Contract terms and Representation

Statements made by the parties may be classified as terms or representations. Different remedies attach to breach of a term and to misrepresentation respectively In addition to the final contract, many statements may be made during the process of negotiation that often lead to the formation of a contract. It is important to be able to establish whether what has been written or said actually amounts to a contract term or whether it is simply a representation. Statements may be classified as terms or as representations. A representation is something which induces the formation of a contract but which does not become a term of the contract. The importance of the distinction is that different remedies are available depending on whether a term is broken or a representation turns out to be untrue. If something said in negotiations proves to be untrue, the party misled can claim for breach of contract if the statement became a term of the contract. If the pre-contract statement was merely a representation then the party misled can claim misrepresentation, resulting in a lesser remedy than for breach of contract. There are a number of factors that a court may consider when determining whether a statement is or is not a term. The court will consider when the representation was made to assess whether it was designed as a contract term or merely as an incidental statement. The court will also look at the importance the recipient of the information attached to it. Bannerman v White 1861 The facts: In negotiations for the sale of hops the buyer emphasised that it was essential to him that the hops should not have been treated with sulphur adding that, if they had, he would not even bother to ask the price. The seller replied explicitly that no sulphur had been used. It was later discovered that a small proportion of the hops (5 acres out of 300) had been treated with sulphur. The buyer refused to pay the price.

Decision: The representation as to the absence of sulphur was intended to be a term of the contract. Routledge v McKay 1954 The facts: The defendant, in discussing the possible sale of his motorcycle to the claimant, said on 23 October that the cycle was a 1942 model; he took this information from the registration document. On 30 October the parties made a written contract which did not refer to the year of the model and the purchaser had not indicated that the age of the cycle was of critical importance to him. The actual date was 1930. Decision: The buyer's claim for damages failed. The reference to a 1942 model was a representation made prior to the contract If the statement is made by a person with special knowledge it is more likely to be treated as a contract term. Dick Bentley Productions v Arnold Smith Motors 1965

The facts: The defendants sold the claimants a car which they stated to have done only 20,000 miles since a replacement engine and gear-box had been fitted. In fact the car had covered 100,000 miles since then and was unsatisfactory. Decision: The defendants' statement was a term of the contract and the claimants were entitled to damages. Oscar Chess v Williams 1957 The facts: The defendant, when selling his car to the claimant car dealers, stated (as the registration book showed) that his car was a 1948 model and the dealers valued it at 280 in the transaction. In fact it was a1939 model, worth only 175, and the registration book had been altered by a previous owner. Decision: The statement was a mere representation. The seller was not an expert and the buyer had better means of discovering the truth.

Express terms and implied terms

Terms in a contract are either express terms or implied.

Express terms
An express term is a term expressly agreed by the parties to a contract to be a term of that contract. In examining a contract, the courts will look first at the terms expressly agreed by the parties. An apparently binding legal agreement must be complete in its terms to be a valid contract. Scammell v Ouston 1941 The facts: The defendants wished to buy a motor-van from the claimants on hire-purchase. They placed an order 'on the understanding that the balance of purchase price can be had on hire-purchase terms over a period of two years'. The hire-purchase terms were never specified. Decision: The court was unable to identify a contract which it could uphold because the language used was so vague. It is always possible for the parties to leave an essential term to be settled by other means, for example by an independent third party.
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It may be agreed to sell at the open market price on the day of delivery, or to invite an arbitrator to determine a fair price. The price may be determined by the course of dealing between the parties. Where an agreement appears vague or incomplete, the courts will seek to uphold it by looking at the intention of the parties: Hillas & Co Ltd v Arcos Ltd 1932. If the parties use standard printed conditions, some of which are inappropriate, such phrases may be disregarded. Nicolene v Simmonds 1953 The facts: The claimant offered to buy steel bars from the defendant. A contract was made by correspondence, in which the defendant provided that 'the usual conditions of acceptance apply'. The defendant failed to deliver the goods and argued that there had been no explicit agreement. Decision: The words should be disregarded. The contract was complete without these words; there were no usual conditions of acceptance.

Implied terms
Implied terms are terms that are not expressly stated in the contract, but they are nevertheless part of the contract because there is an implication that they are terms in the contract.Terms may be implied by the courts, by statute or by custom. There are occasions where certain terms are not expressly adopted by the parties. Additional terms of a contract may be implied by law: through custom, statute or the courts to bring efficacy to the contract. Implied terms may override express terms in certain circumstances such as where they are implied by statute. An implied term can be defined as follows. 'A term deemed to form part of a contract even though not expressly mentioned. Some such terms may be implied by the courts as necessary to give effect to the presumed intentions of the parties. Other terms may be implied by statute, for example, the Sale of Goods Act.'

