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Exclusion clauses

Introduction

This free course explores judicial and legislative approaches to exclusion clauses. In other words, contract terms which seek to limit or exclude liability for loss and damage. This course begins by discussing when and why such exclusion clauses are used before moving on to consider the role of the judiciary in limiting the inclusion and scope of these terms in contracts. It then discusses the development of consumer protection law. This includes an analysis of current legislative provisions and recent reforms. The course then concludes with an evaluation of the balance struck between the classic idea of freedom of contract and the need for consumer protection.

This OpenLearn course is an adapted extract from the Open University course W202 Contract law and tort law.

Learning outcomes

After studying this course, you should be able to:

  • discuss the purpose and common uses of exclusion clauses

  • identify whether an exclusion clause has been incorporated into a contract and what is covered by its wording

  • assess the impact of domestic and European legislation on an exclusion clause

  • analyse and evaluate the balance the law strikes between freedom of contract and consumer protection.

1 What is an exclusion clause?

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Instructor
An exclusion clause aims to limit, or exclude, the liability of one party to a contract. In other words, it will try to, in some way, lessen their contractual responsibilities. You may not always be aware of it, but exclusion clauses are in common use in everyday life.
Often, you may not see them or perhaps be fully aware of their content, as they form part of standard form contracts. On other occasions, it may be hard to tell whether they are part of the contract at all. The courts have devised formal rules to decide when such clauses are valid.
For example, there are a large number of cases dealing with whether or not an exclusion clause does form part of a contract. If no contract is signed, the courts will look at whether reasonable notice of the clause was given. In addition, both the Westminster Parliament and the European Union have passed laws to regulate the use of exclusion clauses. Their focus has been on protecting consumers who are entering into contracts with businesses.
You may think it’s fair that the consumer is protected in these circumstances. But it’s not always straightforward. It’s important to ask yourself how far the courts should go in protecting one party to a contract at the possible expense of the other.
Does the issue of whether they are standard terms or individually negotiated make a difference?
What about if it’s two businesses involved in a contract?
Should clauses included in their contracts be regulated by the courts and legislation, or should these contracts be treated differently?
Isn’t a small shop entering into a contract with a large manufacturer in a similar position to a consumer?
As you work through this unit, you should think about the balance that’s being struck between freedom-to-contract on the terms you choose and the need to protect consumers and other parties who enter into a contract. And, this unit illustrates that it’s still a fascinating and ongoing debate.
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Exclusion clauses
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An exclusion clause is a term in a contract which seeks to exclude or limit the liability of one of its parties. For example, it may state that a party has no liability if the contract is breached or, alternatively, seek to limit the range of remedies available or the time in which they can be claimed.

… they are terms whereby one party seeks to disclaim or reduce his or her responsibility under the contract …

(Wheeler and Shaw, 1994, Chapter 11)

Exclusion clauses are found in many different areas of everyday life from car parks and supermarkets to swimming pool changing rooms and train tickets.

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Figure 1 An exclusion clause

Box 1 Tricky terminology for troublesome terms!

Some authors refer to ‘exclusion clauses’ and ‘limitation clauses’ separately (such as Furmston, 2017, Chapter 6). This is because ‘exclusion clauses’ exclude liability altogether, whereas ‘limitation clauses’ only limit it. For example, an exclusion clause might state that no damages are payable for late delivery of a product. A limitation clause might state that damages would be limited to £100 for late delivery.

In addition, some authors use the term ‘exemption clauses’ when referring to one or both of the above. For example, in Anson’s Law of Contract (Beatson et al., 2010, Chapter 6).

If you were drafting or reading a contract which contained an exclusion clause you may well choose not to use any of these terms and simply write down the clause itself. This can make them harder to identify in practice.

In this course, the term ‘exclusion clauses’ is intended to cover both exclusion and limitation clauses. Where there is any legal difference in the way they are treated, this is highlighted.

1.1 When are exclusion clauses used?

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Figure 2 Pylons

Exclusion clauses are often found in standard form contracts, such as those used by utility and mobile phone companies and public transport providers. A standard form contract is a uniform contract which is used by a large organisation in all its dealings with customers. Apart from standard form contracts you will also find exclusion clauses in individually negotiated contracts.

Activity 1 Standard form contracts

You should allow yourself 30 minutes to do this activity.

Find a copy of an agreement you have entered into with a utility company or mobile phone provider (if you do not have any, go to the web page of a utility or mobile phone company and see if you can find their terms and conditions).

  • a.Are the terms and conditions which apply to the contract on the agreement itself? If not, locate the terms and conditions.
You can type text here, but this facility requires a free OU account. Sign in or register.
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Comment

You may well have found that the terms and conditions were on the back of the piece of paper you signed. If you entered into the agreement online, you may have ticked a box confirming that you had read the terms and conditions.

  • b.Do the terms and conditions include any exclusion clauses?
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Comment

It is very likely that there are exclusion clauses contained in the terms and conditions. For example, British Gas’s Standard Terms and Conditions (2015) for the supply of gas and electricity state that it will not be responsible for any financial loss or loss that could not have been reasonably expected. It also limits its liability for any losses to £1 million.

  • c.Do the exclusion clauses appear reasonable?
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Comment

Your answer to this is likely to depend on the wording of the terms and conditions, how broadly they seem to be drafted and what they cover. The term ‘reasonable’ also has a specific meaning in relation to certain consumer contracts. This is discussed in Section 5.4 of this course.

1.2 The purpose of exclusion clauses

There are two different approaches to the purpose of exclusion clauses:

  1. One approach would use the whole of the contract, including any exclusion clauses, to define the obligations set out in it.
  2. The other approach would be to define the obligations set out in the contract without reference to the exclusion clauses. The exclusion clauses would then be used as defences when necessary.

Cheshire, Fifoot and Furmston’s Law of Contract (Furmston, 2017, Chapter 6) suggests that which approach is taken to the purpose of an exclusion clause usually depends upon the wording of the exclusion clause being considered. However, exclusion clauses are more commonly viewed as a defence.

2 Is the exclusion clause incorporated into the contract?

For an exclusion clause to be valid it must form a part of the contract. The courts have devised a number of rules to ascertain whether or not it has been incorporated into (made part of) the contract.

The document containing the exclusion clause must be part of the contractual documentation and not a mere receipt or acknowledgement of payment. This is demonstrated by Chapelton v Barry Urban District Council [1940] 1 KB 532.

Box 2 Chapelton v Barry Urban District Council [1940] 1 KB 532

Mr Chapelton hired two deckchairs from the defendant. A sign next to the deckchair gave the price and time limit, but did not refer to any exclusion clauses. After Mr Chapelton had paid for the deckchairs he was handed two tickets. The back of the tickets stated that the defendant would ‘not be liable for any accident or damage arising from the hire of the chair’. When the plaintiff sat on the deckchair it gave way, causing him injury. The defendant relied on the exclusion clause contained on the ticket, but the High Court held that this was a voucher or receipt and did not form part of the contract.

