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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Unfair Terms In Contracts [2005] SLC 199(4) (Report) (February 2005) URL: http://www.bailii.org/scot/other/SLC/Report/2005/199(4).html Cite as: [2005] SLC 199(4) (Report) |
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PART 4
PRESERVING THE PROTECTION AFFORDED BY UCTA IN BUSINESS CONTRACTS
INTRODUCTION
4.1 UCTA contains a number of provisions that apply to contracts between one business and another.[1]
(1) Section 2 [section 16] applies to any exclusion or restriction of "business liability"[2] for negligence,[3] whether the victim was acting in the course of business or not.[4] Liability for death or personal injury cannot be excluded or restricted. Other loss or damage can only be restricted where the clause satisfies the requirement of reasonableness.[5] Section 2 [section 16] applies whether or not the clause was negotiated between the parties.
(2) Section 3 [section 17] applies in favour of a party that is a business when it is dealing on the other's "written standard terms of business".[6] It applies to those standard terms that exclude or restrict the party's liability when in breach of contract[7] and those that purport to allow the party in question to render a performance substantially different from that which was reasonably expected or not to perform at all.[8] The term will be valid if it is reasonable.
(3) Section 6(1) [section 20(1)] applies to sale and hire-purchase contracts. It prevents any business seller from excluding or restricting liability for breach of its implied undertaking that it is entitled to sell,[9] whether or not the term was negotiated.
(4) Similarly, section 7(3A) [section 21(3A)] covers other contracts of supply where property in the goods is intended to be transferred (such as barter, exchange and contracts for work and materials). It also provides that the supplier cannot exclude or restrict liability for breach of its implied undertaking that it is entitled to transfer the property. Again, it applies whether or not the term was negotiated.[10]
(5) Section 7(4) [section 21(1)(b)] applies to hire contracts.[11] It covers terms which exclude or restrict liability for breach of the hirer's implied undertaking that it is entitled to transfer possession. Such terms are valid if they are reasonable, whether or not the term was negotiated.
(6) Sections 6(3) and 7(3) [sections 20(2)(ii) and 21(1)(a)(ii)] apply to the exclusion or restriction of liability for breach of any of the four implied undertakings of correspondence and quality. Briefly these undertakings require that goods should correspond with their description or sample, and should be of satisfactory quality and fit for the buyer's purpose.[12] In a contract between two businesses, terms which exclude or restrict these undertakings will be valid if they are reasonable. Again, these provisions apply to terms in business contracts even if they were negotiated between the parties.
SUMMARY OF RECOMMENDATIONS ON BUSINESS CONTRACTS
4.4 For reasons given below, we no longer recommend that protection of the type afforded by the UTCCR be extended to business contracts in general. It should, however, be extended to protect small businesses. This is discussed in Part 5. As for other business contracts, we recommend that the new legislation should broadly replicate the existing controls imposed by UCTA.[13]
4.5 There are some sections of UCTA which we think perform no useful function and could be omitted. In particular, we think that businesses should be allowed to negotiate terms to exclude or restrict liability for breach of any of the four implied undertakings of correspondence and quality. We recommend that the provisions which currently subject such terms to a reasonableness test[14] should be confined to cases where one party contracts on the other's "written standard terms of business". On the other hand, we think that the controls on terms which limit business liability for negligence[15] should remain in place and should continue to apply to both negotiated and non-negotiated terms.[16]
4.6 It will be necessary to fit the UCTA controls which we wish to retain into the structure of the new legislation. This involves a number of difficult questions, in particular, whether the replacement for UCTA section 3 [section 17] should refer to "written standard terms of business" or some other criterion such as whether the term was "not individually negotiated".[17]
4.7 Finally, in this Part we discuss those provisions of UCTA which apply to business contracts and which we think can be replicated in the new legislation without substantive amendment.[18]
THE REACTION ON CONSULTATION
Controls over non-negotiated clauses in general business contracts
Extending the rules to all businesses would in our view have very bad consequences for British business, far outweighing any gain in fairness… Although the burden of proof would be on the party alleging that a term is unfair, legal certainty will nevertheless be affected. It is easy to see how businesses will be tempted to try and challenge the fairness of a term when the real reason behind the challenge is to try and avoid contractual obligations….
The CBI made a similar point:
We believe this proposal would have serious implications for all business in terms of certainty. It would introduce a significant degree of uncertainty into business deals which could later be open to challenge in the courts and, in effect, renegotiation of the contractual arrangement.
Indeed, why do so when, at the precise moment when you want [the financial instrument] to work, the counterparty will be striving to contest your rights under the contract and will be assisted in its efforts by English law, which will hear arguments as to whether the contract was fair?