Terms implied by custom

The parties may enter into a contract subject to customs of their trade. Any express term overrides a term which might be implied by custom. Hutton v Warren 1836 The facts: The defendant landlord gave the claimant, a tenant farmer, notice to quit the farm. He insisted that the tenant should continue to farm the land during the period of notice. The tenant asked for 'a fair allowance' for seeds and labour from which he received no benefit because he was to leave the farm. Decision: By custom he was bound to farm the land until the end of the tenancy; but he was also entitled to a fair allowance for seeds and labour incurred. Les Affreteurs v Walford 1919 The facts: A charter of a ship provided expressly for a 3% commission payment to be made 'on signing the charter'. There was a trade custom that it should only be paid at a later stage. The ship was requisitioned by the French government and so no hire was earned. Decision: An express term prevails over a term otherwise implied by custom. The commission was payable on hire.

Terms implied by statute

Terms may be implied by statute. In some cases the statute permits the parties to contract out of the statutory terms. In other cases the statutory terms are obligatory, for example the protection given by the Sale of Goods Act 1979 to a consumer who buys goods from a trader cannot be taken away from him.

Terms implied by the courts

Terms may be implied if the court concludes that the parties intended those terms to apply to the contract. The Moorcock 1889 The facts: The owners of a wharf agreed that a ship should be moored alongside to unload its cargo. It was well known that at low water the ship would ground on the mud at the bottom. At ebb tide the ship settled on a ridge concealed beneath the mud and suffered damage.

Decision: It was an implied term, though not expressed, that the ground alongside the wharf was safe at low tide since both parties knew that the ship must rest on it. A term of a contract which is left to be implied and is not expressed is often something that goes without saying; so that, if while the parties were making their bargain an officious bystander were to suggest some express provision for it, they would say 'why should we put that in? That's obvious: This was put forward in Shirlaw v Southern Foundries 1940. The terms are required to give efficacy to the contract, that is, to make it work in practice. The court may also imply terms because the court believes such a term to be a 'necessary incident' of this type of contract. Liverpool City Council v Irwin 1977 The facts: The defendants were tenants in a tower block owned by the claimants. There was no formal tenancy agreement. The defendants withheld rent, alleging that the claimants had breached implied terms because inter alia the lifts did not work and the stairs were unlit. Decision: Tenants could only occupy the building with access to stairs and/or lifts, so terms needed to be implied on these matters. Where a term is implied as a 'necessary incident' it has precedent value and such terms will be implied into future contracts of the same type.

Conditions and warranties

Statements which are classified as contract terms may be further categorised as conditions or warranties. A condition can be defined as follows. 'An important term which is vital to a contract so that its breach will destroy the basis of the agreement. It may arise from an express agreement between the parties or may be implied by law. A condition is a vital term going to the root of the contract, while a warranty is a term subsidiary to the main purpose of the contract. The remedies available for breach are different in each case. It is fundamental that students can explain and distinguish between conditions and warranties. The effects of their breach are different. The terms of the contract are usually classified by their relative importance as conditions or warranties. (a) A condition is a vital term, going to the root of the contract, breach of which entitles the injured party to decide to treat the contract as discharged and to claim damages. (b) A warranty is a term subsidiary to the main purpose of the contract , breach of which only entitles the injured party to claim damages. A warranty can be defined as follows. 'A minor term in a contract. If broken, the injured party must continue performance but may claim damages for the loss suffered.' Poussard v Spiers 1876 The facts: Mme Poussard agreed to sing in an opera throughout a series of performances. Owing to illness she was unable to appear on the opening night and the next few days. The producer engaged a

substitute who insisted that she should be engaged for the whole run. When Mme Poussard recovered, the producer declined to accept her services for the remaining performances. Decision: Failure to sing on the opening night was a breach of condition which entitled the producer to treat the contract for the remaining performances as discharged. Bettini v Gye 1876 The facts: An opera singer was engaged for a series of performances under a contract by which he had to be in London for rehearsals six days before the opening performance. Owing to illness he did not arrive until the third day before the opening. The defendant refused to accept his services, treating the contract as discharged. Decision: The rehearsal clause was subsidiary to the main purpose of the contract. Schuler v Wickham Machine Tool Sales 1973 The facts: The claimants entered into a contract with the defendants giving them the sole right to sell panel presses in England. A clause of the contract provided that the defendants' representative should visit six named firms each week to solicit orders. The defendants' representative failed on a few occasions to do so and the claimants claimed to be entitled to repudiate the agreement. Decision: Such minor breaches by the defendants did not entitle the claimants to repudiate. Classification may depend on the following issues. (a) Statute often identifies implied terms specifically as conditions or warranties. An example is the Sale of Goods Act 1979. (b) Case law may also define particular types of clauses as conditions, for example a clause as to the date of 'expected readiness' of a ship let to a charterer: The Mihalis Angelos 1971. (c) The court may construe what was the intention of the parties at the time the contract was made as to whether a broken term was to be a condition or a warranty: Bunge Corporation v Tradax SA 1981. It is important to remember that if the injured party merely wants damages, there is no need to consider whether the term broken is a condition or a warranty, since either type of breach entitles the injured party to damages.