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Figure 3 A deckchair

One exception to this is a bill of lading. This is an official, detailed receipt which is given, by the master of a ship transporting goods, to the person consigning (sending) the goods. Despite acting as a receipt, it is commonly treated as part of the contract.

2.1 Signed contracts

The general rule is that an exclusion clause in a signed contract is binding, regardless of whether or not it was read by the parties. This is demonstrated by L’Estrange v F Graucob Ltd [1934] 2 KB 394.

Box 3 L’Estrange v F Graucob Ltd [1934] 2 KB 394

Mrs L’Estrange purchased a cigarette machine from the defendant for use in her café. At the time of purchase she signed a form which included a clause excludeing all implied conditions and warranties. The machine did not work properly and Mrs L’Estrange claimed there was an implied warranty that it was fit for purpose. The High Court held that by signing the form Mrs L’Estrange had agreed to be bound by its terms, regardless of whether or not she had read them. Therefore, the defendant could rely on the exclusion clause.

The rule that exclusion clauses in signed contracts are binding on the parties is not applied where there has been fraud or misrepresentation as to the scope or effect of the clause. This is illustrated by Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805. Here the defendant’s shop assistant innocently misrepresented the scope of the exclusion clause in the document Mrs Curtis was signing. As a result, the clause was held not to be incorporated into the contract.

2.2 Unsigned contracts

If the contract is unsigned, the question is whether or not reasonable notice of the term has been given.

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Figure 4 A steam train

Activity 2 Has reasonable notice been given?

You should allow yourself 1 hour and 30 minutes to do this activity.

Watch this video and then read the PDF provided of the case of Parker v South Eastern Railway Co (1877) 2 CPD 416.

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Narrator
The development of standard form contracts is inextricably linked to the Industrial Revolution and the changes it created in many areas of British society. One example of this is the development of the railways. Between 1830 and 1880, Britain was transformed by the creation of a huge railway network.
For businesses, it was more effective than canal boats and horse-drawn wagons. For ordinary people, it offered a cheaper, quicker, and more comfortable option than stagecoaches. As people migrated towards the large mills and factories of the towns and cities, the railways became an integral part in finding and reaching work, visiting families, and even taking holidays.
At the same time, this mass movement of people meant an explosion in claims. People were entering into more contracts than ever by buying tickets and depositing items in cloakrooms. They were being placed in novel situations that could result in loss and injury. As you work through this unit, you will see a number of cases involving railway companies and passengers, demonstrating the interplay between law and wider economic and social developments.
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Comment

All three judges agree that a new trial should be held. Lord Justice Baggallay suggests that such a ticket is usually seen as a voucher for payment and, on the face of it, would not be expected to contain conditions. He states that the key issue is whether Parker knew or had good reason to believe that the ticket contained conditions. Lord Justice Bramwell (at p. 428) argues that:

The defendants put into the hands of the plaintiff a paper with printed matter on it, which in all good sense and reason must be supposed to relate to the matter in hand. This printed matter the plaintiff sees, and must either read it, and object if he does not agree to it, or if he does read it and not object, or does not read it, he must be held to consent to its terms.

Although Lord Mellish’s judgment is now taken as the correct approach, this does illustrate that the reasoning used by different judges can be very different, even if the same decision is reached.

You may have noticed that Parker refers to the original trial being decided by a jury. Juries were a significant part of civil cases up to the County Courts Act 1846 and Common Law Procedure Act 1854, which made them optional in certain courts. Further legislation gradually eroded their importance in civil cases and the current position under the Senior Courts Act 1981 is that there is only a right to jury trial in cases of malicious prosecution, fraud and false imprisonment (and defamation if ordered by the court) (Hanly, 2005).

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Figure 5 An advertisement for The Importance of Being Earnest in which a baby is deposited in a handbag in a railway cloakroom

2.2.1 Timing

When determining whether reasonable notice of a term has been given, the timing of the notice is very important. The exclusion clause must be brought to the attention of the other party before the contract is made. This is demonstrated by Chapelton and also Olley v Marlborough Court Ltd [1949] 1 KB 532.

Box 4 Olley v Marlborough Court Ltd [1949] 1 KB 532

Mrs Olley and her husband arrived for a week’s stay at the Marlborough Court Hotel. They paid for the room at reception then went up to their room. A sign on the back of the bedroom door stated, ‘The proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the manageress for safe custody …’. During their time at the hotel, Mrs Olley had furs, jewellery, clothes and a hatbox stolen from her room. She claimed the value of these from the company which owned the hotel. The company argued (among other points) that the sign on the bedroom door excluded their liability for the theft.

In the Court of Appeal, Lord Justice Denning stated (at p. 549):

The first question is whether that notice formed part of the contract. Now people who rely on a contract to exempt themselves from their common law liability must prove that contract strictly … The best way of proving it is by a written document signed by the party to be bound. Another way is by handing him before or at the time of the contract a written notice specifying its terms and making it clear to him that the contract is on those terms. A prominent public notice which is plain for him to see when he makes the contract or an express oral stipulation would, no doubt, have the same effect. But nothing short of one of these three ways will suffice.

As Mrs Olley would only have seen the notice after she had entered into a contract with the hotel, it was held not to form part of the contract. In any event, it was found not to be clear enough to exclude the company’s liability for negligence. Therefore, the company’s appeal was dismissed.

2.2.2 Previous course of dealings

In some situations a consistent previous course of dealings between the parties is sufficient to constitute reasonable notice. For example, in J Spurling Ltd v Bradshaw [1956] 2 All ER 121, the plaintiff received a receipt for storage charges, containing an exclusion clause, from the defendant. Although this was sent after the contract for storage was made, the plaintiff had entered into a number of contracts with the defendant previously and had received similar receipts with the same clause on them. The court, therefore, held that he was bound by the exclusion clause.

However, the case of McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430 held that this only applies if the course of dealing has been consistent.

2.2.3 Unusual terms

If an exclusion clause is unusually wide, it requires an unusually explicit warning. This is demonstrated by Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, where a clause purported to exempt the owner of a car park from all liability for personal injury, however caused. Lord Denning stated (at p. 170):

All I say is that it is so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his attention in the most explicit way … In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling.

This case also, once again, illustrates the importance of timing as the terms and conditions were displayed inside the car park itself and, therefore, the plaintiff would only have been able to read them after he had entered into the contract to use it.

The case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 indicates that the Thornton approach to unusual terms applies to contract terms in general, not just exclusion clauses.

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Figure 6 A red hand

2.2.4 ‘Battle of the forms’

The phrase ‘battle of the forms’ refers to the situation where both parties are trying to incorporate their own standard terms into the contract. The usual approach of the courts is to analyse this in terms of offers and counter-offers, although various other solutions are possible.

Activity 3 Is the clause incorporated?
You should allow yourself 30 minutes to do this activity.

Read the scenarios below. In each case, decide whether or not the exclusion clause has been incorporated and explain your reasoning before revealing the comment.

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3 What does the exclusion clause cover?

