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Unfair contract terms: what a mess
This article describes the current statutory framework for the control
of unfair contract terms, and attempts to show that it is in urgent
need of reform.
It is commonplace for a party drawing up a contract to seek to
minimise the amount of liability that may be incurred in the
performance of that
contract. Contractual
clauses that have this effect are usually called `exclusion clauses'
or `limitation clauses'. There is a whole academic debate about the
doctrinal significance of these clauses in the law of contract.
This debate centres on whether they
are `defensive' or `obligation defining' in nature. This
is of little practical significance, because the courts and, more
recently, the legislature have come down in favour of the `defensive'
interpretation. Arguably, this `defensive' view is more prevalent
in the UK than the European Community (EC), and this may account
for some of the problems that are described in this article.
Exclusion clauses often attempt to exclude or limit liability
for losses arising out of breach of contract, or for
extra-contractual liabilities. Extra-contractual liabilities will
often include losses for misrepresentation, or negligence in
performing the contract.
In practice, most peoples' exposure to the sharp end of an
exclusion clause is as a consumer in a sales or services transaction.
For example, may of us who use public transport have
experienced entering into contracts in which
the service provider excludes liability for being unable to
run a tolerably useful service. Generally we don't find this out
until it is too late, and even if we found out there wouldn't be
much we could do. In a given region, the choice of transport
providers is limited.
Of course, from a business perspective this limitation of liability
makes good sense. It could even be argued that it makes sense for
the consumer as well. If the service provider has to
pay compensation for all the losses that arise from running a poor
service, that cost will simply be passed on to the consumer.
Whatever the merits of this argument, there are clearly exclusions
that perpetuate an injustice so great that
they can't be tolerated in
a decent society. The archetypal case of this sort is
Thompson v London Midland and Scottish Railway (1930).
In this case, an elderly, illiterate woman bought a railway ticket
which contained a reference to the railway company's standard
terms and conditions. These included - on page 552 - a statement
that the railway would not accept liability for negligence.
When the train pulled up at the station, it turned out that it
was too long for the platform, and there was a long drop from
the end carriage to the ground. As a result of this mis-operation,
the unfortunate Mrs Thompson fell and broke her leg. When she sued
the railway in negligence, the exclusion clause was upheld,
to the amazement of almost everybody. Mrs Thompson was an adult of
full capacity, despite being unable to read, and had the notional
freedom to either enter the contact or refrain. Although the courts had
begun to develop common-law principles by which exclusion clauses
could be brought under control, cases like Thompson
made it clear that some form of statutory control was desirable.
The problem with allowing statute law to get to work on exclusion clauses
is that this conflicts with a long-established principle
of English law. This principle is that of `freedom of contract';
it says that adults of full capacity who make contracts with
each other should expect to abide by them, including those terms that
are unwelcome. The moral is: if you don't like the
small print, don't sign on the dotted line. So when the
Unfair Contract Terms Act (1977) (`UCTA') was drafted, it tried to balance
freedom of contract against the need to prevent egregious injustice.
As a result, UCTA deals with a limited set of highly specialised
types of exclusion (table 1). For example, it strikes out any
attempt disclaim liability for death or injury, and this would
probably have allowed Mrs Thompson to win her case against
the LMS Railway. Attempts to disclaim liability for losses caused
by negligence will be struck out if they don't pass the test
of `reasonableness' (of which, more later).
UTCA also restricts the
ability to exclude liability
for selling poor-quality, defective goods, or goods that the seller
doesn't have a right to sell (because, for example, they actually
belong to someone else at the time). Finally, it makes attempts
to exclude liability for misrepresentation subject to a test
of reasonableness. Many of these types of exclusion are treated
differently depending on whether the party affected is
a business or is `dealing as consumer'. As a result (and as should be
clear from table 1) the provisions of UCTA are complex, and
a number of key terms are left undefined.
For example, the definition of `consumer' leaves a lot to the
interpretation of the courts. Notoriously, in the case of
R and B Customs Brokers v UDT the Court of Appeal held
that a family firm that bought a car, partly for work and partly
for social use, was a consumer for the purposes of UCTA. To be
fair, it isn't necessarily obvious what a consumer is, in a number
of borderline situations.
The next problem is that of `reasonableness'. UCTA does not define
what it means to be reasonable, but it does give some guidance.