Linklaters (solicitors) made the point that the relative certainty currently offered by contract law has fostered the role of English law as a governing law of choice in international commercial contracts. They suggested that this would change if our proposals were implemented:
Weakening the extent to which certainty can be achieved would be a colossal change to English contract law in its current form and would risk the end of its dominant international role.
4.12 According to these consultees, businesses value certainty above protection and, with the exception of small businesses,[19] neither need nor want additional protection. Whatever benefits expanded protection might bring to those subjected to harsh terms not covered by UCTA would, they argued, be far outweighed by the additional element of uncertainty injected into the law of contract.
Clauses that there was no opportunity to negotiate
4.13 A particular concern was that our proposals would make it possible for a business to challenge a term which it could perfectly well have negotiated before the contract was made but chose not to do so. The challenge might not succeed but it could still be an effective delaying tactic. Some of those who opposed our proposal generally thought that an extension of the controls might be justifiable if it were limited to clauses that genuinely "took the business by surprise". This would arise when in the circumstances – for example, when a contract had to be made at short notice – the business had no opportunity to digest or negotiate the terms presented by the other party.[20]
Any term that was altered or discussed and any terms whose existence or extent was known (or ought to have been known), provided that there was an opportunity to discuss the term.
Small businesses
BUSINESS CONTRACTS IN GENERAL: MAINTAINING UCTA
4.18 For business contracts in general, we recommend that the controls currently provided by UCTA should be preserved in the new legislation. (This is subject to two minor exceptions, which we discuss below.[21])
4.19 It follows that certain terms in business contracts will continue to be of no effect; for example, clauses which purport to exclude business liability for death or personal injury caused by negligence or breach of duty.[22]
4.20 In the Consultation Paper we explained why, in relation to business contracts, no seller should be able to exclude its undertaking that it is entitled to sell. Equally, in supply contracts involving transfer of title (such as contracts for exchange or for work and materials) no supplier should be able to exclude the undertaking that it is entitled to transfer the property. This is presently provided for in UCTA, sections 6(1) and 7(3A) [sections 20(1)(a) and (b) and 21(3A)].[23] We provisionally proposed that the substance of these sections should be incorporated into the new legislation. The vast majority of consultees supported this.
4.21 We recommend that
(1) clauses which purport to exclude business liability for death or personal injury caused by negligence should continue to be of no effect;[24] and
(2) in business contracts of sale and hire purchase, or in other business supply contracts that involve the transfer of property in goods, a seller or supplier should not be able to exclude or restrict the implied undertaking that it is entitled to sell or transfer the property in those goods. Any such attempt should continue to be of no effect, as provided in sections 6(1) and 7(3A) [sections 20(1)(a) and (b) and 21(3A)] of UCTA.[25]
UCTA provisions that should not be replicated
Negotiated terms and the implied undertakings of correspondence and quality
4.25 As we have seen, UCTA controls the way in which sellers and suppliers may exclude or restrict liability for breach of any of the four implied undertakings of correspondence and quality. Any term which attempts to exclude or restrict liability for breaches of such undertakings must be reasonable. These controls are set out in UCTA sections 6(3) and 7(3) [sections 20(2)(ii) and 21(1)(a)(ii)]. They apply even if the term has been negotiated between the parties. In the Consultation Paper we argued that in the light of the broad controls over non-negotiated terms that we were proposing, it was unnecessary to subject negotiated clauses to a reasonableness test.[26] We thought it would be very rare for a negotiated exclusion clause to be considered unfair. We therefore asked whether consultees had any evidence that negotiated or non-standard terms were being held to be unfair under sections 6(3) or 7(3) [sections 20(2)(ii) and 21(1)(a)(ii)].
4.27 We are no longer recommending the same broad controls that were proposed in the Consultation Paper. Nonetheless, it will be very seldom that an exclusion clause of this kind will be found to be unreasonable when it is not one of the seller's or supplier's written standard terms of business. To maintain these controls over negotiated clauses is not only unnecessary but gives businesses the opportunity to use a challenge as a delaying tactic.[27]
4.28 On the other hand, it is important to retain the controls where a term is one of a set of clauses that have not been negotiated. Exclusion clauses which have not been negotiated will normally be covered by the replacement for UCTA section 3 [section 17], which will apply to clauses in a party's "written standard terms of business".[28] Accordingly, we do not think it necessary to include in the Draft Bill separate provisions replicating any part of UCTA sections 6(3) and 7(3) [sections 20(2)(ii) and 21(1)(a)(ii)].
Negotiated terms in hire contracts and the implied undertaking of a right to transfer possession
4.30 We have already discussed the way in which UCTA treats the implied undertaking of entitlement to sell in contracts of sale and hire purchase. The effect is relatively straightforward: any attempt to exclude or restrict liability for breach of the undertaking is of no effect [void].[29] The way that UCTA deals with the equivalent undertakings in other supply contracts is not so simple. Section 7 [section 21] distinguishes between contracts where property in goods is transferred (such as barter or exchange, or contracts for work and materials)[30] and other supply contracts.