The courts have sought to restrict the use and scope of exclusion clauses which are incorporated into a contract; particularly where one party is seen as being in a weaker bargaining position.

3.1 Use of clear words

If a person is under a legal liability and wishes to get rid of it, he can only do so by using clear words.

(Lord Justice Scrutton, cited in Alison (J Gordon) Ltd v Wallsend Slipway and Engineering Co Ltd (1927) 43 TLR 323, p. 324)

The courts require particularly clear words to be used to exclude a party’s liability for negligence. In Canada Steamship Lines Ltd v The King [1952] AC 192 (heard by the Judicial Committee of the Privy Council), Lord Morton (at p. 208) set out three rules for determining whether or not an exclusion clause did cover liability for negligence.

  1. If the clause contains language which expressly exempts the party seeking to rely on the clause from the consequences of negligence, effect will be given to that provision.

This usually applies where a clause specifically refers to ‘negligence’. For example, ‘Darling Dairies will not be liable for any negligent acts or omissions’. However, it can also include the use of words, which are ‘synonymous with negligence, or words which in the case law have acquired a status equivalent to a reference to negligence’ (per Lord Justice Steyn at p. 651 of EE Caledonia Ltd (formerly Occidental Petroleum (Caledonia) Ltd) v Orbit Valve Co Europe plc [1994] 1 WLR 1515).

If the first rule is not satisfied, then the clause must meet the requirements of both the second and third rules before it is allowed to exclude liability for negligence.

  1. If negligence is not expressly referred to, the court must consider whether the ordinary meaning of the words used is wide enough to cover negligence.

McKendrick (2013, p. 189) explains that if there is any doubt about this, it is resolved against the party seeking to rely on the exclusion clause.

  1. If the second rule is satisfied, the court must then consider whether or not the exclusion clause could cover forms of liability other than negligence. If this is the case, then the clause is generally not interpreted as applying to negligence.

The difficulties in meeting the requirements of both the second and third rules are illustrated by the case of Dorset County Council v Southern Felt Roofing Co Ltd (1990) 6 Const LJ 37, where a clause excluding liability for ‘loss or damage in respect of the Works … by fire’ was held to be wide enough to fall under the second rule. However, the fact it was so wide meant it could then be applied to fires that were not caused by negligence. This meant that it did not satisfy the third rule and the exclusion clause could not be relied on.

McKendrick (2013, p. 190) suggests that the second and third rules are contradictory. He also argues that they mean parties are unable to agree an exclusion clause that covers both negligent and other types of damage. The House of Lords, in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349, did emphasise the importance of giving effect to the parties’ intentions. Lord Bingham (at p. 367) stated that there could be ‘no doubting’ the general authority of the Canada Steamship Lines Ltd rules. However, he stated that they should be seen as giving ‘helpful guidance on the approach to interpretation and not laying down a code’.

In many cases, clauses excluding negligence are now covered by legislation on exclusion clauses (see Section 5.1). Therefore, a party seeking to rely on such a clause may have to show that it is valid both at common law and under the relevant legislation.

3.2 The contra proferentem rule

This rule states that if there is any doubt about the meaning or scope of an exclusion clause, the ambiguity should be resolved against the party seeking to rely on the exclusion clause. It is the other party who is given the benefit of the doubt.

An extreme example of this is given in Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71.

Box 5 Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71

The defendant agreed to repair Mr Hollier’s motor car. While at the defendant’s garage, the car was damaged in a fire caused by the defendant’s negligence. The defendant sought to rely on a clause stating, ‘The company is not responsible for damage caused by fire to customers’ cars on the premises’. The Court of Appeal held that the clause was not incorporated into the contract but, in any event, it was not clear enough to exclude the defendant’s liability. Lord Justice Salmon (at p. 81) stated:

The ordinary man would I think say to himself: ‘Well, what they are telling me is that if there is a fire due to any cause other than their own negligence they are not responsible for it.’ To my mind, if the defendants were seeking to exclude their responsibility for a fire caused by their own negligence, they ought to have done so in far plainer language than the language here used.

More recently, the courts have emphasised the need to avoid what could be termed as ‘illegitimate hostile construction’ rather than a ‘legitimate strict construction’ in cases such as George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 (Furmston, 2017, Chapter 6). Legislation in this area has arguably lessened the need for such judicial interventions (see Section 4 onwards).

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Figure 7 A different type of hostile construction!

3.3 Privity of contract

In some cases issues have arisen over whether someone who is not a party to the contract can rely on an exclusion clause contained in it. At common law the doctrine of privity usually prevents a third party from relying on the terms of a contract.

The original position in relation to exclusion clauses was confirmed by the House of Lords in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, where the defendant (which supplied workpeople to load and unload ships) was sued for damages resulting from its negligent handling of goods. Lord Reid (at p. 473) stated:

Although I may regret it, I find it impossible to deny the existence of the general rule that a stranger to a contract cannot in a question with either of the contracting parties take advantage of provisions of the contract, even where it is clear from the contract that some provision in it was intended to benefit him.

Therefore, the defendant could not take advantage of an exclusion clause in the contract between the owner of the goods and the owner of the ship.

Following Scruttons, there were a number of different devices employed in cases to try and avoid this decision. However, the passing of the Contracts (Rights of Third Parties) Act 1999 means that, in many such cases, third parties now rely on s1(6) of this Act. It states that a third party can rely on an exclusion clause, providing the other requirements of the Act are met.

3.4 Fundamental breaches

McKendrick (2013, p. 193) defines a fundamental breach of contract as one, which either:

  • breaches a fundamental term of the contract (one which goes to the root of the contract or is part of its essential character), or
  • involves a deliberate refusal to perform obligations under a contract, or
  • has especially serious consequences for the other party.

For a number of years it was unclear what approach should be taken where one party to a contract was seeking to rely on an exclusion clause to avoid liability for a fundamental breach of contract. However, in the case of Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, the House of Lords held that it was possible to apply an exclusion clause where there had been a fundamental breach, but this would depend on the construction of the contract. McKendrick (2013, p. 193) suggests that the more serious the breach, or the consequences of the breach, the less likely it is that the courts will interpret the exclusion clause as applying to the breach.

Activity 4 What does the clause cover?

You should allow yourself 15 minutes to do this activity.

Match the rule, which determines what a clause covers, with the correct description of it.

Using the following two lists, match each numbered item with the correct letter.

  1. A clause must clearly indicate the type and extent of the liability it is excluding.

  2. Any doubt is resolved against the person seeking to rely on the exclusion clause.

  3. A third party can only benefit from an exclusion clause in very limited circumstances, unless the Contracts (Rights of Third Parties) Act 1999 applies.

  4. Whether an exclusion clause applies depends on the construction of the contract.

  • a.Privity of contract

  • b.Fundamental breach

  • c.Contra proferentem rule

  • d.Use of clear words

The correct answers are:
  • 1 = d
  • 2 = c
  • 3 = a
  • 4 = b

So far in this course we have been examining the common law (case law) which has produced the rules dealing with incorporation of the exclusion clause and the interpretation of the clause. We have seen that at common law inequality of bargaining power, in itself, is not a ground for invalidating such a clause any more than it is a ground for invalidating a contract as a whole. However, with legislative intervention, in particular with the coming into force of the Consumer Rights Act 2015, the position is different.

