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Exemption Clauses: Unfair Terms

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  • unfair exemption clauses restricted by Unfair Contract Terms Act 1977 (UCTA 1977)
  • Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999) restricts all unfair terms, including exemption

Unfair Contract Terms Act 1977: main provisions

  • applies to any clause excluding, limiting or restricting liability & can render an exemption clause void or subject it to a reasonableness test
  • Schedule 1 outlines contracts which the key provisions do not apply, including insurance or those relating to an interest in land
  • key provisions apply to business liability
    • S1(3) defines business liability : obligations arising from things done or to be done by a person in the course of a business (own business or another's)

Sections 6 and 7: statutory implied terms relating to goods

  • S6 & S7 apply to clauses which exempt liability for breaches of statutory implied terms relating to goods

    S6 Sale and hire purchase
    • S6(2): exemption clause void if person dealing as consumer & breach of obligations arising from (a) S13, 14, or 15 Sale of Goods Act 1979 (SGA 1979)
    • S6(3): if buyer business exemption clause only effective if satisfies reasonableness test
  • Section 6(2)(a) UCTA 1977: applies if clause attempts to exempt liability for breaches of terms implied by SGA 1979 S13 (goods will fit description) & S14 (goods of satisfactory quality & reasonably fit for purpose made known to seller)
  • under S6 UCTA 1977 seller cannot restrict liability for breach of terms implied by S13 or S14 SGA 1979 when buyer is dealing as a consumer

    S12 Dealing as a consumer
    • S12(1): deals as consumer if (a) not make contract in course of business & (b) other party makes contract in course business & (c) goods type ordinarily supplied for private use or consumption
  • under S6 UCTA 1977, if buyer not dealing as consumer, seller only restrict liability for breach of implied terms if exemption clause satisfies reasonableness test
  • S7 UCTA 1977 deals with attempts to exempt liability for breach of terms implied by S3 & S4 Supply of Goods and Services Act 1982 (SGSA 1982)

    S7 Miscellaneous contracts under which goods pass
    • S7(2): exemption clause void if person dealing as consumer & goods not correspondence with description, or not satisfactory quality or fit for particular purpose
    • S7(3): if buyer business exemption clause only effective if satisfies reasonableness test
  • S7 voids exemption clause if breach of S3 SGSA 1982 (implies condition goods transferred fit description) & S4 (implies condition goods transferred satisfactory quality & reasonably fit for any purpose made known), if buyer ocnsumer
  • if buyer business & breach of S3 or S4 SGSA 1982 exemption clause must satisfy reasonableness test

Section 2: negligence

  • S2 UCTA 1977 applies to clauses which exempt liability for negligence, including breach of term implied by S13 SGSA 1982 (service exercised with reasonable care & skill)

    S2 Negligence liability
    • S2(1): no clause can restrict liability for death or personal injury resulting from negligence
    • S2(2): clause must satisfy reasonableness test to restrict other loss or damage
  • S2 does not distinguish between consumers & businesses, but is distinction between nature of loss or damage suffered as result of negligence

Section 3: express terms

  • in practice, S3 UCTA 1977 applies to clauses which exempt liability for breaches of an express term

    S3 Liability arising in contract
    • S3(1): applies if one party deals as consumer or one deals on other's written standard terms of business
    • S3(2): exemption clause must satisfy reasonableness test to restrict liability for breach of express term

Unfair Contract Terms Act 1977: reasonableness test

  • reasonableness test used to evaluate exemption clause, under UCTA 1977: S6 & S7 if party not a consumer, S2 if loss or damage caused by negligence & if S3 applies
  • test defined in S11 UCTA 1977

    S11 The 'reasonableness' test
    • S11(1): whether fair and reasonable to include term, taking account of the circumstances known (or that ought to have been known) to the parties or within their contemplation, when contract formed
    • S11(2): court may take account of factors in Schedule 2 to help detrmine reasonableness, but not limited to these factors
    • S11(5): burden of proof lies with party seeking to rely on exemption clause