The courts are to have regard for, among other things, the relative
bargaining positions of the parties, whether the contract is
negotiated or in standard form, and whether the party affected by
the exclusion clause was offered an incentive to contract on
particular terms. This approach allows the courts a lot of
flexibility, and some surprisingly draconian exclusion clauses
have been upheld. For example, in SAM Business Systems v Hedley and
Co a software supplier was allowed to rely on an exclusion clause
that allowed it to supply a thoroughly inadequate product.
The Technology and Construction Court decided that the parties were
of roughly equal bargaining power, and the purchasers could have
attempted to negotiate better terms. The court also recognised
that such clauses are ubiquitous in the computing industry.
Had the purchaser been a consumer, the reasonableness test
would not have applied; the exclusion clause would simply have
been struck out, because it attempted to disclaim liability for
supplying goods that are not suitable for their purpose.
The other problem with UCTA, which results from the delicate balancing
act it has to perform, is that it only deals with exclusion clauses,
and these are only one type of
onerous contractual clause that causes problems.
Consider the infamous case of Interfoto v Stiletto (1987).
Here an advertising agency asked a photographic service
to produce photographs for a presentation. The photographic service
sent 47 transparencies to the agency for inspection, along with
a contractual letter which had in its small print the statement
that transparencies were to be returned within 14 days. If they
were not, the service would levy a charge of £5 per negative per day.
The agency forgot about the transparencies for a couple of weeks,
and were rather surprised to receive a bill for £3,783. The Court
of Appeal held that a term as onerous as this would have to be
made very clear if it were to be enforced, and the claimants
had not done anything to bring it to the defendant's attention. As
a result, the claim failed. This process of striking out a clause
on the grounds of incomplete `incorporation' was one of the ways
that the courts had sought to control exclusion clauses in
the pre-UCTA days. While the Interfoto case showed that
the courts were prepared to go through the whole process again
for other types of onerous clause, this was hardly satisfactory.
As it turned out, the EC had also been considering legislation to
control onerous clauses, and a Directive was issued to that effect in
1993. This became the Unfair Terms in Consumer Contracts Regulations
(1994) (`UTCCR'; later superseded by the 1999 version). There were,
and are, a number of important differences between UCTA and UTCCR
(summarised in table 2).
First, UTCCR deals only with contracts
between businesses and consumers. For UTCCR purposes, a consumer is
any `natural person' acting outside the course of his business. The
phrase `natural person' implies that only individuals, not businesses,
may benefit from UTCCR. Thus the claimants in R and B Customs Brokers
(above) would be excluded, unless they claimed as private individuals.
There is, therefore, a difference between a `consumer' for UCTA
purposes and for UTCCR purposes. There would, no doubt, be a large
number of cases in which whether a person was a `consumer'
or not would be decided the same way for both UCTA and UTCCR; but
there are cases where it wouldn't. For example, in UCTA a person
who buys at auction is, buy definition, not a consumer. However,
there is nothing in UTCCR that prevents a private individual
buying at auction being a consumer.
Second, UTCCR deals not only with exclusion clauses, but any `unfair' term.
An unfair term is any that imbalances rights and obligations
significantly to the detriment of the consumer. Like UCTA's notion
of `reasonableness', `unfair' is not defined, but there is guidance.
For example, a clause might be unfair if it allows the business
to terminate the contract at its discretion, without extending
the same freedom to the consumer. Another example is a term allowing the
business to vary the contract without the consent of the consumer.
It should be clear that this notion of `unfairness' goes much further
than UCTA's `unreasonableness'. UCTA does not prevent a contract
containing terms that allow one party to vary its obligations, for
example.
However, UTCCR does nothing
to control onerous terms in non-consumer contracts. This means that
the defendants in the Interfoto case would not be able to
rely on UTCCR to escape their huge bill. It still falls to the
courts to handle situations like this on a case-by-case basis.
Third, UTCCR applies only to terms that have not been individually
negotiated between the parties. A term that has been influenced by the
consumer is, by definition, fair. Under UCTA, the test of reasonableness
does allow for consideration of whether the term was negotiated, but
this is only advisory. A negotiated term can still be deemed
unreasonable.
Fourth the explanation of `unfairness' in UTCCR includes the
phrase `contrary to the requirements of good faith'. This seems to
imply that the draughtsman of a consumer contract has an obligation
to contract in good faith, a relatively alien idea in English law.
Of course, UTCCR comes from the EC, and the idea of contractual good
faith is less unusual in other parts of Europe. There is little
case law which considers what `good faith' is in terms of consumer
contracts, so it may be that this phrase adds little to our
understanding of unfairness.