4 The role of legislation

There has been a growing recognition of consumer rights in the twentieth and twenty-first centuries. This has resulted in the emergence of a variety of consumer protection legislation. With the coming into force of the Consumer Rights Act 2015, which applies to consumer contracts made on or after 1 October, 2015, the legislative arrangements have changed significantly from those you may find in text books. There are now only two key pieces of legislation governing exclusion clauses. One governs business-to-business contracts (where all parties to the contract are in business). The other captures all situations where one, or more, of the parties is contracting as a consumer. As a result, you should take a binary (two alternative) approach when determining which piece of legislation might apply to render an exclusion clause either, wholly, or in part, ineffective.

The two principle legislative controls on unfair contract terms or notices and exclusion clauses are:

  1. The Unfair Contract Terms Act 1977 (UCTA 1977) – this general regime covers contracts including business-to-business contracts, but not consumers.
  2. The Consumer Rights Act 2015. As the short title indicates this applies to all contracts, entered into on or after 1 October 2015, in which one of the parties is a consumer.

The CRA 2015 came into force on 1 October 2015 and replaced the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999). However, it is necessary to briefly consider UTCCR 1999 to understand the issues the CRA 2015 is designed to resolve.

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Figure 8 Early consumer rights champion and OU founder, Lord Young of Dartington

5 The Unfair Contract Terms Act 1977 (UCTA 1977)

The introduction to UCTA 1977 states that it is:

An Act to impose further limits on the extent to which under the law of England and Wales and Northern Ireland civil liability for breach of contract, or for negligence or other breach of duty, can be avoided by means of contract terms and otherwise, and under the law of Scotland civil liability can be avoided by means of contract terms.

As a result of the amendments set out in Schedule 4 of CRA 2015, its provisions only apply to business-to-business contracts. Parts 1 and 3 of UCTA 1977 apply to England and Wales. Schedule 1 sets out a number of types of contracts that the key sections in part 1 do not apply to. These include (among others) insurance contracts, contracts relating to interests in land and contracts relating to intellectual property (such as patents and trademarks).

The key sections in relation to exclusion clauses in business-to-business contracts are ss2–7. In these, the term ‘liability’ is defined as ‘business liability’ (other than in s6 of UCTA 1977, as discussed later).

Box 6 What is ‘business liability’?

Business liability is defined in s1 (3) of UCTA 1977 as:

… liability for breach of obligations or duties arising –

  • a.from things done or to be done by a person in the course of a business (whether his own business or another’s); or
  • b.from the occupation of premises used for business purposes of the occupier.

Section 14 states that the term ‘business’ includes professions and the activities of any government department, or local or public authority.

In other words, UCTA 1977 deals with situations where a business is contracting with another business. It does not apply where two non-businesses are entering into a contract.

5.1 Liability for negligence

The common law treatment of clauses excluding liability for negligence was discussed in Section 3.1. Section 2(1) of UCTA 1977 states that an exclusion clause cannot be used to exclude or restrict business liability for death or personal injury caused by negligence. Section 1(1) (a) defines negligence as the breach of an obligation or duty ‘to take reasonable care or exercise reasonable skill’.

Section 2 of UCTA 1977 does not apply to a term in a ‘consumer contract’ nor to a ‘consumer notice’ within the meanings of these expressions in the CRA 2015, but it refers to the provisions governing the fairness of these terms or notices provided by the 2015 Act.

To exclude liability for any other loss or damage caused by negligence, the term would have to pass a ‘reasonableness’ test (s1(2)).

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Figure 9 A disclaimer sign

5.2 Liability for breach of contract

Section 3 of UCTA 1977 regulates exclusion clauses seeking to exclude or limit liability for breaches of contract. This section deals with a situation where one contracting party is dealing with the other contracting party’s standard terms. The section governs the requirements of reasonableness in business contracts. For example, section 3(2) (a) states:

  1. As against that party, the other cannot by reference to any contract term –
    • a.when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
    • b.claimed to be entitled –
    • i.to render a contractual performance substantially different from that which was reasonably expected of him, or
    • ii.in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as the contract term satisfies the requirement of reasonableness. To understand what may be reasonable in a commercial contract you would need to consider S.11 of UCTA and the guidelines in Schedule 2 of this Act.

Please note that this section of UCTA 1977 does not apply to a term in a consumer contract. Instead, section 62 of the Consumer Rights Act 2015 deals with an unfair term and considers any significant imbalance caused by the position of the (consumer and trader) relationship and whether this would be a detriment to the consumer.

5.2.1 When does section 3 apply?

As outlined, above, it will apply to commercial contracts (not consumer contracts) where one party deals on the other's written standard terms of business in which the clause seeks to exclude the other’s liability for breach. The expression … ‘deals on the other's written standard terms of business’ is not defined or explained by the UCTA 1977, but case law seems to indicate that it is that ‘standard terms of business’ would embrace the standard terms of a third party, e.g. a trade association, incorporated into the contract by reference or by course of dealing: African Export-Import Bank v Shebah Exploration and Production Co Ltd [2016] EWHC 311 (Comm).

Where negotiations have taken place around standard terms before the contract is made, and amendments agreed, it is a question of fact whether one party can be said to have dealt on those standard terms. However, the intention of the provision is that it should apply where there is no breach of contract at all, but where the obligation as to performance has been limited or qualified.

The burden of proving a dealing on standard terms lies with the party who alleges s. 3 UCTA 1977 applies: British Fermentation Products Ltd v Compair Reavell Ltd (1999) 66 Const. L.R. 1.

There are no definitions given to explain what ‘on the other’s standard written terms of business’ and ‘deals’ mean. McKendrick (2013, p. 199) identifies four questions that may arise:

  1. Does the term ‘written’ exclude contracts that are part-written and part-verbal?

    To date, there has not been any case law on this issue.

  1. How much change to the terms is needed before they are no longer ‘standard’?

    In Chester Grosvenor Hotel Co Ltd v Alfred McAlpine Management Ltd (1991) 56 BLR 115, it was stated that the term ‘standard’ required a party to regard them as their standard terms and ‘habitually contract on those terms’. It was a question of ‘fact and degree’ as to the extent these had been altered on this or previous occasions (per Judge Stannard at p. 131).

  1. What does the word ‘deals’ mean?

    The word ‘deals’ has been held to mean ‘makes a deal’ so any negotiations over the terms prior to forming the contract are irrelevant if the standard terms are then used. However, if these negotiations have led to a significant difference in the terms, then the parties are not dealing on the standard terms (Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC), [2011] 1 All ER (Comm) 550).

  1. What does the word ‘other’s’ mean?

    In some industries, such as construction, it is common practice for organisations to produce model forms of contract for parties to use. It is not clear whether section 3 applies to standard terms produced by third parties. In the case of British Fermentation Products Ltd v Compair Reavell Ltd [1999] 2 All ER (Comm) 389, it was held that it did not as the model form used was not the defendant’s own standard terms.

