Controlling Contract Terms: Exclusion Clauses, Penalties & Consumer Protection PDF

13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Contract Law (3rd edn) TT Arvind p. 373 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection TT Arvind, Professor of Law and Head of Department, York Law School, University of York https://doi.org/10.1093/he/9780198867777.003.0013 Published in print: 12 July 2022 Published online: September 2022 Abstract This chapter examines how the law regulates contract terms, with particular emphasis on rules that are intended to protect weaker parties. It begins with a discussion of the limits of freedom of contract and proceeds by assessing the role played by formal requirements, such as the requirement that contracts be in writing. It then considers how the law regulates contract terms which seek to alter the liability that one party will have in the event of breach. More specifically, it looks at exclusion clauses in the common law and the statutory regulation of such clauses, along with liquidated damages, contractual remedies, and the rule against penalties. It also explores the extent to which consumer protection law restricts the terms that can be included in consumer contracts, especially when dealing with the problem of unfair terms. Keywords: contract, terms, freedom of contract, liability, exclusion clauses, liquidated damages, remedies, penalties, consumer protection, unfair terms * ‘Blessed are the meek’ 13.1 Introduction: the limits of freedom of contract 13.2 The requirement of writing 13.3 Liability clauses 13.3.1 Exclusion clauses in the common law The contra proferentem rule The Canada Steamship rule Page 1 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection 13.3.2 Statutory regulation of exclusion clauses: the Unfair Contract Terms Act 1977 When does UCTA apply? ‘Written standard terms of business’ The test of reasonableness 13.3.3 Liquidated damages, contractual remedies, and the rule against penalties 13.4 Protecting consumers: the Consumer Rights Act 2015 13.4.1 Defining consumer transactions 13.4.2 Unfairness ‘Contrary to good faith’ ‘Significant imbalance’ A composite test Core terms 13.5 In conclusion: substantive fairness in contracting p. 374 Problem 13: setting the context Consider the following scenario: Page 2 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Bernard Williams, a final year student at the University of Carmarthenshire, goes on a trip to the Gower Peninsula with his friends. They stay in a bed and breakfast. They are extremely dissatisfied with their accommodation. Bernard leaves a negative review on a popular Welsh travel reviews site. A month later, he is shocked to discover that the bed and breakfast has charged a sum of £1,000 to his credit card. When he contacts them, they point to the following clause in their terms and conditions, which he accepted when he made the booking: 13. Reviews: (a) The customer agrees that he will contact the hotel with any complaints or concerns he may have in relation to the stay prior to leaving a negative review on any public forum, in print or online. (b) A negative review may only be left if the hotel has been given at least 28 days to resolve the complaint, and has failed to do so in that period. (c) The customer agrees that he will be liable to pay the hotel compensation of up to £1,000 for the harm to its reputation and loss of business if he leaves a negative review in breach of this clause. The customer consents to the hotel collecting this money through a charge to the payment card provided as security for his booking. The term at issue in this scenario is problematic from the point of view of the affected party. This is partly because it is onerous, but also because the affected party had no realistic chance to negotiate the term. Nevertheless, in terms of the formation process, it was accepted by the party and forms part of the contract. Should its onerous character, or the fact that it could not have been negotiated, in any way affect its legal effect? If so, how, and to what extent? 13.1 Introduction: the limits of freedom of contract Clauses such as the one at issue in Problem 13 are surprisingly common in contracting, and reflect an imbalance of bargaining power. One party prepares the terms and the other has little or no opportunity to alter them. One way of dealing with this is to regulate the formation process, setting limits on the stronger party’s ability to take advantage of the weaker party’s position. As Chapters 11 and 12 have discussed, English law only does this to a limited extent. Whilst there is some regulation, there is no general principle against exploiting a superior bargaining position. Page 3 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection The primary way in which English law protects weaker parties is through rules limiting the effect of terms which the law considers to be particularly onerous. Such rules have long existed. Courts of equity have long had jurisdiction to grant relief against contractually conferred powers, such as the power to impose p. 375 penalties or forfeiture. ↵ Statutes, too, have long regulated specific clauses and contracts—for example, setting limits on the ability of railway companies to exclude liability for damage to goods caused by their negligence. The modern law of contract continues to restrict the ability of parties to a contract to rely on onerous terms through rules derived from common law and statute. As is the case with much of English contract law, there is no general principle underlying these rules, nor is there any single theoretical or doctrinal idea that the various restrictions imposed by law reflect. Instead, the rules setting limits to freedom of contract are particularistic, being addressed either to specific subject matters, types of terms, or parties. What they share is a common concern: namely, that weaker parties lack the ability to effectively protect themselves in the course of contracting, and that this can have material adverse effects not just on the parties themselves but also on the public interest. As Chapter 1 discusses, Professors Adams and Brownsword suggested in the 1990s that this marked a significant shift in contract law. Contract law, in their account, had for much of the 20th century largely left it to the parties to protect their interests. If they failed to do so, the law would not do it for them. They termed this approach ‘market individualism’, on the basis that it gave a central role to the logic of free bargaining on a market, and did so in a manner that was highly individualistic. In the 1970s, however, contract law began to take on a more paternalistic role. Parties with limited bargaining power, such as consumers and employees, received legal protection from the more egregious terms that might have been inserted into contracts if they were left solely to markets. In addition, the law also proactively began to insert terms into contracts that were designed to protect the interests of the weaker party, and which the weaker party could not have individually negotiated. They termed this a ‘consumer-welfarist’ approach, on the basis that it is individual consumers who these rules typically seek to protect. In this chapter, we will examine the logic underlying the legal regulation of contract terms, and study a few examples of such regulation. There are a vast range of statutes and common law rules imposing limits on onerous contract terms, and it is impossible to cover them all in an introductory textbook. The aim of this chapter will, instead, be to give you an overview of the main types of rules that we find in the law, and the circumstance in which they tend to operate. We will begin by looking in section 13.2 at the role played by formal requirements, such as the requirement that contracts be in writing. We will then look, in section 13.3, at how the law regulates one of the types of terms that have historically been most problematic— namely, contract terms which seek to alter a party’s liability for breach. Clauses of this type typically work by restricting the extent of a party’s responsibility for defective performance, or by seeking to use financial consequences to deter a party from pursuing a particular course of conduct, as in Problem 13. In section 13.4, we will move from studying legal regulation of particular types of terms to looking at how the law seeks, more broadly, to protect the interests of particular types of transactors. Our focus in this section will be on consumer contracts and, in particular, on the manner in which the law seeks to deal with the problem of unfair terms in consumer contracts. Page 4 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection p. 376 13.2 The requirement of writing One of the oldest ways of regulating contracts is by requiring them to meet certain requirements of form. Historically, there were many such types of requirement. Three survive to the present day. Some contracts 1 are required to be made by deed, some are required to be made in writing, and others are required to be evidenced in writing. This section describes a few such contracts and the rationale underlying the formal requirements. The most commonly encountered requirements are those relating to disposition of interests in land, found in the Law of Property Act 1925 and the Law of Property (Miscellaneous Provisions) Act 1989. Under s 53 of the Law of Property Act 1925, a number of different types of agreements are required to either be in writing or be evidenced in writing. Conveyances of interests in land are subject to an even higher requirement: under s 52(1), they must be made by deed. Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 adds a further requirement; namely, that contracts for the sale or disposition of an interest in land must be made through a written instrument which incorporates all terms which the parties have expressly agreed. Similarly, s 4 of the Statute of Frauds 1677 requires guarantee agreements under which one person promises ‘to answer for the debt, default or miscarriage of another person’ to be in writing and signed by the guarantor or a person authorized by him. The policy underlying these requirements is to promote certainty, avoid evidential difficulty, and ensure 2 that certain types of contracts are not entered into without full thought being given to their implications. 3 Nevertheless, such requirements can also have deleterious consequences, as Yeoman’s Row v Cobbe illustrates. Cobbe, a developer, entered into an oral development agreement with a company called Yeoman’s Row to develop a property in London. He proceeded to obtain planning permission at considerable effort and expense. Because the property market was frothy at the time, the value of the property increased significantly during this period. Once Cobbe had obtained planning permission, the owners refused to proceed with the transaction, and found another developer who was willing to pay a higher price. Even though this was a breach of their agreement with Cobbe, he had no remedy for breach of contract. The agreement had not been reduced to writing, making it unenforceable under s 2 of the Law of 4 Property (Miscellaneous Provisions) Act 1989. 5 Pitts v Jones, which is also discussed in Chapter 3, section 3.2.1, is a similar example arising out of the Statute of Frauds. Jones was the majority shareholder in a company, in which the claimants held minority stakes. Jones intended to sell his shares to a third party, WG Birch Ltd The claimants were told they could sell their shares to Birch six months later, but not straight away. They were unhappy about the delay. To p. 377 induce ↵ them to agree to the transaction, Jones gave them an oral undertaking that he would pay the price of their shares if Birch failed to do so. Birch became insolvent before paying. When the claimants sued Jones on his oral undertaking, it was held that the agreement between them and Jones was unenforceable. It was a contract of guarantee, and as such had to be in writing under the Statute of Frauds 1677. These cases are clearly problematic. The difficulty with imposing formal requirements on commercial transactions is that they are frequently entered into by business people without legal advice. The requirements of the Statute of Frauds, or even of the Law of Property Act, are not common knowledge, and Page 5 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection the result is that they often take business people by surprise. The Law Reform Committee, which recommended in 1952 that the requirement of the Statute of Frauds in relation to guarantees be retained, justified it on the basis that it was necessary to ensure that inexperienced people were not led into 6 obligations which they did not understand. But it is hard to see how the requirement of writing furthers this requirement. A guarantee buried in a complex 30-page document does nothing to make it clearer to ‘inexperienced people’ what their obligations are; yet it will be perfectly enforceable under the Statute of Frauds. The requirement that guarantees be signed is particularly problematic in an era where contracts are concluded over email. Although the courts try to take a commercially realistic approach—holding, for example, that the sender’s name typed at the bottom of a single email can authenticate a contract 7 contained in a chain of emails —they cannot ignore the plain words of the statute. A very different, and more justifiable, approach to formal requirements has been taken in more recent statutes. The requirements of form they impose are more nuanced, unlike the Law of Property Act or the Statute of Frauds, and are expressly targeted at ensuring that the weaker party understands their rights and obligations under the contract, as well as their rights and obligations under the general law. The Consumer Credit Act 1974 provides a good example. Under s 61(1) of this Act, certain types of consumer credit agreements must be made in a prescribed form, contain all terms other than implied terms, be in a readily legible state, and be signed by both parties. The policy underlying these requirements is to ensure that the consumer is fully aware of her rights and duties under the agreement as well as under the Consumer Credit Act, the actual charge for the credit, and other matters which it is desirable that she have 8 knowledge of. Critically, because the policy is to protect consumers against exploitation, the failure to comply with the formal requirements only has a unidirectional effect. The agreement cannot be enforced 9 against the consumer without the consent of the court, but the consumer’s ability to enforce the agreement remains unaffected. Such an approach, which expressly seeks to minimize the likelihood of perverse outcomes such as those in Pitts v Jones, has much to commend it, and its increased use in recent statutes is to be welcomed. Regrettably, it is at present unlikely that the more blunt-edged approaches taken in older statutes will be altered. p. 378 13.3 Liability clauses Contracts commonly contain clauses seeking to vary the liability of a party in the event of breach. The clause may restrict a party’s liability—for example, by capping it at a particular figure or by excluding certain types of loss. Alternatively, it may increase the liability of the other party to cover additional losses that might not be recoverable by default or fix the quantum of damages. Problem 13 is an example of the latter. Both types of clauses—those that seek to vary a party’s liability downwards and those that seek to vary its liability upwards—are subject to legal regulation. The former are the subject of rules relating to exclusion clauses, while the latter are the subject of the rule against penalties. In this section, we will begin by examining common law rules governing exclusion clauses (section 13.3.1), followed by statutory rules on exclusion clauses (section 13.3.2), ending with a discussion of the rule against penalties (section 13.3.3). Page 6 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection 13.3.1 Exclusion clauses in the common law The clause in Illustration 13.1 is an exclusion clause which, unlike the clause in Problem 13, seeks to reduce rather than increase the liability of a party. Exclusion clauses are governed by rules that are in some respects similar to, and in other respects different from, the rules governing other types of clauses in contracts. As far as incorporation is concerned, the same rules apply to exclusion clauses as to any other clause. Many of the rules on incorporation (discussed in Chapter 6) were developed in the context of exclusion clauses, and when considering whether an exclusion clause was validly incorporated into a contract, the courts will apply the standard three-part test of looking at the timing of notice, the nature of the document in which notice was given, and the extent to which attention was drawn to the term. Illustration 13.1 Sigrid is staging a performance of Wagner’s Ring Cycle in Bayreuth. She orders a steel frame for the dragon from Jarrow Steel Castings in England. Due to a clerical error in the English firm’s workshop, the frame is shipped to Beirut, Lebanon instead of Bayreuth, Germany. By the time the error is discovered and the frame located, it is too late to construct the dragon on time for the opening performance, and the first week’s performances have to be cancelled, resulting in extensive losses. Sigrid discovers that the sale agreement with JSC contains the following clause: Our liability for any defects in the work we are contracted to do under this agreement is limited to a full refund of the purchase price. The interpretation of exclusion clauses, however, presents a more nuanced picture. The approach to interpretation described in Investors Compensation Scheme v West Bromwich Building Society is, in the context of exclusion clauses, subject to two additional rules that do not apply to other types of clauses. The first, the contra proferentem rule, states that an exclusion clause should be construed against the interests p. 379 ↵ of the person seeking to rely on it. The second, referred to as the Canada Steamship rule (after the case in which it was first articulated), sets out three principles that the courts should apply in determining whether a contractual clause successfully excludes or limits liability for negligence. Both doctrines were at one time given a very broad application by English courts. In recent years, however, English courts have been somewhat more cautious and less expansive in applying these