Question Conditions and warranties

Norma, a professional singer, enters into a contract to sing throughout a series of concerts. A term in the contract states that she must attend five rehearsals before the opening night. Norma falls ill and misses the last two rehearsals and the opening night. Is she in breach of contract? Give reasons.

Key terms
Part B The law of obligations 6: Terms of contract 93

Answer
Norma is in breach of contract as she has failed to fulfil the condition that she would sing on the opening night (Poussard v Spiers 1876). Had she just failed to attend the two rehearsals, this would have amounted to breach of warranty (Bettini v Gye 1876).

3.1 Innominate terms

It may not be possible to determine whether a term is a condition or a warranty. Such terms are classified by the courts as innominate terms. Traditionally, terms were either classified as conditions or warranties and the injured party could choose to end the contract only for breach of condition. Sometimes a warranty was broken with catastrophic

results, yet the court could not permit the injured party to end the contract because the term broken was not a condition. More recently the courts have held that where the breach deprives the injured party of substantially the whole benefit of the contract the term broken can be called 'Innominate' and the injured party can choose to end the contract even if it could not be regarded as a condition. If the nature and effect of the breach is such as to deprive the injured party of most of his benefit from the contract then it will be treated as if the guilty party had breached a condition. The doctrine was developed in: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisa Kaisha Ltd 1962 The facts: The defendants chartered a ship from the claimants for a period of 24 months. A term in the contract stated that the claimants would provide a ship which was 'in every way fitted for ordinary cargo service'. Because of the engine's age and the crew's lack of competence the ship's first voyage, from Liverpool to Osaka, was delayed for 5 months and further repairs were required at the end of it. The defendants purported to terminate the contract, so the claimants sued for breach; the defendants claimed that the claimants were in breach of a contractual condition. Decision: The term was innominate and could not automatically be construed as either a condition or a warranty. The obligation of 'seaworthiness' embodied in many charterparty agreements was too complex to be fitted into one of the two categories. The ship was still available for 17 out of 24 months. The consequences of the breach were not so serious that the defendants could be justified in terminating the contract as a result. Do not over emphasise innominate terms. Being able to provide an explanation is sufficient.

Question Breach
Phil agrees with Professional Cars plc that they are to provide a white Rolls Royce for his daughter's wedding. On the day the driver arrives in a black Ford Scorpio. Phil sends him away. What is the consequence?

Answer
Phil can sue Professional Cars plc for breach of contract. The company has not agreed to supply 'a car' but 'a white Rolls Royce'. Its failure to fulfil this term allows Phil to sue for breach if he wishes to claim damages, eg the cost of hiring another car. It does not matter if the term broken is a condition or a warranty.

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94 6: Terms of contract Part B The law of obligations

Question Consequences of breach

To what is the injured party to a contract entitled in the event of breach of: (a) A condition by the other party? (b) A warranty by the other party?

Answer
(a) He may choose to treat the contract as discharged and repudiate or terminate the contract, or alternatively he may go on with it and sue for damages. (b) He may claim damages only.

4 Exclusion clauses
An exclusion clause may attempt to restrict one party's liability for breach of contract or for negligence. To be enforceable, a term must be validly incorporated into a contract. Because most disputes about whether a term has been incorporated arise in the context of exclusion clauses, much of the relevant case law surrounds exclusion clauses. In this section, we will examine the ways in which the courts may determine: (a) Whether an exclusion clause (as a contract term) has been validly incorporated into the contract; and (b) If so, how the exclusion clause should be interpreted