Described image
Figure 10 A model form of contract

5.2.2 What is the effect of s3?

Section 3(2) states:

As against that party, the other cannot by reference to any contract term –

  • a.when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
  • b.claim to be entitled –
    • i.to render a contractual performance substantially different from that which was reasonably expected of him, or
    • ii.in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

(UCTA 1977)

In other words, where section 3 applies, a clause excluding or limiting liability for breach of contract must pass a ‘reasonableness’ test.

5.3 Section 6 of UCTA 1977

Section 6(1) prevents the exclusion of implied undertakings as to title in contracts for sale and hire purchase in any contract. These terms are implied by s. 12 of the Sale of Goods Act 1979 in relation to contracts for the supply of goods.

Section 6 (1A) disapplies the provisions relating to consumers. As amended it prevents a trader excluding the implied rights under the Sale of Goods Act 1979 (see Section 2.2 of Unit 5). However, s. 6 1A (b) allows these statutory provisions to be excluded in a commercial contract if the exclusion clause is deemed to be reasonable.

Section 7 imposes similar restrictions to s6 in relation to contracts not classed as for sale or hire purchase. For example, non-consumer contracts for the provision of services and materials under the Supply of Goods and Services Act 1982.

5.4 The ‘reasonableness’ test

As can be seen, a number of terms under UCTA 1977 are only valid if they pass a ‘reasonableness’ test.

Described image
Figure 11 What is ‘reasonable’?

Activity 5 What is the test for reasonableness?

You should allow yourself 1 hour and 20 minutes to do this activity.

Using legislation.gov.uk (UK Government, 2015a) or an internet search engine, find and read s. 11 and schedule 2 of UCTA 1977. Based on these, give a definition of the test for ‘reasonableness’ in contract terms in your own words. You should use no more than 250 words.

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Comment

The starting point for the ‘reasonableness’ test is s11(1), which looks at the circumstances that were (or ought reasonably to have been) known, or in the contemplation of the parties, at the time the contract was entered into. It asks whether, having regard to these circumstances, the term was a fair and reasonable one to include. In determining this, the court must take into account the factors listed in schedule 2 (s11(2)). These include the strength of the parties’ bargaining positions, any inducements given, what the customer knew (or ought reasonably to have known) about the term, whether an affected term could reasonably have been complied with and whether the goods were customised for the customer. Under s11(4), when a limitation clause has been used (see Box 1), then the resources available to meet the liability and the availability of insurance are also considered. Under s11(5), the burden of proof is on the party arguing that the term is reasonable.

6 Unfair terms provisions of Consumer Rights Act 2015

Whereas UCTA 1977 deals with commercial contracts, this section of the course will deal with consumer contracts. The materials that follow explain how the Consumer Rights Act 2015 has absorbed the various rules under the Unfair Contract Terms Act 1977 and the Unfair Terms in Contracts Regulations 1999 (The UTCCRs) and produced a single piece of legislation that governs exclusion clauses in consumer contracts.

6.1 When does CRA 2015 apply to exclusion clauses?

The CRA 2015 extends the protection given to consumers under the UCTCCR 1999. It does this in several ways:

  • By enlarging the category of persons protected by the requirements of fairness and plain, intelligible language by imposing a requirement that any exclusion be ‘prominent’ as well as transparent. This effectively confirms the contra proferentem rule discussed in Section 3.2
  • By broadening the definition of ‘consumer’ to an individual ‘acting for purposes that are wholly or mainly outside that individual's trade’: ss. 2(3) and 76
  • By including individually negotiated terms under the test of unfairness, whereas as before the Act they were excluded, and
  • By imposing an additional requirement of fairness to terms relating to the main subject matter of the contract or the price/quality ratio in response to comments made by the Supreme Court in the Abbey National Plc v The Office of Fair Trading [2009] UKSC 6; [2010] 1 A.C. 696
  • By expanding an ‘indicative list’ of terms which may be unfair and which are thereby specifically excluded from the possible application of the exemption for terms on the main subject matter and relating to the price.

The CRA 2015 only applies to contracts concluded between a trader and a consumer (s. 2). These terms are defined in s. 2 CRA 2015.

A ‘trader’ means a person acting for purposes relating to that person's trade, business, craft or profession, whether acting personally or through another person acting in the trader's name or on the trader's behalf.

A ‘consumer’ means an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession.

One consequence of using the term ‘trader’ is that it avoids the implication that contracts by which consumers supply goods or services to traders are necessarily excluded from the controls on unfair contract terms. Thus avoiding the issues that arose in R&B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 All ER 847.

There is a burden of disproof on the trader. In other words if a party is asserting they are a consumer entitled to the protections in the Act, the burden is on the trader to prove that the other party is not a consumer.

6.2 The test of Unfairness in Consumer Contracts

There is an overarching requirement under the Act that all terms in a contract with a consumer be fair:

Section 64 (2) CRA 2015 states:

A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer.

To that end the Act provides that:

Whether a term is fair is to be determined –

  • a.taking into account the nature of the subject matter of the contract, and
  • b.by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.

Section 61(4) of the Act provides that Pt 2 of the Act applies to a notice (a ‘consumer notice’) to the extent that it:

  • a.relates to rights or obligations as between a trader and a consumer, or
  • b.purports to exclude or restrict a trader's liability to a consumer.

For this purpose, it does not matter:

Whether the notice is expressed to apply to a consumer, as long as it is reasonable to assume it is intended to be seen or heard by a consumer.

For these purposes, ‘notice’ is defined to include ‘an announcement, whether or not in writing, and any other communication or purported communication’. On the other hand, in keeping with the Act's definition of ‘consumer contract’, the Act excludes from the definition of ‘consumer notice’, a notice relating to rights, obligations or liabilities as between an employer and an employee.

The effects of a finding by a court that a term of a consumer contract is unfair under the CRA 2015 is that it is not enforceable. However, this does not prevent the consumer from relying on the term or notice if the consumer chooses to do so.

Schedule 2 Part 1 of CRA 2015 contains a ‘grey list’ of 20 terms, which may be considered to be unfair. The terms on this list are not automatically unfair, but it is likely that in most circumstances they will be viewed as unfair. It is also possible for other terms not on the list to be held to be unfair.

Activity 6 The ‘grey list’

You should allow yourself 30 minutes to do this activity.

[Reader] Read schedule 2 of Part 1 of CRA 2015

In your own words, give two examples of terms which are on the ‘grey list’.

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Discussion

There are 20 different terms listed and your answer will depend on the two you have chosen.

6.3 The core exemption

Certain terms are exempt from the test for fairness. Section 64 provides that:

A term of a consumer contract may not be assessed for fairness … to the extent that–

  • a.it specifies the main subject matter of the contract, or
  • b.the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it.