4.31 Where property is transferred, any exclusion or restriction of liability for breach of the implied undertaking that the supplier is entitled to transfer the property is also of no effect.[31] As discussed above,[32] we recommend that this provision is preserved.
Business liability for other loss or damage caused by negligence
4.36 In the Consultation Paper we did not think that the same arguments applied to UCTA section 2(2) [section 16(1)(b)]. This controls terms that purport to exclude or restrict liability for damage to property, or economic loss, caused by negligence. This provision also applies whether or not the term was negotiated. We argued that section 2(2) [section 16 (1)(b)] should remain because it applies to non-contractual notices as well as contractual terms.[33]
There is a reasonable argument that should be debated for reducing the application of the UCTA principles to all other business to business contracts [ie outside contracts with small businesses].
Businesses "dealing as consumers"
4.41 We saw in Part 3 that in R & B Customs Brokers v United Dominions Trust Ltd[34] the Court of Appeal held that a company may "deal as consumer" within UCTA if it enters a transaction which is only incidental to its business activity and which is not of a kind that it makes with any degree of regularity.[35] Consequently, any clause excluding or restricting any of the four implied undertakings of correspondence and quality is of no effect by virtue of UCTA sections 6(2) and 7(2) [sections 20(2)(i) and 21(1)(a)(i)], rather than being subjected to a reasonableness test.
4.42 In the Consultation Paper we addressed the question of whether a company or even a natural person making a contract to obtain goods or services "related to" but not "in the course of" business should continue to be treated as a consumer.[36] We were not convinced that exclusion clauses of the type described in the previous paragraph should be treated as automatically ineffective in cases where such a contract was not of a kind regularly made by the business.[37] We suggested that it would be sufficient in business contracts if such clauses purporting to exclude liability for breach of any of the four implied terms of correspondence and quality were subject to a fair and reasonable test.[38] The Consultation Paper concluded that "a person who makes a contract to obtain goods or services related to, even if not in the course of, business should be treated as dealing as a business and not as a consumer."[39]
4.43 Almost all of the responses to this proposal agreed with it.[40] This is now our recommendation.
Fitting the controls over business contracts to the structure of the new legislation
Written standard terms of business
4.46 In the Consultation Paper we proposed that any type of term in a business contract, other than a "core" term, should be challengeable on grounds of unfairness provided that it had not been negotiated.[41] We have explained that we shall no longer be recommending this for business contracts in general. However, we shall be recommending a similar rule (though with a number of important exceptions) to protect small businesses.[42] As we shall see, we recommend for small businesses that the test which has to be satisfied before the controls are triggered should be whether the term:–
(a) was put forward as one of the other party's standard terms of business, and
(b) was not individually negotiated.
The aim is to permit a small business to challenge a term that was one of the other party's standard terms (rather than a "bespoke" term) if that particular term was not negotiated, even if other standard terms were negotiated.
4.48 The formula "deals on the other's written standard terms of business" was used in the English version of the Draft Bill attached to the Law Commissions' Second Report on Exemption Clauses, whilst the Scottish Bill used "standard form transaction".[43] These formulae made their way into the different parts of UCTA virtually unchanged. The formulae were thought by the Commissions to be capable of identifying standard form contracts to which the chief objection was that they were not negotiated.[44] Thus the formula "written standard terms of business" ["standard form transaction"] was intended to go some way towards identifying, albeit indirectly, non-negotiated terms. As we explained in the Consultation Paper, the main mischiefs of standard form contracts are twofold. First, the party who has been offered the standard terms may agree to them without having the chance to read, let alone understand, them. As a result, it may be taken by "unfair surprise". Secondly, even if the customer is aware of the term, it may find that the business is unwilling to remove or alter it; the business will often be reluctant to incur the cost of altering its terms for a single customer unless the customer is of particular importance.[45]
4.50 In UCTA, "written standard terms of business" was deliberately left undefined. The case law interpreting UCTA was discussed in the Consultation Paper.[46] Our survey of the decisions suggests that the preponderant opinion is:
(1) The question is simply whether the parties ultimately dealt on what were one party's standard terms regardless of whether negotiations preceded the conclusion of the contract;[47] and
(2) The fact that negotiations resulted in some small amendments to some of the terms does not prevent the set of terms remaining standard;[48] but at some undefined point there may be sufficient alteration so that the terms as a whole are no longer the party's written standard terms. At this point, none of the terms (whether negotiated or not) can be reviewed under section 3 [section 17].[49]
4.51 Two principal issues[50] have concerned us.
4.52 The first was whether the fact that some terms were negotiated excludes others that were not negotiated from review. In the Consultation Paper we provisionally proposed a "term by term" approach.[51] We were concerned that, while those faced with a set of terms may attempt to amend some terms which they understand and regard as important, they may well overlook others entirely, even if those terms are very harsh. From this point of view, the UCTA test does not catch all the situations we believed to be problematic. It was this concern that led us to say we preferred a term-by-term approach under which the status of each term (negotiated or non-negotiated) would be assessed independently.[52]
4.54 We have tried to find a formula that would exclude the second type of case from review but we have failed.[53] It is simply not feasible to develop a clear criterion to distinguish the case where the term could have been raised for negotiation but was not, from the case in which there was no real opportunity to do so (for example, because the contract had to be concluded in a hurry). We do not pursue this approach any further. We recognise that legislation is a relatively blunt tool.
