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Exemption Clauses: Unfair Terms

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Exemption Clauses: Unfair Terms

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Unfair Contract Terms Act 1977: main provisions

  • applies: to clause excluding limiting or restricting liability / except insurance or land contract (Sch 1) / main provisions apply to business liability (S1(3)) / can render exemption clause void or subject to reasonableness test

Sections 6 and 7: statutory implied terms relating to goods

  • S12(1): deals as a consumer if not making contract in course of business / & other party is
  • S6(2): exemption clause void / if deals as a consumer / breach of obligations from SGA 1979 implied condition: S13 (goods will fit description) or S14 (goods satisfactory quality & reasonably fit for purpose made known to seller) / S6(3): if buyer business / exemption clause must satisfy reasonableness test
  • S7(2): exemption clause void / if deals as a consumer / & goods not correspondence with description / or not satisfactory quality or fit for particular purpose / essentially breach S3 & S4 SGSA 1982 / S7(3): if buyer business / exemption clause must satisfy reasonableness test

Section 2: negligence

  • applies to clauses which exempt liability for negligence / including breach of term implied by S13 SGSA 1982 (service exercised with reasonable care & skill) / no distinction between business or consumer
  • S2(1): no clause can restrict liability for death or personal injury resulting from negligence / S2(2): must satisfy reasonableness test to restrict liability for other loss or damage

Section 3: express terms

  • S3(1) : if one party deals as consumer or on other's written standard terms of business / S3(2) : must satisfy reasonableness test to restrict liability
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Exemption Clauses: Unfair Terms

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Unfair Contract Terms Act 1977: reasonableness test

  • test used: S6 & S7 if party not consumer / S2 if loss or damage not personal injury or death / S3 always
  • S11(1): fair & reasonable to include / taking account: circumstances known (or ought known) or within parties' contemplation / when contract formed
  • S11(2): Schedule 2 guidelines / S11(5): burden of proof with party seeking rely on exemption


  • Schedule 2: expressly apply to test under S6 & S7 / (a) strength bargaining positions / (b) inducement or opportunity for similar contract without exemption clause / (c) knew or ought reasonably to have known exemption clause existed & extent (inc. trade custom or previous course of dealing) / (d) expect compliance with condition breached practicable / (e) goods manufactured to special order of customer
  • S11(4): apply limitation clause only / (a) resources D expect available to meet liability if arise / (b) how far open to D have insurance

Case law

  • courts treat exemption clause as a whole (Stewart Gill v Horatio Myer [1992]) / recently two distinct parts considered separately (Watford Electronics v Sanderson CFL [2001])
  • additional factors: difficulty of task / practical impact of court's decision (Smith v Eric Bush [1990])
  • software error / D sought rely on limitation clause £100 000 / first instance: breach express term / S3 UCTA 1977 / failed reasonableness test: Sch 2 & practical consideration (if reasonable: citizens suffer higher taxes or reduced services) / CoA: agreed unreasonable / lowered damages (P knew existed & trade custom) (St Albans District Council v International Computers Ltd [1995])
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Exemption Clauses: Unfair Terms

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Third parties

  • general rule: exemption clause not protect third party / privity of contract
  • P injured boarding ship / contract with shipping co. protected by exemption clause / P sued Ds (ship workers) / held: D not rely on exemption as not party to contract (Adler v Dickson [1955])

Contracts (Rights of Third Parties) Act 1999

  • statutory exception / S1(1): third party may enforce term if (a) contract expressly provides or (b) term purports to confer benefit on him / S1(3): must be expressly identified by name or class or particular description / S1(6): applies to exemption clauses

Unfair Terms in Consumer Contracts Regulations 1999

  • implement EU Unfair Consumer Contract Terms Directive / narrower than UCTA 1977: only apply consumers / wider: covers all terms
  • Reg 5(1) defines unfair term: contrary to requirement of good faith / causes significant imbalance in parties' rights & obligations / to detriment of consumer / Reg 8(1) unfair term not binding on consumer
  • exemption clauses: unfairness test means outcome under UTCCR likely to be same as under UCTA / not necessary to consider UTCCR if exemption clause void under UCTA
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