Section 64 further provides that this excludes a term from an assessment only if it is ‘transparent and prominent’. For this purpose:

  • 64(3) A term is transparent … if it is expressed in plain and intelligible language and (in the case of a written term) is legible.
  • 64(4) A term is prominent … if it is brought to the consumer's attention in such a way that an average consumer would be aware of the term.
  • 64(5) In subsection (4) ‘average consumer’ means a consumer who is reasonably well-informed, observant and circumspect.

The exclusion which s. 64 provides is specified as not applying to a term in the list of ‘indicative terms’ provided by Pt 1 of Schedule 2.

The indicative terms are known as the core exemptions. The rationale for this exemption is that such key terms are known to the consumer who is then able to make an informed choice whether or not to accept them. Market forces should also play a part in ensuring such key terms are fair – if they are not, consumers will take their business elsewhere (Law Commission, 2012, para. 4.22).

6.3.1 Challenges to the core exemption

Described image
Figure 13 Money

Despite the rationale behind the core exemption, its application proved to be controversial in practice, particularly in relation to bank changes.

Activity 7 Bank charges and the core exemption
You should allow yourself 30 minutes to do this activity.
  • a.Watch this video clip from February 2008 and answer the following questions about the case being discussed.

Note: although this case was decided pre-CRA 2015 it is still good law in relation to the indicative list in the Act.

Download this video clip.Video player: Clip 1 on
Skip transcript: Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

Transcript: Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

[What is the background to this case?]
[Andrew Ellson, Personal finance editor, The Times]
Andrew Ellson
There’s been a consumer revolt over bank charges and bank overdraft charges. Many of the high-street banks have been charging up to £40 for these so-called delinquent fees when customers go over their overdraft limits. There was numerous campaigns started online which are claiming that these charges, not only were they unfair, they were unlawful, and that you should – and they were encouraging consumers to approach the banks and ask for refunds of these charges.
[What is the case about?]
The test case which starts this week is not actually about whether overdraft charges are fair. It’s a fairly technical legal issue. It’s about whether the unfair terms in consumer contract regulations law applies.
If this law does apply to these charges, then the OFT can argue that charges should only be levelled as the administration costs, which is what these contract regulations mean. Because if the bank wins the case, it means that they can carry on charging these fees of, as they do at the moment, of up to £40.
[Who is likely to win?]
There’s been questions raised over the competency of the Office of Fair Trading and the strength of their legal case. At this stage, it’s still up in the air. If I had to guess, sadly, I wouldn’t be surprised if the banks win this.
End transcript: Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696
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  • i.Who was the case being brought by?

a. 

The European Union


b. 

The UK Government


c. 

The Office of Fair Trading


The correct answer is c.

Comment

The Office of Fair Trading (OFT) brought a test case against Abbey National plc, six other banks and one building society. Under UTCCR 1999, the Director General of Fair Trading was given powers to try to prevent the continued use of unfair terms.

  • ii.What type of charges does it relate to?

a. 

Loan charges


b. 

Overdraft charges


c. 

Deposit account charges


The correct answer is b.

Comment

The case related to charges made when bank customers exceeded their agreed overdraft limit.

  • iii.Based on your knowledge of CRA 2015, what issue does the case involve?

a. 

What is a trader?


b. 

Transparency


c. 

Illegible terms?


The correct answer is b.

Comment

The issue was whether the OFT could investigate the fairness of the bank charges, or whether they fell under the core exemption as being an assessment of ‘the adequacy of the price or remuneration’.

In the earlier case of Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481 the House of Lords had held that a term in the defendant’s standard conditions for consumer loans did not fall within the core exemption, but was fair in any event. The suggestion was that the scope of the core exemption should be construed narrowly (Furmston, 2017, Chapter 6).

  • b.The case being discussed was heard by the Supreme Court in June 2009 as Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696. Now watch this video clip of a statement given by Lord Phillips, which explains the Supreme Court’s judgment. In no more than 100 words, summarise the decision.
Download this video clip.Video player: Clip 2 on
Skip transcript: Clip 2 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

Transcript: Clip 2 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

Lord Phillips
This appeal was not about whether bank charges for those who overdraw on their current accounts are fair. It was about a much narrower issue. On what basis can the OFT – that is, the Office of Fair Trading – investigate the fairness of those charges.
The relevant regulation says that the OFT is not allowed to assess the fairness of a charge by the test of whether or not it represents a fair price or remuneration for the goods or services provided in exchange. The Court of Appeal had held that this exclusion only applied to core terms and that overdraft charges did not constitute core terms.
The Supreme Court did not agree with this approach. We have held that overdraft charges form part of the price or remuneration for the package of services that the banks provide to their current account customers. This means that the OFT cannot consider whether, in imposing those charges, the banks are giving fair value for money.
It may still be open to the OFT to assess the fairness of the charges by other criteria. For these reasons, the appeal is allowed. The order will be in the terms agreed by counsel.
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Comment

In this case, the court of first instance and the Court of Appeal had both held that reg 6(2) only applied to core terms. The charges were not viewed as part of the main subject matter of the contract and were, therefore, subject to review. However, the Supreme Court held that the charges formed part of the price or remuneration for the package of services the banks provided for their current account customers and, therefore, did fall under the core exemption.

There is one key limitation to the Supreme Court’s decision in Abbey National:

Regulation 6(2) (b) did not state that a court cannot review the price, but that it cannot review ‘the adequacy of the price as against the goods or services in exchange’.

At first instance, the question arose as to whether Regulation 6(2) (b) excluded a price term from any assessment of fairness (the ‘excluded terms’ construction) or whether it excludes only an assessment relating to the adequacy of the price (the ‘excluded assessment’ construction). Mr Justice Andrew Smith decided in favour of the excluded assessment construction. This finding was not challenged on appeal. The question therefore became not whether the OFT was entitled to assess the fairness of the relevant charges but whether, in doing so, it was entitled to take into account ‘the adequacy of the price or remuneration, as against the goods or services supplied in exchange’.

(Law Commission, 2012, paras 5.55–5.56).

This view is reflected directly in s.64 (1) (b) of the CRA 2015 which excludes from the assessment of the term ‘the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied’ under the contract.

Despite the Abbey National decision, there has been continued uncertainty over the scope of the core exemption. In Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch), [2011] ECC 31, the High Court considered terms requiring gym users to remain as members for a minimum period. Justice Kitchin concluded the terms were part of the main subject matter of the contract, but could still be assessed for fairness, providing that assessment related to the consequences for early termination and not to the definition of the subject matter.

The Court of Justice of the European Union (ECJ) ruled in Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt (Case C-472/10) [2012] 3 CMLR 1, where the ECJ had stated (at para. 23) that:

… the assessment of the unfair nature of terms was to relate neither to the definition of the main subject-matter of the contract nor to the adequacy of the price and remuneration … However, this exclusion could not apply to a term relating to a mechanism for amending the prices of the services provided to the consumer.

In Foster-Burnell, the County Court held that the fact the defendant had increased the overdraft charges meant that Hatóság applied and the core exemption under reg 6(2) was not applicable. The increased charges were held to be unfair under reg 5(1). This case does not set a binding precedent and has been appealed.