4.55 We have also been persuaded that for business contracts in general it is not appropriate to adopt a "term by term" approach. A business party that has the expertise, time and bargaining power to negotiate substantial changes to some of the other party's standard terms[54] should not have the opportunity to challenge other standard terms of the contract at a later stage. However, we do not take the rigid view adopted by a few consultees that any change whatever to the "written standard terms" prevents them from being "standard". We think that the approach currently taken by the courts[55] is satisfactory.
industry standard terms and trade association terms
4.59 It is not wholly clear whether industry standard terms would be included in the existing reference in UCTA to "the other's written standard terms of business".[56] In their Second Report, the Law Commissions did mention such terms. They said:
Broadly speaking, standard form contracts are of two different types. One type is exemplified by forms which may be adopted in commercial transactions of a particular type or for dealings in a particular commodity, such as the different forms of sale contracts used by the Grain and Feed Trade Association or the forms for building and engineering contracts sponsored by the Royal Institute of British Architects, the Institution of Civil Engineers and the Federation of Associations of Specialists and Sub-contractors. Such forms may be drawn up by representative bodies with the intention of taking into account the conflicting interests of the different parties and producing a document acceptable to all. The other type is the form produced by, or on behalf of, one of the parties to an intended transaction for incorporation into a number of contracts of that type without negotiation.… Although it is the second type of standard form contract that has attracted most criticism, both types have in common the fact that they were not drafted with any particular transaction between particular parties in mind and are often entered into without much, if any, thought being given to the wisdom of the standard terms in the individual circumstances.[57]
The Commissions decided to leave the phrase "written standard terms of business" to be interpreted by the courts.
4.60 Terms like those promulgated by the Grain and Feed Trade Association ("GAFTA") seem to fall within the phrase "written standard terms"; but it could be argued that because they are drawn up by a third party they are not "the other party's" written standard terms. The only authority to address this question, British Fermentation Products Ltd v Compare Reavell Ltd,[58] leaves it open. In that case, Judge Bowsher concluded that section 3 did not apply on the facts as it had not been shown that the defendants consistently used the trade association terms (in that case a model contract developed by the British Institute of Mechanical Engineers). He said :
I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of Model Forms drafted by an outside body. However, if the Act ever does apply to such Model Forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the Model Form is invariably or at least usually used by the party in question… Without such proof, it could not be said that the form is, in the words of the Act, "the other's standard terms of business." I leave open the question what would be the position where there is such proof, and whether such proof either alone or with other features would make section 3 of the Act applicable.[59]
It seems probable that where trade association or industry standard terms are commonly used by a business, those terms are its written standard terms of business, even though they are also the written standard terms of others in the same market.[60]
4.61 We can see an argument for exempting from review terms that have been drawn up by a neutral body such as GAFTA or the Joint Contracts Tribunal.[61] As the Second Report said, such terms are likely to have been negotiated carefully by representatives of each side of the industry and to represent a fair balance. However, we have concluded that it would not be practicable to create an exemption for such terms. The reason is that there can be no guarantee that terms will be fair simply because they were drawn up by a third party and are used widely in the relevant market. The terms might have been drawn up by a trade association that represents the interests of one party and not those of the other party; and yet may be used in the vast majority of contracts in the market because, for example, the other party usually lacks the sophistication or the bargaining power to demand terms that would be more favourable to it. The provenance of the terms and the degree of acceptance of them in "the market" are highly relevant to their reasonableness but there is no sufficiently precise criterion by which it can be decided whether or not industry standard terms should be exempt from review.