An exclusion clause can be defined as follows. 'A clause in a contract which purports to exclude liability altogether or to restrict it by limiting damages or by imposing other onerous conditions. They are sometimes referred to as exemption clauses. There has been strong criticism of the use of exclusion clauses in contracts made between manufacturers or sellers of goods or services and private citizens as consumers. The seller puts forward standard conditions of sale which the buyer may not understand, but which he must accept if he wishes to buy. With these so-called standard form contracts, the presence of exclusion clauses becomes an important consideration. For many years the courts demonstrated the hostility of the common law to exclusion clauses by developing various rules of case law designed to restrain their effect. These are described in this section of the chapter. To these must also be added the considerable statutory safeguards provided by the Unfair Contract Terms Act 1977 (UCTA). These are considered in the next section of this chapter. The statutory rules do permit exclusion clauses to continue in some circumstances. Hence it is necessary to consider both the older case law and the newer statutory rules. The courts have generally sought to protect consumers from the harsher effects of exclusion clauses in two ways. (a) Exclusion clauses must be incorporated into a contract before they have legal effect. (b) Exclusion clauses are interpreted strictly. This may prevent the application of the clause.

Key term
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Part B The law of obligations 6: Terms of contract 95

4.1 Incorporation of exclusion clauses

The courts protect customers from the harsher effects of exclusion clauses by ensuring that they are properly incorporated into a contract and then by interpreting them strictly. The law seeks to protect customers (usually the weaker party to the contract) from the full force of exclusion clauses. They do this by applying the 'letter of the law' to see if such clauses have been incorporated correctly. Where there is uncertainty the clauses may be excluded from the contract. Such uncertainty can arise in several circumstances. The document containing notice of the clause must be an integral part of the contract. If the document is an integral part of the contract, a term may not usually be disputed if it is included in a document which a party has signed. The term must be put forward before the contract is made. If the contact is not signed, an exclusion clause is not a binding term unless the person whose rights it restricts was made sufficiently aware of it at the time of agreeing to it. Onerous terms must be sufficiently highlighted (it is doubtful whether this applies to signed contracts).

4.1.1 Contractual documents

Where the exclusion clause is contained in an unsigned document it must be shown that this document is an integral part of the contract and is one which could be expected to contain terms. Chapelton v Barry UDC 1940 The facts: There was a pile of deck chairs and a notice stating 'Hire of chairs 2d per session of three hours'. The claimant took two chairs, paid for them and received two tickets which were headed 'receipt' which he put in his pocket. One of the chairs collapsed and he was injured. The defendant council relied on a notice on the back of the tickets by which it disclaimed liability for injury. Decision: The notice advertising chairs for hire gave no warning of limiting conditions and it was not reasonable to communicate them on a receipt. The disclaimer of liability was not binding on the claimant. Thompson v LMS Railway 1930 The facts: An elderly lady who could not read asked her niece to buy her a railway excursion ticket on which was printed 'Excursion: for conditions see back'. On the back it was stated that the ticket was issued subject to conditions contained in the company's timetables. These conditions excluded liability for injury. Decision: The conditions had been adequately communicated and therefore had been accepted.

4.1.2 Signed contracts

If a person signs a document containing a term, he is held to have agreed to the term even if he had not read the document. But this is not so if the party who puts forward the document for signature gives a misleading explanation of the term's legal effect. L'Estrange v Graucob 1934 The facts: The defendant sold to the claimant, a shopkeeper, a slot machine under conditions which excluded the claimant's normal rights under the Sale of Goods Act 1893. The claimant signed the document described as a 'Sales Agreement' and including clauses in 'legible, but regrettably small print'. Decision: The conditions were binding on the claimant since she had signed them. It was not material that the defendant had given her no information of their terms nor called her attention to them.
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96 6: Terms of contract Part B The law of obligations Curtis v Chemical Cleaning Co 1951 The facts: The claimant took her wedding dress to be cleaned. She was asked to sign a receipt on which there were conditions that restricted the cleaner's liability and in particular placed on the claimant the risk of damage to beads and sequins on the dress. The document in fact contained a clause 'that the company is not liable for any damage however caused'. The dress was badly stained in the course of cleaning. Decision: The cleaners could not rely on their disclaimer since they had misled the claimant. She was entitled to assume that she was running the risk of damage to beads and sequins only.