doctrines. An important factor behind this more cautious approach is the creation of statutory schemes regulating exclusion clauses, which has made it less necessary to rely on common law doctrines of construction. Nevertheless, both rules remain part of English law, and in this section we will look at each in turn. Page 7 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection The contra proferentem rule The essence of the contra proferentem rule is simple. It provides that an ambiguous exclusion clause will be construed against the party seeking to rely on the exclusion of liability, and in favour of the party seeking to impose liability. Although the origins of this rule appear to lie in a policy against overly broad exclusions of liability, in the modern context it is purely a rule of interpretation, and its underlying logic is that of contextual interpretation. Most parties are unlikely to have wanted to give up a right to claim compensation for breach. As such, when construing an ambiguous exclusion clause contextually, a sensible starting point is that a reasonable addressee would read the clause narrowly. However, this is only a starting point. If the matrix of fact suggests that a broader reading of the exclusion clause is the more appropriate one, then that is the one the court will adopt. Cases decided up to the middle of the last century evidenced a judicial willingness to construe exclusion clauses narrowly even if that meant adopting a strained reading of the clause. In Andrews Brothers 10 (Bournemouth) Ltd v Singer & Co Ltd, a term in a contract for the sale of cars, described as ‘new Singer cars’, provided that ‘all conditions, warranties and liabilities implied by statute, common law or otherwise are excluded’. One of the cars delivered was not a new car. When the seller sought to rely on the exclusion clause, the court held that the wording of the clause only applied to implied terms, not express terms, and the term breached here was an express term. 11 In Houghton v Trafalgar Insurance Co Ltd, a clause in an insurance contract excluded liability for damage ‘caused or arising whilst the car is conveying any load in excess of that for which it was constructed’. The car had seating for five people, but was carrying six at the time of the accident. The court held that the exclusion clause was not applicable. The term ‘load’ was construed to apply only to a limit on the weight the car was carrying, not the number of passengers. 12 Similarly, in Beck & Co v Szymanowski & Co, a contract for the sale of reels of cotton required the buyer to give notice of any defect in the goods within 14 days of their arrival. If no notice was given within that time, the contract provided that ‘the goods delivered shall be deemed to be in all respects in accordance with the contract’. Eighteen months after delivery, the buyer discovered that the length of cotton on each reel was p. 380 shorter than the 200 yards stipulated in the contract. The seller sought ↵ to rely on the exclusion clause, but the court held that the clause was not applicable. The clause spoke of liability for goods delivered. However, the court held that the damages that were actually being claimed were not in respect of goods delivered but in respect of goods which were not delivered. This put them outside the ambit of the exclusion clause. Although none of these cases have been overruled, more recent cases show a greater reluctance to place a 13 strained construction on exclusion clauses. In Photo Production Ltd v Securicor Ltd, Lord Diplock summarized the general principles underlying the judicial approach to construing exclusion clauses. The starting point must be that: Parties are free to agree to whatever exclusion or modification of all types of obligations as they 14 please within the limits that the agreement must retain the legal characteristics of a contract. Page 8 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Courts are entitled to construe such clauses strictly, and with reference to reasonableness, particularly when it comes to the exclusion of duties imposed by implied terms: the court’s view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another is a relevant consideration in deciding what meaning the 15 words were intended to bear. But this only applies if the exclusion clause is genuinely capable of bearing two meanings. Courts should not resort to strained constructions for the sake of reading down an exclusion clause: In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one 16 meaning … 17 In Whitecap Leisure Ltd v John H Rundle Ltd, the Court of Appeal held that older cases on contra proferentem must now be read in the light of the contextual approach to interpretation adopted in Investors Compensation Scheme v West Bromwich Building Society. It is only where the parties’ objective intention cannot be ascertained from the clause’s words read in the context of the document as a whole, and the surrounding matrix of fact, that the contra proferentem rule will apply. In all other cases, the courts should 18 read the exclusion clause like any other clause. Contra proferentem, in other words, has not gone away, but the set of cases in which it is applicable has diminished. The decisions at first instance and on appeal in the case of University of Keele v Price 19 Waterhouse illustrate how the post-Investors approach to contextual interpretation significantly reduces the role that was formerly played by the contra proferentem rule. Case in depth: University of Keele v Price Waterhouse EWCA Civ 583 p. 381 ↵ Price Waterhouse, a firm of accountants, contacted the University of Keele in 1996 offering to assist them in adopting a ‘Profit-Related Pay Scheme’. If this had been successfully adopted, it would have restructured salary payments in a way that saved considerable amounts of tax for the university as well as the staff. The scheme failed due to Price Waterhouse’s negligence. The Revenue’s requirements for schemes of this type required 80 per cent of the workforce to participate. Price Waterhouse advised the university that this threshold had been met when, in fact, it had not. The university’s auditors Page 9 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection refused to sign off on the accounts, leading to the scheme being cancelled. In litigation, Price Waterhouse accepted that it had been negligent in advising the university that the threshold had been met. It had negligently misinterpreted the relevant statute. However, it sought to rely on the following exclusion clause in its contract with the university: Subject to the preceding paragraph we accept liability to pay damages in respect of loss or damage suffered by you as a direct result of our providing the Services. All other liability is expressly excluded, in particular consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the scheme. Price Waterhouse argued that the losses were a ‘failure to realise anticipated savings’, and were 20 therefore excluded by the clause. At first instance, Hart J rejected this argument. The first half of the paragraph accepted liability for damages that were a direct result of Price Waterhouse’s performance, while the second clause excluded liability for the form of loss that was likeliest to be a direct result. This meant the clause was self-contradictory. He accordingly construed the clause 21 contra proferentem, and held that it did not apply, leaving Price Waterhouse liable. Price Waterhouse appealed. The Court of Appeal dismissed the appeal, but approached the construction of the exclusion clause very differently. Rather than apply the contra proferentem rule, Arden LJ adopted a contextual reading of the clause. Read as a whole, the use of the word ‘other’ in the second sentence made it clear that it was a residual category and, as such, only applied to losses not covered by the first sentence. This meant that the loss suffered by the university fell within the losses for which Price Waterhouse had expressly accepted liability, and not within the exclusion clause. Because the meaning of the clause was clear once it was properly construed, it was not 22 necessary to apply the contra proferentem rule. The implications of this shift can be seen by returning to Illustration 13.1. Had the courts still been as willing to apply strained readings of exclusion clauses as they were earlier in the 20th century, it is likely that the clause would be read down, even at the cost of a far-fetched reading, meaning that Sigrid would be able to sue for breach of contract. In the current approach, however, this can no longer be taken as a given. The court’s starting point, in each of these examples, will be a contextual reading of the clause. It is only where the usual interpretation clause yields a possible multiplicity of meanings that the court will resort to the contra proferentem rule. p. 382 The Canada Steamship rule A second possible issue arises where the loss has been caused by the negligence of one of the parties, as was the case in Illustration 13.1. In general terms, it does not matter whether a contract has been breached because of a party’s fault, or in spite of the party having done everything in its power to perform its contractual obligations. Where exclusion clauses are concerned, however, the