The test of reasonableness
general
4.63 In the context of consumer contracts,[62] we have explained the "fair and reasonable" test which we recommend to replace the reasonableness test set out in UCTA section 11 [section 24].[63] The new test will be supplemented by a list of factors to replace the guidelines in Schedule 2 to UCTA. In the Consultation Paper we suggested that the same test should be applied to determine the fairness of terms in business contracts. We thought that it would simplify and lend coherence to the new legislation if the basic "fair and reasonable" test were the same for business and consumer contracts.[64] We also proposed that the court should take into account the same list of factors though it was expected that the factors would be applied somewhat differently in the case of businesses.[65]
4.65 We are no longer recommending a wide extension of controls over unfair terms in general business contracts. Nevertheless, we think that the same guidelines (set out in clause 14 of the Draft Bill) should still be used in respect of the controls which will be applicable to business contracts.[66] They are as relevant to exclusion clauses as they are to other kinds of unfair term. But we reiterate that, as the City of London Solicitors Company put it, "whilst the same test could be used in both cases [consumer and business contracts], it should not imply that the same standards are to apply in both cases". While we anticipate that the guidelines will be understood and applied differently in consumer and business settings, this does not necessitate the creation of a separate list. Some of the guidelines adopt language more appropriate for individuals than legal persons, particularly language referring to experience, understanding and knowledge. Nevertheless, we do not see this as a particular problem. The guidelines in Schedule 2 to UCTA[67] adopt similar language and the courts do not appear to have encountered any difficulties in applying these guidelines to terms in contracts between businesses.
plain and intelligible language
whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties).
4.67 For consumer contracts, we have recommended that a lack of transparency should be listed among the factors to be taken into account in assessing fairness.[68] In the Consultation Paper we proposed that transparency should also be taken into account when assessing fairness in business contracts.[69]
4.69 We asked consultees whether they felt that transparency should be capable of being the principal or sole reason for a finding of unfairness.[70] Half of our respondents agreed that this should be so, several again stressing the importance of transparency in business contracts. The Specialist Engineering Contractors Group told us that this was important in the construction industry which is "bedevilled by the use of lengthy contractual documentation, even for contracts of low value" and went on to stress the difficulties encountered by small businesses. Though we think the number of cases in which a clause in a business contract will be unfair simply because it was not transparent will be very small, we accept these arguments.
4.70 We therefore recommend that
(1) the same "fair and reasonable" test, including whether the term is transparent, which we propose for consumer contracts should apply to business-to-business contracts;
(2) the same expanded set of guidelines for the application of the "fair and reasonable" test should apply to both consumer and business contracts; and
(3) in applying the test and the guidelines, the court should have regard to whether the contract is a consumer contract, a small business contract or a general business-to-business contract.
Choice of law and conflicts issues
Other aspects of UCTA that will be replicated in the new legislation
Burden of showing that a term is fair
4.73 Under UCTA the burden of showing that a term is reasonable is on the party claiming that the term satisfies the requirement of reasonableness. This applies to all contracts, including business contracts.[71] In the Part of the Draft Bill affecting business contracts in general, we are largely replicating the status quo; it will apply only to exclusion and restriction of liability clauses. We think this burden of proof should continue to apply to the new business provisions. Any other approach would amount to a significant alteration of the balance of interests currently protected under UCTA.
The effect of an invalid term
4.75 We said in Part 3 that the formula adopted by UCTA for describing the effect of an unreasonable or invalid term is "purposive".[72] It prevents a party relying on an unreasonable term for the purpose of excluding liability but allows either party to rely on the clause for any other purpose.[73] This will remain the case under the Draft Bill.
4.76 UCTA tests the reasonableness of a contractual clause not by whether it would be reasonable to rely on the clause to exclude a particular liability but by whether it was reasonable to include [or incorporate] the clause in the contract.[74] This prevents a party from relying on an unreasonably broad clause to exclude or restrict a liability that it would have been reasonable to exclude. It also prevents it from relying on any part of a clause that would be reasonable were the unreasonable element excised (a "blue pencil" approach). Under UCTA an unreasonable term is wholly ineffective to exclude or restrict liability though it remains effective for any other purpose. We see no reason to alter the existing position. The alternative approach would encourage businesses to draft overly wide exclusion clauses (thereby deterring claims), safe in the knowledge that they can still rely on reasonable parts of the clause if challenged in court. The majority of our respondents supported maintaining the status quo.
Mandatory and permitted terms
4.78 As stated in Part 3,[75] UCTA contains provisions designed to exclude from its operation terms that conform to what is required or permitted by other legislation, an international convention or the decision of a competent authority.[76] In the Consultation Paper we proposed keeping these provisions.[77] This saving is necessary if we are to preserve the new legislation's coherence with the law as a whole. It will mean that the position on mandatory and permitted terms will be the same under the new legislation for both consumer and business contracts. Almost all our respondents agreed with our proposals and our Draft Bill therefore includes such a provision.[78]
Attempted evasion by secondary contract
4.80 Just as for consumer contracts, it should not be possible to evade the controls over business contracts by means of a secondary contract, whether between the same parties or different parties. The issues are the same as they are for consumer contracts and we refer readers to the discussion in Part 3.[79]
Excluded contracts
(1) contracts of insurance;
(2) any contract so far as it relates to the creation or transfer of any interest in land, or the termination of such an interest;
(3) any contract so far as it relates to the creation or transfer of any interest in intellectual property, or the termination of such an interest;
(4) any contract so far as it relates to the formation or dissolution of a company or to its constitution or the rights or obligations of its members;[80]
(5) any contract so far as it relates to the creation or transfer of securities or of any right or interest in securities; and
(6) (except in so far as the contract purports to exclude or restrict liability for negligence or breach of duty in respect of death or personal injury)
(a) any contract of marine salvage or towage;
(b) any charterparty of a ship or hovercraft; and
(c) any contract for the carriage of goods by ship or hovercraft.[81]
4.82 In the Consultation Paper we provisionally proposed to maintain the existing categories of excluded contract in respect of business contracts (although we were, at the time, proposing to implement controls similar to those recommended for consumer contracts to business contracts as well).[82] The majority of consultees who responded on this issue agreed with our position on excluded categories.