4.1.3 Unsigned contracts and notices

Each party must be aware of the contract's terms before or at the time of entering into the agreement if they are to be binding. Olley v Marlborough Court 1949 The facts: A husband and wife arrived at a hotel and paid for a room in advance. On reaching their bedroom they saw a notice on the wall by which the hotel disclaimed liability for loss of valuables unless handed to the management for safe keeping. The wife locked the room and handed the key in at the reception desk. A thief obtained the key and stole the wife's furs from the bedroom. Decision: The hotel could not rely on the notice disclaiming liability since the contract had been made previously and the disclaimer was too late. Complications can arise when it is difficult to determine at exactly what point in time the contract is formed so as to determine whether or not a term is validly included. Thornton v Shoe Lane Parking Ltd 1971 The facts: The claimant wished to park his car in the defendant's automatic car park. He had seen a sign saying 'All cars parked at owner's risk' outside the car park and when he received his ticket he saw that it contained words which he did not read. In fact these made the contract subject to conditions displayed obscurely on the premises. These not only disclaimed liability for damage but also excluded liability for injury. When he returned to collect his car there was an accident in which he was badly injured. Decision: The reference on the ticket to conditions was received too late for the conditions to be included as contractual terms. At any rate, it was unreasonable for a term disclaiming liability for personal injury to be presented so obscurely. Note that since the Unfair Contracts Terms Act 1977 the personal injury clause would be unenforceable anyway. An exception to the rule that there should be prior notice of the terms is where the parties have had consistent dealings with each other in the past, and the documents used then contained similar terms. J Spurling Ltd v Bradshaw 1956 The facts: Having dealt with a company of warehousemen for many years, the defendant gave it eight barrels of orange juice for storage. A document he received a few days later acknowledged receipt and contained a clause excluding liability for damage caused by negligence. When he collected the barrels they were empty and he refused to pay.

Decision: It was a valid clause as it had also been present in the course of previous dealings, even though he had never read it. If the parties have had previous dealings (but not on a consistent basis), then the person to be bound by the term must be sufficiently aware of it at the time of making the latest contract. Part B The law of obligations 6: Terms of contract 97 Hollier v Rambler Motors 1972 The facts: On three or four occasions over a period of five years the claimant had had repairs done at a garage. On each occasion he had signed a form by which the garage disclaimed liability for damage caused by fire to customers' cars. The car was damaged by fire caused by negligence of garage employees. The garage contended that the disclaimer had by course of dealing become an established term of any contract made between them and the claimant. Decision: The garage was liable. There was no evidence to show that the claimant knew of and agreed to the condition as a continuing term of his contracts with the garage.

4.1.4 Onerous terms

Where a term is particularly unusual and onerous it should be highlighted (although it is doubtful whether this applies to signed contracts). Failure to do so may mean that it does not become incorporated into the contract. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd 1988 The facts: 47 photographic transparencies were delivered to the defendant together with a delivery note with conditions on the back. Included in small type was a clause stating that for every day late each transparency was held a 'holding fee' of 5 plus VAT would be charged. They were returned 14 days late. The claimants sued for the full amount. Decision: The term was onerous and had not been sufficiently brought to the attention of the defendant. The court reduced the fee to one tenth of the contractual figure to reflect more fairly the loss caused to the claimants by the delay.

Question Exclusion clause

Natasha hires a care from a car rental company. On arrival at their office she is given a form, which includes terms and conditions in small print on the back, and asked to sign it. She does so and pays the hire charge. When she gets into the car, she happens to look in the glove compartment and sees a document headed 'Limitation of Liability'. This states that the hire company will not be liable for any injury caused by a defect in the car unless this is as a result of the company's negligence. While Natasha is driving on the motorway, the airbag inflates and causes her to crash. She is badly injured. Assuming that negligence is not claimed, what is the status of the exclusion clause?

Answer
There must be prior notice of the presence of an exclusion clause. The answer here will depend on whether this exclusion was included in the original terms and conditions (and therefore merely reinforced by the later document) or not. The hire company's only other possible defence will be to show a consistent course of dealings with Natasha.

4.2 Interpretation of exclusion clauses

In deciding what an exclusion clause means, the courts interpret any ambiguity against the person who relies on the exclusion. This is known as the contra proferentem rule. Liability can only be excluded or restricted by clear words. In the Hollier case above, the court decided that as a matter of interpretation the disclaimer of liability could be interpreted to apply: Only to accidental fire damage or To fire damage caused in any way including negligence. 98 6: Terms of contract Part B The law of obligations It should therefore be interpreted against the garage in the narrower sense of (a) so that it did not give exemption from fire damage due to negligence. If a person wishes successfully to exclude or limit liability for loss caused by negligence the courts require that the word 'negligence', or an accepted synonym for it, should be included in the clause. Alderslade v Hendon Laundry 1945

The facts: The conditions of contracts made by a laundry with its customers excluded liability for loss of or damage to customers' clothing in the possession of the laundry. By its negligence the laundry lost the claimant's handkerchief. Decision: The exclusion clause would have no meaning unless it covered loss or damage due to negligence. It did therefore cover loss by negligence.

4.2.1 The 'main purpose' rule

When construing an exclusion clause the court will also consider the main purpose rule. By this, the court presumes that the clause was not intended to prevent the main purpose of the contract.