  • Schedule 2 lists some factors to consider when applying reasonableness test, expresly applies to test S6(3), S7(3) & S7(4) but in practice considered more generally

    Sch 2 'Guidelines' for Application of Reasonableness Test
    • (a): relative strength of bargaining positions of parties
    • (b): whether customer received an inducement to agree to exemption clause or an opportunity to enter similar contract with another party but without exemption clause
    • (c): whether customer knew or ought reasonably to have known of existence & extent of exemption clause (including custom of trade or previous course of dealing between parties)
    • (d): if exemption clause applies to condition, whether reasonable at time contract made, to expect compliance with that condition would be practicable
    • (e): whether goods were manufactured or adapted to special order of customer
  • S11(4) UCTA 1977 sets out factors to consider and applies to limitation clauses only
    • S11(4): (a) resources which defendant could expect to be available for purpose of meeting liability should it arise & (b) how far was open to defendant to cover himself by insurance


  • if defendant seeks rely on part of exemption clause: should court consider whole exemption clause under reasonableness test or just relevant part?
  • traditionally treated exemption clause as a whole
    • Court of Appeal held whole clause should be considered, Lord Donaldson MR: .. The issue is whether the term [the whole term and nothing but the term] shall have been a fair and reasonable one to be included...
  • recently, more liberal approach taken in some cases

    Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317

    • Court of Appeal held exemption clause could be split into two parts & reasonableness test could be applied to each distinct part

Case law

  • case law shows application of guidelines & additional factors that have been considered under reasonableness test
    • Lord Griffiths suggested difficulty of the task & practical impact of court's decision could be considered, alongside guidelines in Schedule 2 UCTA 1977
    • plaintiff (P) used software supplied by defendant (D) to calculate appropriate local community charge but software contained an error & miscalculated population
    • P lost £484 000 in receipts & suffered further losses & claimed £1 314 846 damages, D sought to rely on limitation clause, limiting their liability to £100 000
    • could D rely on the limitation clause?
    • Scott Baker J (first instance) found D in breach express term, applied S3 UCTA 1977 & reasonableness test
    • limitation clause failed test, using Schedule 2 guidelines: D strong baragining position only few companies supplied software, large company could afford liability, had sufficient insurance & not shown why it was reasonable to limit their liability
    • also practical consideration in favour of finding clause unreasonable: if clause was reasonable would have meant local citizens suffered through increased tax or reduced services (Smith v Eric Bush [1990])
    • Court of Appeal agreed term failed reasonableness test, but lowered damages awarded P (P was aware of limitation clause & common practice in computer software trade)

Third parties

  • general rule: exemption clause cannot protect a third party (privity of contract)


    • P was injured boarding a ship, P had contract with a Shipping Company, who were protected by an exemption clause
    • therefore P sued Ds (the ship master & boatswain) who sought to rely on the exemption clause


    • could Ds (a third party) rely on the exemption clause?


    • Ds could not rely on exemption clause becuase not parties to the contract
  • there is a statutory exception to this rule

    S1 Right of third party to enforce contractual term
    • S1(1): a third party may enforce a term if (a) the contract expressly provides that he may or (b) the term purports to confer a benefit on him
    • S1(3): third party must be expressly identified in the contract by name or as a member of a class or answering a particular description
    • S1(6): applies to exemption clauses

Unfair Terms in Consumer Contracts Regulations 1999

  • UTCCR 1999 implement EU Unfair Consumer Contract Terms Directive
  • narrower than UCTA 1977 as only applies to consumers but wider as applies to all contract terms, not individually negotiated

    Reg 5 Unfair Terms
    • 5(1): defines an unfair term as: contrary to requirement of good faith, it causes a significant imbalance in the parties' rights & obligations, to detriment of consumer

    Reg 8 Effect of unfair term
    • 8(1): an unfair term is not binding on a consumer
  • for exemption clauses, unfairness test means outcome under UTCCR 1999 likely to be same as under UCTA 1977
  • similarly, not necessary to consider UTCCR if exemption clause is void under UCTA
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