4.84 We recommend that those categories of contract currently excluded from the operation of UCTA, should continue to be exempt from controls over unfair contract terms.[83]
Contracts of employment
4.85 As already mentioned, the Draft Bill makes separate provisions for contracts of employment. These are discussed in Part 6 below.[84]
Application outside contract
4.86 As we have seen,[85] UCTA section 2 [section 16] applies not only to contractual terms but also to non-contractual notices which purport to exclude liability in tort [delict]. This is dealt with in Part 6.
Note 1 This account does not cover terms under which a business may be treated as dealing as a consumer, see below, para 4.41 – 4.44. For England, s 8 (which amends the Misrepresentation Act 1967, s 3) applies to any kind of contract but only to clauses excluding or restricting liability, or the remedies available, for misrepresentation. Amendment of the Misrepresentation Act 1967 is not within the scope of this project save insofar as that Act refers to the test of reasonableness in UCTA. [Back] Note 2 See s 1(3). Pt II (Scotland) does not use this phrase but the effect of s 16 is similar. [Back] Note 3 Whether the liability is under a contract or in tort: UCTA section 1(1) [or in Scotland, delict: breach of duty is defined in s 25(1).] On notices purporting to exclude liability in tort [delict], see below, paras 6.28 – 6.35. [Back] Note 4 See s 2(1) [s 16(1)(a)]. [Back] Note 5 See s 2(2) [s 16(1)(b)]. [Back] Note 6 On s 3 [s 17], see para 4.45, below. [Back] Note 7 See s 3(2)(a) [s 17(1)(a)]. [Back] Note 8 See s 3(2)(b) [s 17(1)(b)]. [Back] Note 9 These undertakings are the Sale of Goods Act 1979, s 12 (for sales) and the Supply of Goods (Implied Terms) Act 1973, s 8 (for hire purchase). Section 6(1) [s 20(1)] applies irrespective of whether the seller is a business or a purely private seller and irrespective of whether the buyer is buying for business or private purposes: see further below, paras 6.14 – 6.16. [Back] Note 10 The implied term is to be found in the Supply of Goods and Services Act 1982, ss 2 [s 11B]. Note that s 7(3A) [s 21(3A)] only applies to contracts where the seller is acting in the course of a business, by virtue of s 1(3) [the opening words of s 21(3)]. [Back] Note 11 It may also apply to some other supply contracts where property does not pass such as contracts of deposit or pledges: see para 4.33 below. [Back] Note 12 Section 6(3) [s 20(2)(ii)] applies to sale and hire-purchase. It covers the implied undertakings in the Sale of Goods Act 1979, ss 13,14 & 15 and the Supply of Goods (Implied Terms) Act 1973, ss 9, 10 & 11. UCTA, s 7(3) [s 21(1)(a)(ii)] applies to other types of contract “under or in pursuance” of which possession or ownership of goods passes. It covers the equivalent implied undertakings set out in the Supply of Goods and Services Act 1982, ss 3, 4, 5, 8, 9 & 10 [ss 11B – 11E and 11H – 11K]. The way in which these provisions apply to private sales is discussed in paras 6.11 – 6.27, below. [Back] Note 13 See below, paras 4.18 – 4.24. [Back] Note 14 UCTA, ss 6(3) and 7(3) [ss 20(2)(ii) and 21(1)(a)(ii)]; see below, para 4.25. [Back] Note 15 UCTA, s 2(2) [s 16(1)(b)]. [Back] Note 16 See below, paras 4.36 – 4.40. [Back] Note 17 See below, paras 4.45 – 4.57. [Back] Note 18 See below, paras 4.72 – 4.83. [Back] Note 19 Discussed in Part 5, below. [Back] Note 20 And where it was the lack of time that prevented negotiation rather than the claimant’s indifference or the refusal of the other party to negotiate. [Back] Note 21 Paras 4.25 – 4.35. [Back] Note 22 It will be seen that the Draft Bill treats all attempts to exclude business liability for negligence, including death or personal injury, in a single clause, namely clause 1. [Back] Note 23 See Consultation Paper paras 5.13 – 5.14. The position in “private sales” and sales by consumers to businesses is considered in Part 6 below, paras 6.11 – 6.27. [Back] Note 24 See Draft Bill, clause 1(1). [Back] Note 25 See Draft Bill, clause 10. [Back] Note 26 See Consultation Paper, paras 5.45 – 5.47. [Back] Note 27 We believe that subjecting clauses to a reasonableness, or a fairness, test where there is very little chance that the term will be found to be unreasonable, or unfair, amounts to creating uncertainty about a term with very little justification. [Back] Note 28 See below, paras 4.45 – 4.57. [Back] Note 29 UCTA, s 6(1) [s 20(1)]. [Back] Note 30 UCTA, s 7(3)(A) [s 21(3A)] refers to those contracts to which the Supply of Goods and Services Act 1982, s 2 [s 11B] applies. This category is defined in the Supply of Goods and Services Act 1982, s 