So, currently we have two major pieces of legislation that
overlap, but not completely. Certain
contractual arrangements are caught by both UCTA and UTCCR and handled
the same. For example, both UCTA (certainly) and UTCCR (advisedly)
would strike out a clause that attempted to disclaim liability for
death or injury. Situations like this should not cause any problems.
Then there are contractual arrangements that are handled by
one piece of legislation and not the other. For example, UTCCR
deals with onerous terms
in consumer contracts, while these are beyond the remit of UCTA.
Some contractual arrangements are within the scope of both UCTA and
UTCCR, but are subject to different tests. For example, consider
a term in a
contract for supply of goods and services, that tried to disclaim liability for
faulty goods where the manufacturers were to blame for the faults.
Such a term would be void under UCTA if the purchaser were a consumer,
void unless reasonable under UCTA if the purchaser were a business,
void if `unfair' under UTCCR if the purchaser is a consumer,
and unaffected by UTCCR if the purchaser is a business. Since
`unfair' is not the same as `unreasonable', these complications are
even more opaque.
Finally, some contractual injustices that cry out for redress
are handled neither by UCTA nor UTCCR.
For example, a large, powerful business can still impose onerous terms
on a small business, and there is no statutory protection against
these terms.
Apart from the problems of determining which types of term in which
types of contract are caught by which piece of legislation,
there is the additional problem that UTCCR goes beyond striking out
unfair terms: it also imposes obligations on the contract draughtsman,
such as to write in clear language. This may be no bad thing, but
there is no corresponding rule for business contracts.
In summary, the law on statutory control of exclusion clauses is in
a lamentable state. The Law Commission has recently proposed the
introduction of new legislation to unify UCTA and UTCCR. Among the
proposed changes are plans to make the same rules apply to both businesses
and consumers, and to replace the current `reasonableness' and
`fairness' tests with a common test of `fair and reasonable' that
would apply to all kinds of contract.
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Source of liability
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Definition of liability (where relevant)
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Effect on consumer
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Effect on non-consumer
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Negligence leading to death or injury
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void s.2(1) UCTA
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void s.2(1) UCTA
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Negligence leading to loss or damage
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acceptable if reasonable s.2(1) UCTA
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acceptable if reasonable s.2(1) UCTA
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Sale of goods with defective title
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s.12 Sale of Goods Act 1979
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void (UCTA s.6(1))
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void (UCTA s.6(1))
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Sale of goods that do match their description
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s.13 Sale of Goods Act 1979
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void (UCTA s.6(2)a)
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acceptable if reasonable (UCTA s.6(3))
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Sale of goods that do match their sample
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s.14 Sale of Goods Act 1979
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void (UCTA s.6(2)a)
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acceptable if reasonable (UCTA s.6(3))
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Sale of goods that are of unsatisfactory quality
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s.15 Sale of Goods Act 1979
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void (UCTA s.6(2)a)
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acceptable if reasonable (UCTA s.6(3))
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Any other passage of goods where the goods are of
unsatisfactory quality or do not match their sample or
description
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void (UCTA s.7(2))
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acceptable if reasonable (UCTA s.7(2))
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Breach of standard-form contract
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acceptable if reasonable (UCTA s.3)
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not affected
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Misrepresentation
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s.3 Misrepresentation Act 1967
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acceptable if reasonable (UCTA s.8(1))
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acceptable if reasonable (UCTA s.8(1))
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Table 1: summary of the effect of UCTA on exclusion of liability
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UCTA 1977
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UTCCR 1999
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Who can benefit?
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Anyone, but consumers get greater protection
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Only consumers
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Definition of `consumer'
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a person who ``neither makes the contract in the course of a business nor holds
himself out as doing so; and
the other party does make the contract in the course of a
business ''
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``any
natural person who, in contracts covered by these Regulations, is
acting for purposes which are outside his trade, business or
profession''
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Scope of contractual terms affected
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Exclusion and limitation clauses only
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All terms that are not negotiated
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Identification of affected terms
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Certain terms are entirely void. Others must satisfy a
test of `reasonableness'. Reasonableness is not defined, but
there are guidelines
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All `unfair' terms. Terms are unfair if they significantly
imbalance rights and responsibilities against the consumer
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Effect on draughting
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None
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Impose an obligation to write standard-form contracts in terms
intelligible to the consumer
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Introduce an element of `good faith' in contractual statements
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No
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Yes (see r.5(1))
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Table 2: brief comparison between UCTA and UTCCR
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