4.2.2 Fundamental breach

There is no doubt that at common law a properly drafted exclusion clause can cover any breach of contract. Photo Productions v Securicor Transport 1980 The facts: The defendants agreed to guard the claimants' factory under a contract by which the defendant were excluded from liability for damage caused by any of their employees. One of the guards deliberately started a small fire which destroyed the factory and contents. It was contended that Securicor had entirely failed to perform their contract and so they could not rely on any exclusion clause in the contract. Decision: There is no principle that total failure to perform a contract deprives the party at fault of any exclusion from liability provided by the contract. In this case the exclusion clause was drawn widely enough to cover the damage which had happened. As the fire occurred before the UCTA was in force, the Act could not apply here. But if it had done it would have been necessary to consider whether the exclusion clause was reasonable. Reliance on exclusion clauses is an everyday occurrence in business dealings and therefore is of great practical relevance.

5 The Unfair Contract Terms Act 1977

The Unfair Contract Terms Act 1977 aims to protect consumers (effectively individuals) when they enter contracts by stating that some exclusion clauses are void, and considering whether others are reasonable. When considering the validity of exclusion clauses the courts have had to strike a balance between: The principle that parties should have complete freedom to contract on whatever terms they wish, and The need to protect the public from unfair exclusion clauses Exclusion clauses do have a proper place in business. They can be used to allocate contractual risk, and thus to determine in advance who is to insure against that risk. Between businessmen with similar bargaining power exclusion clauses are a legitimate device. The main limitations are now contained in the Unfair Contract Terms Act 1977.

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Part B The law of obligations 6: Terms of contract 99

Before we consider the specific terms of UCTA, it is necessary to describe how its scope is restricted. (a) In general the Act only applies to clauses inserted into agreements by commercial concerns or businesses. In principle private persons may restrict liability as much as they wish. (b) The Act does not apply to some contracts, for example contracts of insurance or contracts relating to the transfer of an interest in land. (c) Specifically, the Act applies to: (i) clauses that attempt to limit liability for negligence; (ii) clauses that attempt to limit liability for breach of contract. The Act uses two techniques for controlling exclusion clauses some types of clauses are void, whereas others are subject to a test of reasonableness. The main provisions can be summarised as follows: (a) Any clause that attempts to restrict liability for death or personal injury arising from negligence is

void. (b) Any clause that attempts to restrict liability for other loss or damage arising from negligence is void unless it can be shown to be reasonable. (c) Any clause that attempts to limit liability for breach of contract, where the contract is based on standard terms or conditions, or where one of the parties is a consumer, is void unless it can be shown to be reasonable.

5.1 Clauses which are void

If an exclusion clause is made void by statute it is unnecessary to consider how other legal rules might affect it. There is simply no need to assess whether it is reasonable. A clause is void by statute in the following circumstances. A clause which purports to exclude or limit liability for death or personal injury resulting from negligence is void: s 2(1) UCTA. This is the key circumstance to remember. A guarantee clause which purports to exclude or limit liability for loss or damage caused by a defect of the goods in consumer use is void: s 5 UCTA. In a contract for the sale or hire purchase of goods, a clause that purports to exclude the condition that the seller has a right to sell the goods is void: s 6(1) UCTA. In a contract for the sale of goods, hire purchase, supply of work or materials or exchange with a consumer, a clause that purports to exclude or limit liability for breach of the conditions relating to description, quality, fitness and sample implied by the Sale of Goods Act 1979 is void: s 6(2) and 7(2) UCTA.

5.2 Clauses which are subject to a test of reasonableness

If a clause is not automatically void, it is subject to a test of reasonableness. The main provisions of the Act that refer to this type of clause are set out in Sections 2, 3, 6 and 7 of the Act.

5.3 Exclusion of liability for negligence (s 2)

As we saw above, a person acting in the course of a business cannot, by reference to any contract term, restrict his liability for death or personal injury resulting from negligence. The clause containing the term is simply void. In the case of other loss or damage, a person cannot introduce a clause restricting his liability for negligence unless the term is reasonable.

5.4 Standard term contracts and consumer contracts (s 3)

The person who uses a standard-term contract in dealing with a consumer cannot, unless the term is reasonable, restrict liability for his own breach. 100 6: Terms of contract Part B The law of obligations George Mitchell Ltd v Finney Lock Seeds Ltd 1983 The facts: The claimant ordered 30 pounds of Dutch winter cabbage seeds from the defendants. The defendant's standard term contract included an exclusion clause that limited their liability to a refund of the amount paid by the claimant. The wrong type of cabbage seed was delivered. The seed was planted over 63 acres, but when the crop came up it was not fit for human consumption. The claimant claimed 61,500 damages plus 30,000 interest. Decision: At common law the exclusion clause would have protected the defendant, but the court decided in favour of the claimant, relying exclusively on the statutory ground of reasonableness.