1 as “contracts under which one person transfers or agrees to transfer to another property in goods, other than an excepted contract”. The only exception relevant for these purposes are contracts “intended to operate by way of mortgage, pledge, charge or other security”. [Section 11A is to similar effect for Scots law]. [Back] Note 31 Section 7(3A) [s 21(3A)]. [Back] Note 33 It may also be argued that to exclude or restrict liability for negligence is more anti-social than to exclude (strict) liability for goods failing to correspond to description or sample, or not being fit for the purpose. [Back] Note 34 [1988] 1 WLR 321. [Back] Note 35 See para 3.21 above. In Stevenson v Rogers [1999] QB 1028 (sale by a fisherman of his old working boat held to be made in course of business within Sale of Goods Act 1979, s 14(2)) Potter LJ, delivering the leading judgment, seems to cast some doubt on R & B Customs. However, in Feldarol Foundry plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747 the Court of Appeal held that it was bound to followR & B Customs. [Back] Note 36 SSGCR, reg 14(3) which inserts s 12(2) [s 25 (1B)] into UCTA regulates instances where a party may be deemed to “deal as a consumer” but the changes do not affect this point: compare para 3.27, above. [Back] Note 37 One reason is that the supplier will find it difficult to know whether the purchaser-business is “dealing as consumer” without quite detailed enquiries. [Back] Note 38 The same point would apply when it is the party supplying the goods or service who is making the contract for purposes related to business but the transaction is not made regularly. In Stevenson v Rogers [1999] QB 1028 (above, note 35) a transaction of this kind was held to be made in the course of his business within Sale of Goods Act 1979, s 14(2). We think that the same approach would and should be applied to the question whether a supplier using a potentially unfair term is acting in the course of his or her business. [Back] Note 40 Of the two dissenters, the Specialist Engineering Contractors Group was concerned about the effects on small businesses rather than the wider business community. On small businesses see Part 5. [Back] Note 41 Consultation Paper, para 5.44. [Back] Note 43 Exemption Clauses (Scotland) Bill, s 2. [Back] Note 44 Law Com No 69; Scot Law Com No 39, para 151. [Back] Note 45 Consultation Paper, paras 2.4 – 2.6. [Back] Note 46 Ibid, paras 5.49 – 5.53. [Back] Note 47 St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481. In Salvage Association v CAP Financial Services Ltd [1995] FSR 654 (QB), His Honour Judge Thayne Forbes QC took a rather different approach. He set out a non-exhaustive list of factors that should be considered when determining whether, as a matter of fact, it continues to be correct to describe the terms of the contract eventually agreed as the standard terms of business of the party originally putting them forward. Those factors are as follows: (i) the degree to which the standard terms are considered by the other party as part of the process of agreeing the terms of the contract; (ii) the degree to which the standard terms are “imposed on the other party”; (iii) the relative bargaining power of the parties; (iv) the degree to which the party putting forward the standard terms is prepared to entertain negotiations with regard to the terms of the contract generally and the standard terms in particular; (v) the extent and nature of any agreed alterations to the standard terms made as a result of the negotiations; and (vi) the extent and duration of the negotiations. In St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481, the Court of Appeal was less concerned about contextual factors than Judge Forbes, merely enquiring whether the parties ultimately dealt on the terms proffered regardless of whether negotiations preceded the conclusion of the contract. While this approach may appear at odds with Judge Forbes’s approach, it should be stressed that the Court of Appeal was considering the question of whether the parties dealt on the standard terms, not whether the terms themselves were standard. It should also be noted that Nourse LJ did refer to Judge Forbes’s judgment when he said that Judge Forbes’ words should not be read as indicating that “dealing” depends on the absence of negotiations. [Back] Note 48 Pegler Ltd v Wang (UK) Ltd [2000] EWHC Technology 127 (25 February 2000): “A standard term is nonetheless a standard term even though the party putting forward that term is willing to negotiate some small variations of that term.” [Back] Note 49 Salvage Association v CAP Financial Services