law tends to be less willing Page 10 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection to give effect to clauses excluding liability where the party has been negligent. The leading case on this 23 point is the decision of the Privy Council in Canada Steamship v R, where the Privy Council considered the approach that should be taken when deciding whether an exclusion clause was wide enough to cover loss caused by negligence. Lord Morton set out a three-stage test, which has been widely applied in subsequent cases. In the first stage, the court asks whether the clause in question has expressly excluded or limited liability for negligence. If it has, it will be given effect. If the clause does not expressly exclude liability for negligence, the court proceeds to the second stage. Here, it asks whether the clause is worded widely enough to cover negligence. If there is any doubt as to the clause’s scope, the court should apply the contra proferentem rule. If the contra proferentem rule is satisfied, the court proceeds to the third stage. Here, it asks whether the clause could cover some liability other than negligence. If the party in breach cannot be liable on any ground other than negligence, the clause is effective to exclude liability for negligence. If the party in breach may be liable on grounds other than negligence, then the clause should generally be construed to only cover those grounds, and not negligence. The first of these stages is relatively straightforward. It will obviously be satisfied if the exclusion clause expressly mentions ‘negligence’. The courts have held that it will also be satisfied by other phrases having 24 a similar meaning, such as ‘act, omission, neglect or default’. Where the words used in the exclusion clause are more generic, for example ‘all losses’ or ‘any loss howsoever arising’, however, it becomes necessary to proceed to the second and third stages. The general import of these stages is that generic words will not be construed as excluding liability for negligence if there was some other ground on which liability might have been based. If, however, negligence is the only basis of liability, then the words will be 25 construed as excluding liability for negligence. The enquiry into whether there is an alternative head of liability is a contextual enquiry, not a technical one. The focus is on looking at: the facts and realities of the situation as they … presented themselves to the contracting parties at the time the contract was made, and ask to what potential liabilities … did the parties apply their 26 minds. If a contextual interpretation suggests that negligence was intended to fall within the exclusion clause, p. 383 then it will be held to fall within the exclusion clause. The courts will ↵ not resort to a strained reading 27 of the words as they did in the early days of the Canada Steamship rule. In relation to Illustration 13.1, the key question will therefore be whether the phrase ‘work we are contracted to do’ refers only to the steelwork, or to the entirety of JSC’s obligations under the contract (including the dispatch of the goods). This will be answered with reference to the matrix of fact. Once that has been done, the court will move on to asking whether the clause covers liability for negligence. The words ‘any defect’ are generic. However, given the context, it is likely that they will be held to cover negligence. This is because a significant proportion of the defects that could arise in the manufacture of a steel frame will be attributable to negligence on the part of JSC. The clause is likely to be held to be sufficiently wide to cover the type of loss that is at issue. Page 11 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection 13.3.2 Statutory regulation of exclusion clauses: the Unfair Contract Terms Act 1977 In addition to common law rules, statute has also long restricted the ability of parties to exclude or limit their liability, particularly where negligence is involved. The oldest statutes tended to be very specific, covering particular clauses in particular types of transactions. The approach they took was not uniform. The Carriers Act 1830, which applied to contracts entered into with public common carriers, prohibited 28 exclusion clauses altogether in relation to certain types of loss. In contrast, the Railway and Canal Traffic Act 1854 permitted parties to exclude liability for negligence if the clause in question was ‘just and 29 reasonable’. The law is now more consistent. Currently, two statutes cover the vast majority of exclusion clauses: the Unfair Contract Terms Act (UCTA) 1977 and the Consumer Rights Act 2015. UCTA applies to exclusion clauses in commercial contracts which seek to restrict or limit ‘business liability’. Business liability is defined to cover ‘liability for breaches of obligations or duties’ which arise either from things which 30 someone does in the course of a business or from the occupation of premises used for business purposes. It does not, however, apply to exclusion clauses in contracts involving consumers. These are covered by a separate regime contained in the Consumer Rights Act 2015. This section focuses on UCTA. The Consumer Rights Act is discussed in section 13.4. p. 384 When does UCTA apply? UCTA restricts the validity of clauses such as these. It does so in two ways. Some types of exclusion clauses are prohibited altogether. There are two such prohibitions in UCTA. First, it is not possible for a business to 31 exclude or restrict liability for causing death or personal injury through negligence. For the purposes of UCTA, negligence is defined to cover two things: the breach of any duty to take reasonable care or exercise reasonable skill, whether imposed by common law or arising from the terms of the contract, and a type of 32 statutory duty known as occupier’s liability. Secondly, it is not possible to restrict liability for breach of 33 the warranty of title in transactions involving the passing of possession or ownership of goods. Other exclusion clauses are restricted by being subject to a test of reasonableness. In UCTA this includes clauses excluding or restricting liability for causing loss short of death or personal injury through 34 negligence. It also includes breaches of other implied terms in contracts which transfer possession or 35 ownership of goods. Where reasonableness is at issue, the onus is on the person asserting that the term was reasonable to prove it. As this discussion should suggest, the activity centre’s planned exclusion clause in the first scenario in Illustration 13.2 is directly hit by UCTA’s prohibition on exclusion or limitation of liability for personal injury. Any such clause will not be enforceable. The only option for a business in the position of Free Range Kids will be to obtain insurance against the risk. It cannot legally exclude liability for the risk. Page 12 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Illustration 13.2 Consider the following examples, which indicate the sort of circumstances in which UCTA applies. Free Range Kids is a newly started early years activity centre based in Hevingham, Norfolk, which provides services to local schools. The owners are worried by press reports concerning the ‘compensation culture’ and the large awards of damages that are sometimes made for personal injury. They decide to insert a clause in their terms and conditions that excludes all liability for any injuries suffered by children in their charge. Wallshire Computing Services is a small business which supplies laptop computers and tablets to businesses. They are concerned about liability for computing devices whose screens have dead pixels (ie pixels which do not light up due to a manufacturing defect). They therefore insert a clause in their terms of sale which excludes liability for dead pixels. As far as the second scenario in Illustration 13.2 is concerned, dead pixels will be covered by the implied term as to the quality and fitness for purpose of the goods. As such, liability can only be excluded if it satisfies the requirement of reasonableness. p. 385 ‘Written standard terms of business’ Before we move on to the test of reasonableness, it is important to note that in several cases, UCTA’s restrictions only apply if the parties deal on written terms prepared by one of them. Clauses excluding or limiting liability for breach of contract, for example, are only subject to a test of reasonableness if the parties contracted on ‘written standard terms of business’ prepared by the party who seeks to rely on the 36 exclusion clause. If the contract was individually negotiated, a clause excluding liability for breach will be valid. There is no need to demonstrate that it is reasonable. What, then, are standard terms of business? The answer appears to be that terms are standard if the party 37 in question habitually contracts on those terms. They must be used for all, or nearly all, the transactions 38 entered into by that company. If the company regularly uses a range of different terms in its contracts, then they are not likely to be treated as standard terms. But if it has only used other terms in a very small number of transactions, then the terms it regularly uses may be treated as standard terms. What, then, happens if the