7 The Consumer Rights Act 2015 (‘the Act’) in general

So far we have been examining the effect of the Act in relation to effectiveness of exclusion clauses. In 2005, the Law Commission and the Scottish Law Commission produced a report on unfair terms in contracts, recommending that provisions affecting consumers in UCTA 1977 and UTCCR 1999 should be replaced by a single Act of Parliament. In 2013, these recommendations were reviewed and updated to become part of the CRA 2015. In this section there is an opportunity to research the Act’s impact on exclusion clauses.

It is worthwhile reflecting on the purposes behind the Act by considering its legislative history.

Described image
Figure 14 The Law Commission

Activity 8 The impact of the Act

You should allow yourself 2 hours and 45 minutes to do this activity.
  • a.Using a search engine of your choice find and read the Law Commission’s summary paper entitled Unfair terms in consumer contracts: Advice to the Department of Business, Innovation and Skills (Law Com Summary, 2013). Create a spider diagram to set out the key changes recommended in this paper.

Comment

The paper recommended the following changes:

The core exemption

  • The price or main subject matter terms should be exempt from review only if they are transparent and prominent, with definitions given of both these words.
  • The amount of the price should be exempt from review (subject to being transparent and prominent) but other aspects of price terms, such as timing, could be assessed for fairness (the excluded assessment construction).
  • The main subject matter exemption applies to all aspects of the term (subject to being transparent and prominent).

The grey list

  • The grey list should be retained and three additions made. All terms on it should be assessable for fairness.

Other terms

  • The Bill will apply to negotiated terms as well as standard forms of contract.
  • All terms are required to be ‘transparent’ and whether or not a term is transparent is an important factor to consider in whether it is unfair.
  • Any terms excluding or restricting liability for causing death or personal injury by negligence will be considered unfair.
  • As well as contract terms, notices which exclude a trader’s liability to a consumer will be covered. For example, end-user agreements for computer software.

Scope

  • A new definition of a consumer will be introduced.
  • All references to ‘dealing as a consumer’ will be removed from UCTA 1977 so it will only apply to business-to-business contracts.
  • The courts will be able to introduce questions of fairness of their own motion (without the argument being raised by one of the parties).
  • Terms will be exempt from review if they merely reflect the existing law.
  • b.Now you have researched the original proposals for reform, you need to find out to what extent these were implemented by the introduction of the 2015 Act.

    This video clip shows the Act being introduced to Parliament for its second reading as a Bill. The UK Parliament’s website (2015) gives the most up-to-date information on the progress of Bills. You can also find information on the relevant government department’s web page. In this case, it is the Department for Business, Innovation and Skills (UK Government, 2015b).

    Using these (and other appropriate) legal resources, answer the following questions.

Download this video clip.Video player: Introduction of the Consumer Rights Bill for its first reading
Skip transcript: Introduction of the Consumer Rights Bill for its first reading

Transcript: Introduction of the Consumer Rights Bill for its first reading

Speaker
The context in which we’re bringing in this legislation is a determination to build and enhance a climate of trust within which British business operates, indeed restoring trusts, which is often needed in markets and market transactions.
The consumer law reforms, which we’re talking about today, lie at the heart of a crusade towards trusted business, trusted capitalism, and we see it as part of an overarching overhaul of UK competition and consumer legislation.
We can’t expect consumers to be confident, when they don’t understand their rights or when they find it hard to know where they’re entitled to if something goes wrong, and unclear rights and remedies mean that businesses also find it costly to understand their responsibilities.
We seek in this legislation to address those concerns, because we’re here, setting out in one place key consumer rights, what consumers are entitled to.
It covers goods, services, and for the first time, digital content, such as ebooks and software. We estimate on an impact assessment a value of something at the order of 4 billion over a 10-year period.
Of course, it involves strengthening statute and does involve regulation, but overall, this is a deregulatory measure, and it is positive in its impact on business. It makes it easier for business to understand what should happen when a problem arises, stops problems escalating with all the associated costs and development of disputes.
It helps to create a level playing field for business, so it is pro-consumer, but it’s also pro-business.
End transcript: Introduction of the Consumer Rights Bill for its first reading
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  • i.Which part of the CRA 2015 deals with unfair contract terms?
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Comment

Part 2 deals with unfair terms. Part 1 of schedule 2 contains the amended ‘grey list’. The definition of a ‘consumer’ is given in s2(3) of part 1.

  • ii.Read the parts of the CRA 2015 which deal with unfair contract terms. Using the Comment to Part A of this activity as a checklist, have all of the Law Commission’s recommendations been implemented? Are there any other key changes?
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Comment

The Law Commission’s proposals have all been incorporated into the CRA 2015. One change is that it is the ‘appropriateness’, not the ‘amount’ of the price that is exempt for review under the core exemption (s64(1)(b) of the CRA 2015).

The definition of a consumer is given in s2(3) of the CRA 2015 as:

… an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession.

The test for unfairness in regs 5(1) and 6(1) of UTCCR 1999 is reused by the CRA 2015 (ss62(4) and (5) of the CRA 2015). As in reg 8 of UTCCR 1999, where a term is held to be unfair (and therefore invalid) the rest of the contract continues as far as is practicable (s67 of the CRA 2015).

8 Getting the balance right

It is important that unfair terms legislation continues to fulfil its primary role, which is to protect consumers against unfair surprise. Unfair terms legislation cannot, however, solve all the problems of the market place and it should not protect consumers against the consequences of their own poor decisions.

(Law Commission, 2012, para. 3.4)

This quotation demonstrates the difficult balance that the courts and Parliament have to strike between protecting the rights of consumers and upholding the traditional notion of freedom of contract. This notion views the role of the law as being to uphold the obligations the parties have agreed without trying to protect either party or rewrite the contract in any way. In the video clip that was watched relating to the CRA 2015, Vince Cable (as the then Business Secretary) was keen to emphasise that the CRA 2015 was ‘pro-consumer but also pro-business’, presumably to avoid accusations that the balance has swung too far in favour of consumers. The diagram in Box 7 demonstrates the full range of protection available to both consumers and businesses.

Please note that this diagram was prepared prior to the coming into force of the CRA 2015. The CRA 2015 has repealed s5 of UCTA 1977.

Box 7 Protection from exclusion clauses

Based on a diagram from Mulcahy (2008, p. 172).

Activity 9 Balancing freedom of contract and consumer protection

You should allow yourself 45 minutes to do this activity.
  • a.Based on this course and the diagram in Box 7, do you think the current balance between freedom to contract and consumer protection is appropriate?
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Comment

There is no one ‘right’ answer to this question. Your answer may depend on a number of factors, including your analysis of the approach taken by the courts and how legislative provisions apply to both business and consumer contracts.

  • b.The academic, Ben-Shahar, states that the reality for consumers entering into standard form contracts is:

Real people don’t read standard form contracts. Reading is boring, incomprehensible, alienating, time consuming, but most of all pointless. We want the product, not the contract. Besides, lots of people bought the product or the service along with the same contract and seem happy enough, so we presume that there must be nothing particularly important buried in the contract terms.

