Introduction to Business Law: Unfair Contracts Act 1977

Assessment Question

•       ‘The Unfair Contract Terms Act 1977 is misleadingly named. It only deals with a tiny subset of terms, and does nothing to make sure that contracts are fair.’  Discuss

Failings of UCTA 1977

•       UCTA 1977 does not apply to all contracts

•       Only to those between business suppliers and ordinary consumers

•       Private sales are unaffected by UCTA

•       Transactions between businesses are unaffected by UCTA unless one of the businesses is acting as a consumer, R & B Customs Brokers C. Ltd v United Dominions Trust [1988] 1 WLR 321

L’Estrange v Graucob [1934]

•       A café owner bought a cigarette vending machine and signed a sales agreement which she did not read

•       A term of the contract which was ‘in regrettably small print but quite legible’  stated:

•       The machine did not need to work and that all the statutory implied terms were not to apply.

•       The machine did not work

•       The café owner sued to get her money back

•       She lost! She had accepted this as a contract term (even though the statutory terms had been breached)

•       When faced with an exclusion clause the first thing to examine is whether the clause is a term of the contract

Unfair Contracts

•       We have already seen that contracts can impose unfair conditions on one party

•       And give an unfair advantage to another

•       Duress and Undue Influence

•       Misrepresentation and Mistake

•       Another category is that of imposing unfair terms

Statute over Common Law

•       The common law was traditionally used to control the behavior of the parties in contract

•       One of the most effective controls is now found in statute

•       The Unfair Contract Terms Act 1977

•       This imposes statutory limits on the extent to which contractual liability can be avoided by means of a contract term

Unfair Contracts

•       UCTA 1977 applies to business liabilities which are defined in section 1(3) as liabilities arising from breaches or obligations such as:

•       (a) From things done or to be done by a person in the course of their business (whether his own business or another’s) or:

•       (b) From the occupation of premises used for business purposes of the occupier

UCTA 1977 & Negligence

•       Section 2 of the Act refers to a party attempting to exclude liability arising from negligence.

•       S.2(1) No contract term can exclude liability for death or personal injury

Thornton v Shoe Lane Parking Ltd [1971]

•       The claimant was badly injured in the defendant’s car park

•       The claimant had driven into the car park and passed a notice which said that cars were parked at owners risk

•       When the claimant stopped at a red light he was issued with a ticket staying he was subject to the notices displayed inside the car park

•       These notices could only be read when the customers were inside the car park and they stated that the owners were not liable for injury

•       The notices were not part of the contract

•       Following the introduction of UCTA 1977 the notices would be invalid anyway

UCTA 1977 & Negligence

•       Section2(2) of the Act:

•       Provides that liability for other types of damage arising from negligence, such as damage to goods, can be excluded if the term excluding liability was reasonable

•       Schedule 2 of the Act and section 11 define what reasonable means

Smith v Eric S Bush [1989]

•       The claimant applied to a building society for a mortgage to buy a house

•       The building society employed the defendant to survey the house and the claimant paid £40 for a copy of the report

•       The report contained a disclaimer stating that neither the surveyor nor the building society were liable for an inaccuracies

•       The report valued the house at £16,000 and that no major repairs were necessary

•       18 months later the chimney fell thorough the roof (chimney breasts had been removed without supports being fitted)

•       The court held that the defendants owed a duty of care to the claimant

•       The disclaimer had not been reasonable

•       If the claimant had been killed or injured by the falling chimney then s.1(2) UCTA 1977 would have applied

•       It is not possible to exclude liability for death or injury

•       In such circumstances it is not necessary to consider whether the term is reasonable

UCTA 1977 Sch. 2

•       Section 11(2) refers to schedule 2 of the Act

•       Which provides guidelines on the application of the reasonableness test

•       ‘the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought  reasonably to have been made known to or in the contemplation of the parties when the contract was made’

•       Schedule 2 of the Act says that if the contract is to sell or supply any type of goods, regard must be had to the following, in deciding whether or not a term was reasonable

•       The relative strength of the parties bargaining position relative to each other, which will include whether or not the customer could find another supplier

•       b) Whether the customer was given any inducement to agree to the term, or could have made a similar contract with a different supplier without agreeing to such a term

•       c) Whether the customer knew or ought to have known that the term existed

•       d) If the term excludes liability unless some condition is complied with, whether or not it is practicable to comply with that condition

•       e) Whether the goods were manufactured, altered or adapted at the customers request