Ltd [1995] FSR 654: “[i]n such circumstances, whether it continues to be correct to describe the terms of the contract eventually agreed by the parties as the standard terms of business of the party who originally put them forward will be a question of fact and degree to be decided in all the circumstances of the particular case.” [Back] Note 50 There are of course other points. One is whether the party uses the particular set of terms on a sufficiently regular basis for them to amount to its written standard terms. This has been the subject of a number of decisions, in particular Salvage Association v CAP Financial Services Ltd [1995] FSR 654: see above, notes 47 and 49. We see no need to make provision on this point in the Draft Bill. Another is whether a set of terms drafted by a third party (such as a trade association) amount to the party’s written standard terms. On the latter point see below, paras 4.58 – 4.62. [Back] Note 51 Consultation Paper, para 5.56. [Back] Note 52 The UTCCR adopt a clear term-by-term approach: any term that was “not individually negotiated” can be challenged as unfair: reg 5(1). [Back] Note 53 See paras 4.13 – 4.16, above. [Back] Note 54 Compare the position of small businesses, below, Part 5. [Back] Note 55 See para 4.50, above. [Back] Note 56 Section 3(1). For Scotland, s 17 speaks of a “standard form contract” that affects the rights of a customer. Section 17(2) defines “customer” as “a party to a standard form contract who deals on the basis of written standard terms of business of the other party.” [Back] Note 57 Exemption Clauses Second Report (Law Com no 69; Scot Law Com no 39), para 152. [Back] Note 58 [1999] EWHC Technology 227; [1999] 2 All ER (Comm) 389. [Back] Note 59 Ibid, at para 46. [Back] Note 60 In Hadley Design Associates Ltd v Westminster City Council [2003] EWHC 1617; [2004] TCLR 1, the claimants contracted with the defendant on the basis of a contract that incorporated standard terms drafted by the Royal Institute of Chartered Surveyors. Judge Richard Seymour QC took the view that terms which the defendant later referred to as its “standard conditions” (based on a version of the RICS Conditions of Engagement) were not the defendant’s written standard terms of business because they were drawn up especially for the deal in question. However, at paragraphs 77– 79 of the transcript, Judge Seymour implies that by the time a later contract between the parties was agreed the same “standard conditions” might have become the defendant’s written standard terms. [Back] Note 61 The standard forms of building contracts once issued under the auspices of the RIBA and other bodies referred to in the Second Report, above para 4.59, are now issued by the Joint Contracts Tribunal. [Back] Note 62 See paras 3.84 – 3.105, above. [Back] Note 63 See Draft Bill, clause 14. [Back] Note 64 See Consultation Paper, paras 5.74 – 5.75. [Back] Note 65 See Consultation Paper, para 5.83. [Back] Note 66 The Indicative List will not apply. The majority of the list is concerned with clauses that will not be subject to control in business contracts generally; it would make no sense to apply it to business contracts. [Back] Note 67 They are applicable to cases where one party "deals otherwise than as a consumer" as well as to terms in consumer contracts. [Back] Note 68 See paras 3.97 – 3.101, above. [Back] Note 69 See Consultation Paper, para 5.79. [Back] Note 70 See Consultation Paper, para 5.81. [Back] Note 71 UCTA, s 11(5) [s 24(4)]. [Back] Note 72 As opposed to treating the term as of no effect in any circumstances. See Part 3 paras 3.131 – 3.134. [Back] Note 73 The effect of an invalid term under the Scottish provisions of UCTA is discussed in para 3.134, above. [Back] Note 74 s 11(1) [ss 16(1), 17(1), 18(1), 20(2), 21(1)]. [Back] Note 75 See para 3.67, above. [Back] Note 76 UCTA, s 29; UTCCR, reg 4(2). [Back] Note 77 Consultation Paper, paras 5.62 – 5.63. [Back] Note 78 Draft Bill, clause 22 and Schedule 3. [Back] Note 79 See paras 3.141 – 3.142, above. [Back] Note 80 Sch 3, para 6 [s 15(3)(a)(ii)]. [Back] Note 81 Sch 3, paras 9 and 10 [s 15(3)(b) and (4)]. [Back] Note 82 Consultation Paper, paras 5.64 – 5.66. [Back] Note 83 See Draft Bill, Sch 3. [Back] Note 84 See paras 6.2 – 6.10, below and also 2.14, above. Although under clause 1(4) of the Draft Bill, business liability may include acts done by an employee, we do not think that a contract of employment would ever amount to a business contract, as employees would not be regarded as in acting in the course of their own business. For reasons of clarity we treat employment contracts as a separate category. [Back]