parties start with terms that were one party’s standard terms, but then negotiate away from those terms—for example, by varying them? In such a case, the court will look at how substantial the alterations were. If the difference between the contract that was originally offered (the standard terms) and the contract that was finally concluded is significant, then the court will treat the 39 contract as not having been made on the party’s standard terms. Page 13 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection The test of reasonableness The key test under UCTA is the test of reasonableness. The requirement of reasonableness is defined in s 11(2) of UCTA as meaning that: the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. Schedule 2 lists matters that are of relevance to determining whether a term is reasonable for the purpose of transactions dealing with the transfer of ownership or possession of goods by sale, hire purchase, or otherwise. In addition, where the exclusion clause in question is linked to a monetary cap on liability, s 11(4) provides that the assessment of reasonableness will depend on the resources available to the party in question and how far it was open to him to cover himself by insurance. A clause is not unreasonable merely because it is wide-ranging or stringent, especially where the limitation of liability has been factored into 40 the price or where the option of insurance is available. In contrast, if its consequences are exorbitant and unusual, and if there is no good explanation as to its commercial necessity, a court is likely to be more 41 willing to hold it to be unreasonable. p. 386 ↵ Whether a particular term is reasonable depends on the facts. It is difficult to extract any general principles from the case law, even at the level of simply trying to summarize the factors that courts take into account in determining reasonableness, and the courts have been at pains to stress the fact that individual decisions have very limited precedent value. The fact that a clause is similar to one that has previously been held unreasonable does not in itself signify very much. The clause must always be read in 42 the context of the facts of the specific case. In Phillips Products Ltd v Hyland, Slade LJ in the Court of Appeal said, in discussing the reasonableness of the restriction at issue in that case, that: It is important therefore that our conclusion on the particular facts of this case should not be treated as a binding precedent in other cases where similar clauses fall to be considered but the evidence of the surrounding circumstances may be very different. The clause at issue in Phillips Products Ltd v Hyland was contained in a set of standard terms prepared by an industry association. The case arose out of the hire of a JCB excavator. Phillips were building extensions to their factory and hired a JCB excavator from Hampstead Plant Hire, together with a driver. The contracts (there were three in total) were on the basis of a standard form prepared by the Contractors Plant-Hire Association. While the excavator was being driven, Hyland, the driver, collided with part of the factory causing considerable damage. When Phillips sued, Hampstead sought to resist liability on the basis of a clause in the contract which said that Hyland was under the direction and control of Phillips when he was on site, and that Phillips (and not Hampstead) would be liable for any claims arising in connection with Hyland’s operation of the excavator. The Court of Appeal held that the clause was unreasonable. They were influenced by the specific facts of this case, placing weight on the fact that Phillips had had to find an excavator in a hurry, and had little practical choice but to contract with Hampstead. Page 14 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection 43 In Thompson v T Lohan (Plant Hire) Ltd, however, faced with a very similar clause (prepared by the same industry association, but in a newer version of the contract) and very similar facts, the Court of Appeal held that the clause was reasonable. The main reason appears to have been that in this case the victim of the negligence was a third party, and not the hirer as was the case in Phillips. In Phillips, had the clause been valid, it would have left Phillips with significant uncompensated losses. In Thompson v T Lohan, in contrast, the only difference the validity or invalidity of the clause would have made was in relation to who would compensate the third party. There was no question of uncompensated loss. As this suggests, decisions about reasonableness are very fact-specific. A better way of viewing the effect of the Act, therefore, is that it is not clauses that are reasonable in and of themselves. It is, rather, the application of the clause to facts that is being judged as reasonable or unreasonable. The facts that are used as the yardstick are not the actual facts that have triggered the dispute, but rather the type of circumstances that the parties would have reasonably had in contemplation when the contract was 44 45 p. 387 ↵ entered into. In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd, Lord Bridge described the process as one in which the court: must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. The amount of objectivity that can be achieved in such a process is necessarily limited. Trial judges therefore have considerable discretion to make a decision on reasonableness: There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong. The open-ended character of the test makes it very difficult to predict what the outcome of any particular case will be, but as far as the second scenario in Illustration 13.2 is concerned, it is very likely that a term excluding liability for dead pixels will be reasonable. A single dead pixel is not very visible, and several of the industry standards for quality certification of LCD screens tolerate a certain number of dead pixels in a screen. 13.3.3 Liquidated damages, contractual remedies, and the rule against penal ties The discussion thus far has not directly touched on the particular clause that is at issue in Problem 13. Unlike exclusion clauses, the clause in Problem 13 does not seek to limit the liability of the party advancing it. It seeks, instead, to enhance the liability of the other party. Is such a clause enforceable? Page 15 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Section 13.4 discusses the extent to which consumer protection law restricts the terms that can be included in consumer contracts. In addition, however, English law also incorporates an old rule called the rule against penalties. The rule against penalties was in origin equitable, but it came to be adopted by the common law as far back as the 17th century. In the late 18th century the common law rule replaced the equitable rule entirely. It was in origin related to the equitable jurisdiction to relieve against forfeiture, but in the common law it became a rule applicable to damages clauses. Under the rule as it currently stands, clauses which impose penalties on parties who breach contracts are unenforceable. The rule against penalties is often challenged by commentators on the ground of freedom of contract. The main practical problem with the rule against penalties, however, is that it runs up against a common commercial practice, namely, the use of liquidated damages clauses. Stripped to its essentials, a liquidated damages clause provides that if a party breaches a contract, or a particular provision of a contract, it p. 388 ↵ will be required to pay the other party a predetermined sum. Such clauses are common, and they perform an important function. The law in relation to contract remedies has a number of limitations, especially when it comes to proving loss. Given this, an obvious option is for parties to design their own remedies by agreeing in advance on the amount payable by way of damages. Liquidated damages clauses are a common way of achieving this end. Consider the following example: Consider, now, what the consequences would be if this clause were to be breached. The university would, in principle, be able to bring an action for damages. But what would this really mean, in practice? What loss would the university be able to show that it had suffered? Liquidated damages clauses are designed to deal with precisely such circumstances. The idea behind a liquidated damages provision is that rather than having to deal with the problems of attempting to prove the extent of loss after breach has happened, the parties simply reach agreement before breach takes place on how much will be payable by way of damages should the contract be breached. In a contract such as the one in Illustration 13.3, this would typically take the form of a ‘late fee’ payable for each day of delay, but the parties are free to specify any remedy they choose. Illustration 13.3 The University of Carmarthenshire is in the process of constructing a new teaching building. It will be admitting more students from September of the following year. It therefore inserts a clause in the contract requiring that the building and the teaching rooms in it be ready for occupation and use before 31 August of that year. It should be clear from the foregoing discussion that there are sound reasons to want to