5.4.1 Consumers
Where a business engages in an activity which is merely incidental to the business, the activity will not be in the course of the business unless it is an integral part and carried on with a degree of regularity. R & B Customs Brokers Ltd v United Dominions Trust Ltd 1988 The facts: The claimants, a company owned by Mr and Mrs Bell and operating as a shipping broker, bought a second-hand Colt Shogun. The car was to be used partly for business and partly for private use. Decision: This was a consumer sale, since the company was not in the business of buying cars.

5.5 Sale and supply of goods (ss 6-7)

Any contract (that is, consumer or non-consumer) for the sale or hire purchase of goods cannot exclude the implied condition that the seller has a right to sell the goods. As we saw earlier when looking at clauses that are automatically void, a consumer contract for the sale of goods, hire purchase, supply of work or materials or exchange of goods cannot exclude or restrict liability for breach of the conditions relating to description, quality, fitness and sample implied by the Sale of

Goods Act 1979 and the Supply of Goods and Services Act 1982. For a non-consumer contract, such exclusions are subject to a reasonableness test. The rules are set out in the following table. Exemption clauses in contracts for the sale of goods or supply of work or materials Consumer transaction Non-consumer transaction Title Void Void Description Void Subject to reasonableness test Quality and suitability Void Subject to reasonableness test Implied terms Sample Void Subject to reasonableness test

5.6 The statutory test of reasonableness (s 11)

The term must be fair and reasonable having regard to all the circumstances which were, or which ought to have been, known to the parties when the contract was made. The burden of proving reasonableness lies on the person seeking to rely on the clause. Statutory guidelines have been included in the Act to assist the determination of reasonableness. For instance, the court will consider the following. The relative strength of the parties' bargaining positions. Whether any inducement (for example, a reduced price) was offered to the customer to persuade him to accept limitation of his rights. Whether the customer knew or ought to have known of the existence and extent of the exclusion clause. If failure to comply with a condition (for example, failure to give notice of a defect within a short period) excludes or restricts the customer's rights, whether it was reasonable to expect when the contract was made that compliance with the condition would be practicable. Whether the goods were made, processed or adapted to the special order of the customer (UCTA Sch 2). Part B The law of obligations 6: Terms of contract 101 Smith v Eric S Bush 1989 The facts: A surveyor prepared a report on a property which contained a clause disclaiming liability for the accuracy and validity of the report. In fact the survey was negligently done and the claimant had to make good a lot of defects once the property was purchased. Decision: In the absence of special difficulties, it was unreasonable for the surveyor to disclaim liability given the cost of the report, his profession and his knowledge that it would be relied upon to make a major purchase. St Albans City and District Council v International Computers Ltd 1994 The facts: The defendants had been hired to assess population figures on which to base community charges (local government taxation). Their standard contract contained a clause restricting liability to 100,000. The database which they supplied to the claimants was seriously inaccurate and the latter sustained a loss of 1.3 million. Decision: The clause was unreasonable. The defendants could not justify this limitation, which was very low in relation to the potential loss. In addition, they had aggregate insurance of 50 million. The defendants had to pay full damages.

Question UCTA
The Unfair Contract Terms Act 1977 limits the extent to which it is possible to exclude or restrict business liability. What do you understand by the phrase business liability?

Answer
Business liability is liability which arises from things done or to be done in the course of a business, or from the occupation of premises used for business purposes. Business includes a profession and the activities of any government department or public or local authority.

6 The Unfair Terms in Consumer Contracts Regulations 1999

The Unfair Terms in Consumer Contracts Regulations 1999 defines what is meant by an unfair term. They deal with consumer contracts and terms which have not been individually negotiated.

