or contemplated, at the time of the contract. Examples Situation Clause more or less likely to be reasonable? The seller is a large company that insists The buyer is in a weaker bargaining position than the on selling goods on its own standard seller, and the seller may be taking advantage of terms and conditions, which contain the buyer’s position. That makes it less likely to pass exemption clauses similar to those of the reasonableness test. other suppliers. 77 Contract Situation Clause more or less likely to be reasonable? The seller agreed to reduce the price The buyer has chosen to get the lower price in of goods if the buyer was prepared to exchange for the exemption clause. It would be a accept the exemption clause. touch harsh on the seller to deny them the benefit of the exemption clause, when in effect the seller has paid for the protection of the exemption clause by reducing the price. That all makes it more likely to pass the reasonableness test. The exemption clause is set out in the Whether the customer knew –or even ought to have small print at clause 76(3)(i)(d). Clause 76 known –about the clause is relevant to determining its is headed ‘Other matters’. reasonableness. Here, the clause is buried in the small print and overall is less likely to be reasonable. Whilst s 11 of UCTA 1977 itself is not very helpful, there are guidelines to assist the court, both in the 1977 Act and in case law. The guidelines in the 1977 Act are contained in Sch 2. They specifically apply when the court is considering the reasonableness test under ss 6 and 7. As these are the only guidelines in the 1977 Act, however, the court can, and does, take them into account when applying the reasonableness test in other situations. The Sch 2 guidelines The Sch 2 guidelines say that the court should have regard to certain matters if they appear relevant. These include the following: (a) The relative strength of the bargaining positions of the parties For example, if the bargaining positions of the parties are equal, it will be easier to show that the exemption clause is reasonable (Watford Electronics v Sanderson CFL Ltd EWCA Civ 317 and Goodlife Foods Ltd v Hall Fire Protection Ltd EWCA Civ 1371) than if a multinational corporation is dealing with a small trader. Businesses negotiating contracts will very often agree on exemption clauses as a legitimate method of allocating the commercial risk between them. Risk is generally reflected in the price; so the greater the risk to the supplier, the higher the price. The following extract from Chadwick LJ’s judgment in Watford Electronics v Sanderson CFL Ltd EWCA Civ 317, CA sums up the attitude of judges in commercial cases: Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view, be taken to be the best judge of the commercial fairness of the agreement which they have made. … They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. (b) Did the customer receive an inducement to agree to the exemption clause, or in accepting it did the customer have an opportunity to enter a similar contract with someone else, but without having to accept a similar exemption clause? For example, was the customer offered a lower price for accepting a contract with an exemption clause and a higher price for accepting a contract without an exemption clause? If so, this might suggest that the clause was reasonable. Also, if the customer could have gone elsewhere and avoided an exemption clause but chose not to do so, the court might feel that the customer had some good reason for accepting the contract with the clause and be reluctant to interfere with the agreement the parties had reached. 78 Contents of a Contract (c) Did the customer know, or ought reasonably to have known, of the existence and extent of the clause, taking into account any trade custom or previous dealings between the parties? For example, if the clause is clearly worded and clearly set out in the document, the court might be encouraged to say that the clause is reasonable as the customer should have been aware of the existence and extent of the clause. (d) W here the exemption clause will apply if a condition is not complied with, was it reasonable at the time of the contract to expect that compliance with the condition would be practicable? For example, have a look at clause 5.1 in the Specimen Conditions of Sale (Reading 1 in the Appendix). You will see that the seller is saying that the seller will not be liable for defects in goods unless the buyer notifies the seller of the defects within 14 days of the time when the buyer discovers, or ought to have discovered, the defect. At the time of the contract, was it reasonable to expect that it would be practicable for the buyer to comply with this condition? (e) Were the goods manufactured, processed or adapted to the special order of the customer? Additional guidelines for limitation clauses There are also additional guidelines in s 11(4) of UCTA 1977 which apply to limitation clauses. If the court is trying to decide whether a limitation clause is reasonable, s 11(4) says that the court should also have regard to: the resources which the defendant could expect to be available for the purpose of meeting the liability should it arise; and how far it was open to the defendant to cover itself by insurance. Must the whole clause be reasonable? It may be that the defendant is relying on just part of a much longer exemption clause. The question then is whether the whole clause has to satisfy the reasonableness test or whether the court will consider only the part on which the defendant is relying. In the case of Stewart Gill Ltd v Horatio Myer & Co Ltd 1 QB 600 the Court of Appeal took the view that the court should consider the clause as a whole and not just the part relied on. Lord Donaldson MR said that, in the face of the wording of s 11 of the 1977 Act: 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. The Court of Appeal refused to sever the unreasonable parts of an exemption clause when assessing reasonableness. The Court took the view that the clause as a whole was unreasonable, and that it was immaterial that parts of the clause might have been reasonable had they stood on their own. However, in the case of Watford Electronics Ltd v Sanderson CFL Ltd EWCA Civ 317, the Court of Appeal decided that an exemption clause could be split into two parts as the two parts served two distinct purposes. In this case the reasonableness of each part could be decided separately.

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