enforce liquidated damages clauses, while at the same time maintaining the jurisdiction of the courts to refuse to give effect to penalty clauses. We would want a clause designed to deal with the problem in Illustration 13.3 to be enforceable, but we would not want a clause of the type set out in Problem 13 to be enforceable. Coming up with a test that distinguishes reliably between the two, however, has been far from easy. Consider the following example: Page 16 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Illustration 13.4 LIMITED TIME PARKING! Overstayers will be charged a fixed amount of £150 for each hour of parking over the time limit. How might we go about deciding whether a clause of this type is a liquidated damages clause or a penalty clause? The task of answering these questions has occupied the courts since as far back as the 19th century. Over the years between then and 2015, a particular approach to making the distinction had evolved piecemeal. In 2015, however, much of the old law was swept away by the decision of the Supreme Court in 46 p. 389 ↵ Cavendish Square Holding BV v Talal El Makdessi. Before we consider the decision in this case, it is useful to first briefly examine the legal position as it stood immediately prior to the decision. Until 2015, the scope of the rule against penalties had been checked by two doctrines, both restricting the types of clauses to which it applied. First, the rule against penalties only applied to payments triggered by breach. A primary obligation, no matter how onerous, could not be a penalty clause which provided for payment to be made on the happening of any event other than a breach would always be a contingent promise to pay and, thus, a primary obligation. As such it would never be hit by the rule on penalties, no 47 matter how onerous its provisions. Secondly, the law drew a distinction between penalty clauses and liquidated damages clauses based on whether they were intended to deter the other party from breach (in which case they were penalty clauses), or were a genuine pre-estimate of the loss that was likely to be caused by a breach (in which case they were liquidated damages clauses). The question of which side of the line a particular clause lay was a question of 48 construction. In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, the House of Lords set out four factors which were of assistance in the task of construction. First, a clause would be a penalty clause if the sum it stipulated was extravagant or unconscionable in comparison with the greatest loss that could have followed from the breach. Secondly, a clause would be a penalty if the breach consisted of a failure to pay money, and the clause stipulated the payment of a greater sum than that which should have been paid. Thirdly, there was a presumption that the clause was a penalty if it stipulated the same sum for serious breaches as well as for trifling events. Finally, a clause could be a liquidated damages clause even if precise pre-estimation was difficult. The first of these was criticized by commentators who argued for an expansion of the rule on penalties. The distinction between a clause providing for payment on breach and a clause providing for payment on an event other than breach, they argued, was anomalous and hard to support on principle. With skilful drafting, many clauses could be reworded as being the latter rather than the former, thus effectively turning the rule against penalties into a rule against bad drafting. In 2012, the High Court of Australia abandoned the distinction, and expanded the rule against penalties to cover payments on breach as well as 49 conditional promises to pay. Several commentators argued that the English courts should follow its lead. Page 17 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection At the same time, the ‘genuine pre-estimate’ test was criticized by scholars who argued for a narrowing of the rule on penalties. They argued that the test was uncertain and eroded commercial certainty because the entire rule was outmoded and outdated, and against the principle of freedom of contract. They accordingly argued for its abolition. In 2015, the rule against penalties came before the Supreme Court for the first time in over a century in 50 p. 390 Cavendish Square Holding BV v Talal El Makdessi. Arguments were ↵ advanced both for the expansion of the rule and its abolition. In its decision, the Supreme Court moved the law firmly in the direction of narrowing the rule. It kept in place the qualification that the rule only applies to payments on breach and not to conditional promises to pay, rejecting the approach taken in Australia. When it came to the distinction between penalty clauses and liquidated damages clauses, however, the Supreme Court abandoned the Dunlop test which, it held, had led to many clauses being struck down when they should have been upheld. In its place, the Supreme Court laid down a new test which replaced the ‘genuine pre- estimate’ test with a much narrower principle: The correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s 51 interest in the performance of the contract. This is accompanied by a new presumption of enforceability: In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is 52 legitimate in a provision dealing with the consequences of breach. This means that the courts should, in general, uphold remedial clauses agreed to by the parties if two conditions are met. First, the innocent party must have a legitimate interest in the performance of the primary obligation in question. Secondly, the remedy set out in the clause must not impose a detriment on 53 the party in breach which is out of proportion to that legitimate interest. The case involved two conjoined appeals. The first, Cavendish v Makdessi, related to a shareholders’ agreement between the shareholders of a company called Team Y&R Holdings, including Makdessi and Cavendish. The agreement contained a ‘protection of goodwill’ clause. Under this, Makdessi was restrained from competing with TYRH. If he failed to comply with this obligation, he would be treated as a ‘defaulting shareholder’, and would lose his right to receive certain payments from Cavendish. He would also be required to sell his shares to Cavendish at net asset value (a lower valuation than the standard valuation, because it does not include goodwill). Makdessi undertook activities which Cavendish believed were in breach of his non-compete obligation, and they sought to invoke the ‘defaulting shareholder’ provision. Makdessi argued that these provisions were penalty clauses. The Supreme Court held that properly construed, the clause in question was a price adjustment clause, which adjusted the contract price depending on whether or not Makdessi competed with the company. As such, it was a primary obligation, 54 and the rule against penalties was not applicable. The court stressed that it based its conclusion on the substance of the clause rather than its form: a clause which was a ‘disguised punishment’ for breach would Page 18 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection be contrary to the rule against penalties even if it were dressed up as a price adjustment clause. But, on the 55 facts, there was no basis for the court to reach a conclusion that this clause was actually a penalty. The p. 391 court further held that the clause would, in ↵ any event, have been justified by the legitimate interest of Cavendish in maintaining TYRH’s goodwill, and would not have imposed a disproportionate obligation. The second case, ParkingEye Ltd v Beavis, involved parking charges. Mr Beavis had overstayed in a car park which permitted free parking for up to two hours, but imposed a charge of £85 for overstaying. The Supreme Court held that the charge was not penal. The charge was motivated by two reasons: managing demand for parking spaces by deterring overstaying and providing ParkingEye with an income stream. Both objectives were reasonable, and created a legitimate interest for ParkingEye to impose the charge. The amount of £85 was not out of proportion to that legitimate interest. The position that a charge is not a penalty merely because it aims at deterrence fits well with the purpose of liquidated damages clauses, even if it represents a fairly significant departure from the old rule. Returning to Illustration 13.3, the university in imposing a daily late fee is in part trying to cover the losses it will suffer, but struggle to prove, if the teaching building is delayed. But it is equally reminding the contractor of the costs to it of delay and, thereby, seeking to incentivize it to complete on time, and deter it from delay. This intertwining of deterrence and compensation is characteristic of liquidated damages clauses, and the willingness of the Supreme Court to recognize it is a definite step in the direction of recognizing the nuances of commercial practice in this area. Equally, proportionality and legitimate interests are conceptually easier to work with than the old ‘genuine pre-estimate’ test, and the courts have tended to approach them broadly. In Signia Wealth Ltd v Vector 56 Trustees Ltd, the High Court upheld a clause providing for differential valuations on buyout depending on whether or not the entity being bought out was in