These regulations implemented an EU directive on unfair contract terms. UCTA 1977 continues to apply. There are now three layers of relevant law. The common law, which applies to all contracts, whether or not one party is a consumer UCTA 1977, which applies to all contracts and has specific provisions for consumer contracts The Regulations (UTCCR 1999), which only apply to consumer contracts and to terms which have not been individually negotiated The new regulations apply to contracts for the supply of goods or services. They apply to terms in consumer contracts. They apply to contractual terms which have not been individually negotiated. There are a number of exceptions including contracts relating to family law or to the incorporation or organisation of companies and partnerships and employment contracts.
FAST FORWARD

102 6: Terms of contract Part B The law of obligations A consumer is defined as 'a natural person who, in making a contract to which these regulations apply, is acting for purposes which are outside his business'. A key aspect of the regulations is the definition of an unfair term. An unfair term is any term which causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. In making an assessment of good faith, the courts will have regard to the following. The strength of the bargaining positions of the parties Whether the consumer had an inducement to agree to the term Whether the goods or services were sold or supplied to the special order of the consumer The extent to which the seller or supplier has dealt fairly and equitably with the consumer The effect of the regulations is to render certain terms in consumer contracts unfair. Excluding or limiting liability of the seller when the consumer dies or is injured, where this results from an act or omission of the seller Excluding or limiting liability for partial or incomplete performance by the seller Making a contract binding on the consumer where the seller can still avoid performing the contract Two forms of redress are available. A consumer who has concluded a contract containing an unfair term can ask the court to find that the unfair term should not be binding. A complaint, for example by an individual, a consumer group or a trading standards department can be made to the Director General of Fair Trading.

Chapter Roundup
Statements made by the parties may be classified as terms or representations. Different remedies attach to breach of a term and to misrepresentation respectively. As a general rule, the parties to a contract may include in the agreement whatever terms they choose. This is the principle of freedom of contract. Terms clearly included in the contract are express terms. The law may complement or replace terms by implying terms into a contract. Terms may be implied by the courts, by statute or by custom. Statements which are classified as contract terms may be further categorised as conditions or warranties. A condition is a vital term going to the root of the contract, while a warranty is a term subsidiary to the main purpose of the contract. The remedies available for breach are different in each case. It may not be possible to determine whether a term is a condition or a warranty. Such terms are classified by the courts as innominate terms. An exclusion clause may attempt to restrict one party's liability for breach of contract or for negligence. The courts protect customers from the harsher effects of exclusion clauses by ensuring that they are properly incorporated into a contract and then by interpreting them strictly.

 The Unfair Contract Terms Act 1977 aims to protect consumers (effectively individuals) when they enter contracts by stating that some exclusion clauses are void, and considering whether others are reasonable. The Unfair Terms in Consumer Contracts Regulations 1999 defines what is meant by an unfair term. They deal with consumer contracts and terms which have not been individually negotiated.

Key term Key term

Part B The law of obligations 6: Terms of contract 103

Quick Quiz
1 Why is it important to distinguish between terms and representations? 2 A term may be implied into a contract by i Statute ii Trade practice unless an express term overrides it iii The court, to provide for events not contemplated by the parties iv The court, to give effect to a term which the parties had agreed upon but failed to express because it was obvious v The court, to override an express term which is contrary to normal custom A ii and iii only B i, ii and iv only C i, iv and v only D i, ii, iv and v only 3 Fill in the blanks in the statements below, using the words in the box. A (1) .. is a vital term, going to the root of the contract, breach of which entitles the injured party to treat the contract as (2) .. and claim (3) .. . A (4) .. is a term (5) .. to the main purpose of the contract. The consequence of a term being classified as innominate is that the court must decide what is the actual effect of its (6) .. . breach condition subsidiary warranty damages discharged 4 Give an example of a statute which identifies implied terms specifically as conditions or warranties. 5 Terms implied by custom cannot be overridden True False 6 Fill in the blanks in the statement below, using the words in the box. A contract is a consumer contract if the buyer neither makes the contract in course of (1) .. nor holds himself out as doing so. The other (2) .. does make the contract in course of (3) .. In the case of a contract governed by the law of (4) .., the goods are of a type ordinarily supplied for (5) .. . business sale of goods business party private use or consumption 7 Match the laws to their jurisdictions under the law of contract (a) Common law (1) All contracts with specific provisions for consumer contracts (b) UCTA 1977 (2) Applies only to consumer contracts and to non-negotiated terms (c) UTCCR 1999 (3) All contracts 8 What is the 'contra proferentem' rule? 104 6: Terms of contract Part B The law of obligations

Answers to Quick Quiz

1 The importance of the distinction is that different remedies are available depending on whether a term is broken or a representation turns out to be untrue. 2 B. Courts will not imply factors outside the contemplation of the parties. 3 (1) condition (2) discharged (3) damages (4) warranty (5) subsidiary (6) breach

4 Sale of Goods Act 1979 5 False. Such terms can be overridden. 6 (1) business, (2) party, (3) business, (4) sale of goods, (5) private use or consumption 7 (a) (3) (b) (1) (c) (2) 8 In deciding what an exclusion clause means, the courts interpret any ambiguity against the person at fault who relies on the exclusion.