And what if they did read? Surely, there is nothing they can do about the bad stuff they know they will find. Are they going to cross out the unfavourable term? Are they going to call some semi-automatic ‘customer service agent’ and negotiate? Other than lose the excitement about the deal and maybe walk away from it (to what? A better contract?), there is not much individuals can do. Dedicated readers can expect only heartache, which is a very poor reward for engaging in such time-consuming endeavor. Apart from an exotic individual here or there, nobody reads.

(2009, p. 1)
  • i.Do you agree with Ben-Shahar’s argument?
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Comment

In 2010, the video games retailer, Gamestation, played an April Fool’s joke on its customers and amended the standard terms and conditions on its website to include a term saying it ‘legally owned the soul of each customer who bought from them’. Customers were given an option to opt-out of that term (and claim a £5.00 voucher). Only 12 per cent of customers did so, suggesting the remaining 88 per cent had not read the standard terms before their purchase (Richmond, 2010). This does suggest that Ben-Shahar’s argument is valid.

  • ii.If Ben-Shahar is correct, is there anything that can be done to protect consumers?
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Comment

Ben-Shahar (2009) argues that many legal measures have focused on improving the opportunities to read, and the readability of, such contracts. He suggests that non-legal methods should be used such as a ratings system for contracts (similar to those used by review websites in relation to hotels or restaurants). He also suggests using labelling, rather like on food products, to indicate key features of a contract.

Conclusion

The Consumer Rights Act demonstrates that the treatment of exclusion clauses remains an important, and sometimes controversial, area in contract law. The protections put into place by the common law have now been supplemented by substantive legislation in this area. The tensions between freedom of contract and consumer protection are clearly illustrated by such clauses. There is also the question of whether legal methods alone can ever fully protect consumers.

You should now be able to:

  • discuss the purpose and common uses of exclusion clauses
  • identify whether an exclusion clause has been incorporated into a contract and what is covered by its wording
  • assess the impact of domestic and European legislation on an exclusion clause
  • analyse and evaluate the balance the law strikes between freedom of contract and consumer protection.

If you are unsure about any of these, go back and reread the relevant section(s) of this course.

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References

Books
Beatson, J., Burrows, A. and Cartwright, J. (2010) Anson’s Law of Contract, 29th edn, Oxford, Oxford University Press.
Furmston, M. (2017) Cheshire, Fifoot and Furmston’s Law of Contract, 17th edn, Oxford, Oxford University Press.
McKendrick, E. (2013) Contract Law, 10th edn, Basingstoke, Palgrave Macmillan.
Mulcahy, L. (2008) Contract Law in Perspective, 5th edn, Abingdon, Routledge–Cavendish.
Wheeler, S. and Shaw, J. (1994) Contract Law: Cases, Materials, and Commentary, Oxford, Oxford University Press.
Articles
Ben-Shahar, O. (2009) ‘The myth of the “opportunity to read” in contract law’, European Review of Contract Law, vol. 5, no. 1, pp. 1–28.
Hanly, C. (2005) ‘The decline of civil jury trial in nineteenth-century England’, Journal of Legal History, vol. 26, no. 3, pp. 253–78.
Richmond, S. (2010) ‘Gamestation collects customers’ souls in April Fools gag’, The Telegraph, 17 April 2010 [Online]. Available at http://blogs.telegraph.co.uk/technology/shanerichmond/100004946/gamestation-collects-customers-souls-in-april-fools-gag/ (Accessed 19 February 2015).
Cases
Alison (J Gordon) Ltd v Wallsend Slipway and Engineering Co Ltd (1927) 43 TLR 323
African Export-Import Bank v Shebah Exploration and Production Co Ltd [2016] EWHC 311 (Comm)
British Fermentation Products Ltd v Compair Reavell Ltd [1999] 2 All ER (Comm) 389
Canada Steamship Lines Ltd v The King [1952] AC 192
Chapelton v Barry Urban District Council [1940] 1 KB 532
Chester Grosvenor Hotel Co Ltd v Alfred McAlpine Management Ltd (1991) 56 BLR 115
Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805
Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481
Dorset County Council v Southern Felt Roofing Co Ltd (1990) 6 Const LJ 37
EE Caledonia Ltd (formerly Occidental Petroleum (Caledonia) Ltd) v Orbit Valve Co Europe plc [1994] 1 WLR 1515
Foster-Burnell v Lloyds TSB Bank plc (Taunton County Court, 23 June 2014)
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349
Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71
Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433
J Spurling Ltd v Bradshaw [1956] 2 All ER 121
L’Estrange v F Graucob Ltd [1934] 2 KB 394
McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430
Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt (Case C-472/10) [2012] 3 CMLR 1
Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696
Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch), [2011] ECC 31
Olley v Marlborough Court Ltd [1949] 1 KB 532
Parker v South Eastern Railway Co (1877) 2 CPD 416
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Scruttons Ltd v Midland Silicones Ltd [1962] AC 446
Tekdata Interconnections Ltd v Amphenol Ltd [2009] EWCA Civ 1209, [2010] 2 All ER (Comm) 302
Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163
Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC), [2011] 1 All ER (Comm) 550
Legislation
Common Law Procedure Act 1854 c 125
Consumer Rights Act 2015 c 15
Contracts (Rights of Third Parties) Act 1999 c 31
County Courts Act 1846 c 95
Sale of Goods Act 1979 c 54
Senior Courts Act 1981 c 54
Supply of Goods and Services Act 1982 c 29
The Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994/3159)
The Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) repealed
Unfair Contract Terms Act 1977 c 50
International instruments
Directive 1993/13/EEC of the European Council of 5 April 1993 on unfair terms in consumer contracts OJ 1993 L 95/29
Other sources
British Gas (2015) Standard – Terms and Conditions [Online]. Available at www.britishgas.co.uk/products-and-services/gas-and-electricity/our-energy-tariffs/standard/terms.html (Accessed 26 May 2015).
Law Commission Unfair terms in contracts (Law Com No 292, 2005).
Law Commission Unfair terms in consumer contracts: A new approach (Law Com Issues Paper, 2012).
Law Commission Unfair terms in consumer contracts: Advice to the Department of Business, Innovation and Skills (Law Com Summary, 2013).
UK Government (2015a) legislation.gov.uk [Online]. Available at www.legislation.gov.uk/ (Accessed 16 December 2015).
UK Government (2015b) Department for Business Innovation and Skills [Online]. Available at www.gov.uk/government/organisations/department-for-business-innovation-skills (Accessed 26 May 2015).
UK Parliament (2015) www.parliament.uk [Online]. Available at www.parliament.uk (Accessed 26 May 2015).

Acknowledgements

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Box 7: Adapted from Mulcahy (2008) Contract Law in Perspective, 5th edn, Oxford, Routledge-Cavendish

Text

Activity 2: Case: Parker v South Eastern Railway Co (1877) 2 CPD 416, courtesy of ICLR http://www.iclr.co.uk/

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