breach, on the basis that these clauses had an important 57 commercial function, and were not out of proportion with the parties’ legitimate interests. Similarly, in 58 Wright v Prudential Assurance Co Ltd, the High Court upheld a clause in a Company Voluntary Arrangement (a type of agreement which tries to restructure a company’s obligations to avoid insolvency) which gave the company a discount on its rent, but provided that the discount would be retrospectively revoked if the CVA failed to avert insolvency. The landlords had a legitimate commercial interest in the CVA’s success or failure, and their desire to be returned to their pre-CVA position if it failed was not exorbitant or unconscionable. These cases suggest that the new rule will make it significantly easier to draft enforceable liquidated damages clauses. The distinction between primary obligations and penalties, in contrast, appears to 59 continue to cause difficulty. In Vivienne Westwood Ltd v Conduit Street Development Ltd, a commercial tenancy agreement provided that a tenant would lose a substantial discount on its rent if it breached any of its obligations under the lease. The tenant missed one instalment on its rent, and the landlord sought to revoke its discount on the basis that it had breached an obligation. The High Court held that the clause in question was a penalty clause, as it involved a consequence of breach rather than a primary obligation. In 60 Richards v IP Solutions Group Ltd, the High Court held that a ‘bad leaver’ clause, which provided that a p. 392 shareholder-employee ↵ could be compelled to sell their shares at an aggregate price of £1 if they breached their service agreement, was enforceable because it was a primary obligation. In Edgeworth 61 Capital (Luxembourg) Sarl v Ramblas Investments BV, the Court of Appeal similarly held that a clause in a Page 19 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection financing agreement providing for the payment of a fee on default was a primary obligation and not a penalty, even though it far exceeded any loss the bank could suffer. Although the result in these cases can be defended on the ground of freedom of contract, it is difficult to avoid the conclusion that the difference between them lies more in the way in which the clauses were drafted than the substance of what they sought to achieve. It was precisely this consequence that led the High Court of Australia to abandon the primary obligation/penalty distinction, and it is unfortunate that the Supreme Court did not follow its lead. Outside the commercial arena, ParkingEye Ltd v Beavis appears to represent a step back from paternalism. Early indications are that courts may be inclined to take a wide view of what constitutes a ‘legitimate’ interest and, hence, of the types of charges that will be recoverable. In the Scottish case of Indigo Park 62 Services UK Ltd v Watson, the court held that a parking company’s legitimate interest in the efficient management of the car park justified imposing a higher charge than would be recoverable at common law. Although the case has little precedential value, it nevertheless indicates the likely direction of travel. It is also unclear how ‘proportionality’ will be judged in the consumer context. Compare the position in Illustration 13.3 with that in Problem 13. It is evident that the B&B also has a legitimate interest in safeguarding its reputation by controlling unfair reviews posted about it on internet fora. It is also evident that that interest will involve deterring knee-jerk negative reviews, in addition to encouraging consumers to engage with its own processes for resolving consumer complaints. It remains unclear, however, if £1,000 is a proportionate sum to that interest. Finally, note that statutory regulation may affect whether a clause is a penalty. In First Personnel Services 63 Ltd v Halfords Ltd, a clause provided for the payment of a rate of interest greatly in excess of the default rate prescribed under the Late Payment of Commercial Debts (Interest) Act 1998. The court held that the provision was penal, as there was no evidence to explain why such a rate was justified. 13.4 Protecting consumers: the Consumer Rights Act 2015 In addition to the rules of general applicability discussed in sections 13.2 and 13.3, English law has in recent years enacted a number of laws specifically to protect consumers. These represent a relatively new trend. Whilst the law has long sought to ameliorate some of the problems caused by the inequality of bargaining power, the law had previously sought to apply the same principles to consumer transactions as it 64 p. 393 ↵ did to commercial transactions. This position came in for criticism, and in the 1970s a number of consumer-specific laws were enacted, under the influence of the Law Commission. The most important of these was the Consumer Credit Act 1974, which remains in force and imposes significant restrictions on terms in consumer lending contracts. Currently, the most important consumer protection statute in contract law is the Consumer Rights Act 2015. The Consumer Rights Act was enacted to consolidate a patchwork of statutes—specifically, the consumer-facing provisions of UCTA, the Sale of Goods Act 1979, and the Supply of Goods and Services Act 1982, as well as the Unfair Terms in Consumer Contracts Regulations 1999, which were based on a 65 European Union directive. The changes created by the 2015 Act are far-reaching, giving consumer law its own set of remedies, implied terms, and control on unfair terms. These supplement older statutes such as Page 20 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection the Consumer Credit Act 1974. Other rules such as the Consumer Protection from Unfair Trading 66 Regulations 2008 have created consumer-specific alternatives to core common law doctrines such as misrepresentation, duress, and undue influence. Most of these are dealt with elsewhere in this book. This section focuses on one specific aspect of consumer law; namely, the control of unfair terms under Part 2 of the 2015 Act. The impetus behind Part 2 of the 2015 Act was that the regimes created by UCTA and the 1999 Regulations overlapped quite substantially, but imposed very different requirements. The 1999 Regulations used a test of good faith, whereas UCTA used a test of reasonableness, and the criteria used in each were different. This made it difficult for companies seeking to comply with the statutes to figure out precisely what they were allowed to say and what they were not allowed to say in their contracts. The Law Commission, accordingly, recommended that the regimes be merged. Instead of merger, however, the change that was actually made was the restriction of UCTA to commercial contracts. Part 2 of the 2015 Act is substantially 67 based on the Directive on Unfair Terms in Consumer Contracts, as were the 1999 Regulations, but it extends them in a few ways. The most significant extension is that the directive and the 1999 Regulations only applied to terms which were not individually negotiated, and had been drafted in advance by the trader. The 2015 Act removes this restriction, and extends the regime to all terms, whether or not individually negotiated. Unlike UCTA, it is not confined to exclusion clauses and clauses seeking to restrict liability in other ways. The regime it creates applies both to contracts and to notices that non- contractually seek to vary rights or obligations as between a trader and consumer, or to exclude or restrict a trader’s liability to a consumer. A classic example of such a notice would be a disclaimer stating that a trader has not assumed responsibility towards the consumer for the purpose of tort law. If a term or notice is ‘unfair’ under the 2015 Act, it does not bind the consumer. This means that the trader cannot enforce it against the consumer. The consumer, however, is free to rely on the term if she 68 chooses. In addition, the Competition and Markets Authority as well as other named regulators have 69 been given a wide range of enforcement and investigatory powers against traders under the Act. p. 394 13.4.1 Defining consumer transactions Section 61 of the 2015 Act defines consumer transactions as contracts between a trader and a consumer, other than a contract of employment or apprenticeship. ‘Traders’ and ‘consumers’ are defined with reference to the purpose for which they enter into a transaction. A trader is ‘a person acting for purposes 70 relating to that person’s trade, business, craft or profession’, whereas a consumer is ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or 71 profession’. Contrast the following illustrations: Page 21 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection Illustration 13.5 Claire Devaux owns a café in Oswestry. She requires a second coffee machine. As finances are tight, she buys a refurbished coffee machine from a specialist dealer. She is given a receipt, on the back of which terms and conditions are printed. She has no opportunity to negotiate better terms. The machine is not able to handle the volume of coffee she produces, and breaks down frequently. It stops working completely within six months of her purchase. When she contacts the dealership, they point to the following term on the receipt: The buyer acknowledges