UCTA 1977 and the Sale of Goods Act 1979

•       Providing the claimant is dealing as a consumer terms excluding liability under s.12 SGA 1979 are invalid (implied condition relating to title, or right to sell)

•       As are terms excluding liability under s. 13 (conformity with description)

•       S. 14 (quality or fitness)

•       S.15 (conformity with sample)

UCTA 1977 & Contract

•       Section 3 of the Act protects two classes of persons who make a contract

1. Those who ‘deal as a consumer’; and
2. Those who deal on the other parties written terms
3. In order to determine what protection section 3 offers, we should be clear about exactly who is protected
4. The Act makes a very clear distinction between a person who ‘deals as a consumer’ and a person who does not

Dealing as a Consumer

•       Section 12(1)… a buyer or hirer deals as a consumer if:

a)      They make the contract otherwise than in the course of business and not holding themselves out to be in the course of business

b)      The other party to the contract does make the contract in the course of business; and

c)       If the goods pass under the contract, they are the type of goods ordinarily supplied for private use or consumption

d)      All three conditions must be met to be a consumer

e)      Example:

f)       A freelance journalist buys a computer for her daughter’s birthday

g)      She is dealing as a consumer

h)      She buys specialist page editing software for her own computer

i)        She is dealing in the course of her business

j)        Section 3 UCTA 1977 also offer protection to those who deal on written standard terms

k)      This means that the contract is made on the same terms as it is with all other customers

l)        Price and quantity can vary but ‘standard’ terms are the same for all

Standard Form Contracts

•       Standard form contracts are often issued by commercial entities operating in the course of their business

•       Hire agreements

•       Conditions of Carriage

•       Insurance policies

•       Licenses to use patented goods

Section 3 Protection

•       A consumer is unlikely to operate standard terms contracts

•       Only the business operator will do so

•       Section 3 is designed to protect the consumer from unreasonable or unfair exclusion clauses

•       An exclusion clause cannot protect a party against liability for breach of contract unless it is reasonable; and

•       An exclusion clause cannot protect a party who fails to perform the contract at all, or who performs in a manner different from what was reasonably expected, unless this is reasonable

What is Reasonable?

•       The term included in the contract should be fair and reasonable

•       When judging whether a term is fair and reasonable, circumstances which were known or ought to have been known, should be considered.

•       The fairness and reasonableness factor are judged in relation to when the contract was entered and not after the events have occurred

•       Where a term is restrictive rather than excluding liability, resources and insurance available to the party should be taken into consideration.

•       Lastly, under this test the burden is on the party seeking to enforce the disputed term to prove that it is fair and reasonable.

Reasonableness - Schedule 2

•       Schedule 2 states that if the contract is to sell or supply any type of goods regard must be had to the following in deciding if a a term was reasonable

•       The relative strength of the parties bargaining position (including whether an alternative supplier was available)

•       Whether the customer was given any inducement to agree to the term or could have made a similar contract with another supplier without agreeing the term.

•       Whether the customer knew or ought to have known that the term existed

•       If the term excludes liability unless some condition is complied with, whether or not it was reasonably practicable to comply with that condition.

•       Whether the good were manufactured, altered or adapted at the customers request

Misrepresentation

•       Section 8 UCTA 1977 provides that no term can restrict liability for misrepresentation unless satisfied by the requirement of reasonableness

•       ‘Reasonableness’ once again negatives the provisions of the Act

Unreasonable Misrepresentation

•       Curtis v Chemical Cleaning & Dyeing Co Ltd [1951]

•       A person who misrepresents the effect of an exclusion clause may not be able to rely on it even if the customer signs a document containing the clause

Unfair Terms in Consumer Contracts Regulations 1999

•       Consumers have further protection under UTCCR 1999

•       These regulations do not displace UCTA 1977 but give effect to EU legislation and run alongside the Act

•       A company cannot be a consumer under these regulations

•       The regulations require sellers to act in good faith

UTCCR 1999

•       4.  (1)  These Regulations apply in relation to unfair terms in contracts concluded between a seller or a supplier and a consumer.

•       (2) These Regulations do not apply to contractual terms which reflect–

•       (a) mandatory statutory or regulatory provisions (including such provisions under the law of any Member State or in Community legislation having effect in the United Kingdom without further enactment);

•       (b) the provisions or principles of international conventions to which the Member States or the Community are party.

5.  (1)  A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.

•       For a list of terms (not exhaustive) considered unfair see:

http://www.legislation.gov.uk/uksi/1999/2083/schedule/2/made