that the goods are sold as-is, and that the seller makes no warranty in relation to the condition of the product or its suitability for any purpose. Any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded. The seller excludes all liability for any loss caused by the mechanical failure or breakdown of the goods, or by their unsuitability for the buyer’s purpose. Uncle Percival buys a coffee machine for his kitchen. He places the order online, checking a box saying he accepts the webstore’s terms and conditions as he does so. The machine breaks down within a month of his purchase. When he contacts the store, they point to a term in the webstore’s terms and conditions which says that they exclude all liability for mechanical failure or breakdown in terms substantially similar to those quoted above. Claire in the first illustration here is a trader because she buys the coffee machine for the purpose of her café. She is acting in a commercial capacity. Uncle Percival, in contrast, is a consumer because he buys the coffee machine for purposes wholly unconnected with any trade, business, craft, or profession. He is acting in a purely personal capacity. The difference between the words ‘person’ and ‘individual’ in the two definitions is also significant. ‘Person’ includes natural persons as well as juristic persons. ‘Individuals’, in contrast, are only natural persons. Companies are persons in law, but are not individuals. This means that only human beings can be consumers. A company, or other juristic person, cannot. The exclusion of companies from the p. 395 ↵ categories of consumers represents a departure from the situation before 2015. Before the Consumer 72 Rights Act, companies could be consumers for the purposes of UCTA, even though they were not consumers under the Unfair Terms in Consumer Contracts Regulations 1999. The 1999 Regulations were based on an EU directive, and it was a long-established principle in most civil law jurisdictions that only individuals could claim the protection of consumer legislation. This was not true of the common law, and the inequality of bargaining power that makes regulation of onerous terms necessary arguably affects small businesses at least as much as it affects consumers. The approach of UCTA therefore had much to commend it. However, as things stand, the additional protection available to consumers is only available to individuals, and not to companies acting outside their trade. Page 22 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection 13.4.2 Unfairness The heart of the regime created by the 2015 Act lies in its definition of unfairness. The statute imposes two requirements for a term or notice to be unfair: it must cause a ‘significant imbalance’ in the parties’ rights and obligations to the detriment of the consumer and it must be ‘contrary to the requirement of good 73 faith’. The Act further provides that fairness is to be determined with reference to two things. First, the assessment of fairness must take into account the subject matter of the contract or notice. Secondly, it must take into account the circumstances existing when the term was agreed (or, in the case of a notice, when the rights and obligations arose) as well as the broader context of the other terms of the contract 74 between the parties. In keeping with the general trend in English law of distinguishing between substantive and procedural 75 dimensions of imbalances of bargaining power, English courts have interpreted ‘good faith’ as being a procedural concept, while ‘significant imbalance’ has been interpreted as having substantive implications, although subsequent judgments from the European Court of Justice have suggested that ‘good faith’ also has some substantive implications. Some terms are dealt with specifically in the Act. Part 1 of Schedule 2 contains an ‘indicative and non- 76 exhaustive’ list of 20 terms which ‘may’ be regarded as unfair (although a court is not required to do so). Item 1 covers terms which have the ‘object or effect of excluding or limiting the trader’s liability’ in the event the consumer dies or suffers personal injury due to the trader’s acts or omissions. Item 2 covers terms which have the object or effect of ‘inappropriately excluding or limiting the legal rights of the consumer … in the event of total or partial non-performance or inadequate performance by the trader of any of the contractual obligations’. Item 6 covers terms which have the object or effect ‘of requiring a consumer who fails to fulfil his obligations under the contract to pay a disproportionately high sum in compensation’. Part 2 of Schedule 2 qualifies some of these in relation to certain specific types of p. 396 transactions. ↵ The Act also declares that a term must be regarded as unfair if it has the effect of making the consumer bear the burden of proof in relation to whether a distance supplier or intermediary 77 has complied with obligations under the Distance Marketing Directive. Outside these specific instances, however, questions in relation to whether a term is unfair will fall to be decided with reference to whether the term causes a significant imbalance contrary to the requirement of good faith. The implications of some of these to the scenarios set out in Problem 13 are obvious, and we will return to them later on in the course of this section. Before that, however, let us look in some more detail at the individual elements that must be made out to demonstrate that a particular term is unfair. ‘Contrary to good faith’ The key elements of unfairness are the requirements of contrariness to good faith and ‘significant imbalance’. The first of these, contrariness to good faith, was controversial when the directive was first transposed into English law. At that time, English law had not yet taken the first tentative steps towards a 78 doctrine of good faith that it did in Yam Seng v International Trade Corp. Good faith was seen as being 79 totally alien to English law, on the strength of cases such as Walford v Miles. Commentators predicted that 80 the introduction of the requirement would cause problems for English law. Page 23 of 37 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 13. Controlling contract terms Exclusion clauses, penalties, and consumer protection The courts, however, faced little difficulty in dealing with the requirement. They did this by giving the requirement of good faith a procedural meaning, rather than a substantive one. In DGFT v First National 81 Bank, the House of Lords interpreted good faith as requiring open and fair dealing between the parties. To comply with this requirement, a trader would be required to express the terms of the transactions fully and clearly, without hidden pitfalls. He should give appropriate prominence to matters which might operate to the consumer’s disadvantage. Equally, the trader must not take advantage, even unconsciously, of the consumer’s weaker bargaining position. A clause framed in obscure language, which is neither signposted 82 nor explained, is not consistent with the requirement of open and fair dealing. DGFT v First National Bank related to an interest term in a consumer borrowing agreement. The Consumer Credit Act 1974 gives courts the power to extend the term and specify a schedule of instalments for repayment of a loan. The bank in this case had added a term to its loan agreements providing that borrowers would remain liable to pay interest at the contractual rate on the outstanding amount of the loan over and above the instalments which the court specified. The Director General of Fair Trading 83 (DGFT), who at the time had the power to challenge practices in contravention of the directive, brought an action arguing that this clause was unfair within the meaning of the 1999 Regulations. As the definition p. 397 of unfairness under the 2015 Act is the same ↵ as that under the Regulations it replaced, the case remains the leading case on the meaning of unfairness. The DGFT succeeded at first instance and in the Court of Appeal. The House of Lords, however, reversed the judgment, and held that the clause was not unfair. This was because it was neither contrary to the requirement of good faith nor did it cause a significant imbalance between the parties. The court’s interpretation of significant imbalance is discussed in the next subsection. On good faith, the House of Lords held the requirement had been met because the obligation in relation to interest was clearly and unambiguously set out in the terms and conditions. It was not a hidden pitfall. Nothing on the facts suggested that it was an attempt to take advantage of the consumer’s weaker bargaining position. The problem faced by the borrowers arose out of the fact that there was a regulatory gap in the Consumer Credit Act 1974. Borrowers were often unaware of the precise nature of the protection offered by that Act and its relationship to contractually agreed terms. The requirement of good faith did not impose an onus on lenders to resolve this. Lenders did not have to draw the provisions of the Consumer Credit Act to the attention of borrowers. No statute required them to do this. Their failure to do so was therefore not contrary to good faith. The meaning of good faith has

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