Unfair exemption clauses are restricted by the Unfair Contract Terms Act 1977 (UCTA 1977). The Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999) also restricts all unfair contract terms, including exemption clauses. Statutory regulation of unfair contract terms primarily developed to protect consumers as weaker parties.
Unfair Contract Terms Act 1977: main provisions
The UCTA 1977 applies to any clause excluding, limiting or restricting liability. Most of the key provisions of the Act apply to business liability. The Act can render an exemption clause void or subject it to a reasonableness test. However, Schedule 1 outlines contracts which the key provisions of the Act do not apply, including contracts of insurance or those relating to an interest in land.
S1(3) defines business liability : liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business (whether his own business or another's).
Sections 6 and 7: statutory implied terms relating to goods
Sections 6 and 7 apply to clauses which exempt liability for breaches of statutory implied terms relating to goods.
S6 Sale and hire purchase
(2) As against a person dealing as consumer, liability for breach of the obligations arising from -
(a) section 13, 14, or 15 of the 1979 Act (sellers's implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose) ...
cannot be excluded or restricted by reference to any contract term.
(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.
(4) The liabilities referred to in this section are not only the business liabilities defined by section 1(3), but include those arising under any contract of sale of goods or hire-purchase agreement.
Section 6(2)(a) UCTA 1977, applies to cases where the exemption clauses attempt to exempt liability for breaches of the terms implied by S13 and S14 of the Sale of Goods Act 1979 (SGA 1979). S13 provides that in a sale of goods by description a term is implied that the goods will fit the description. S14 provides that where the seller is selling in the course of a business, a term is implied that the goods are of satisfactory quality and reasonably fit for any purpose made known to the seller. Therefore, under S6 UCTA 1977, a seller cannot restrict liability for a breach of terms implied by S13 or S14 SGA 1979 when the buyer is
dealing as a consumer.
S12 Dealing as a consumer
(1) A party to a contract
deals as consumerin relation to another party if -
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and
(b) the other party does make the contract in the course of a business; and
(c) in the case of a contract governed by the law of sale of goods or hire-purchase, or by section 7 of this Act, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.
According to S12 UCTA 1977, a person deals as a consumer if not making the contract in the course of business and the other party is making the contract in the course of business.
Furthermore, under S6 UCTA 1977, if the buyer is not dealing as a consumer the seller may only restrict liability for a breach of implied terms if the exemption clause satisfies the reasonableness test.
Similarly, Section 7 UCTA 1977 deals with attempts to exempt liability for breach of terms implied by S3 and S4 of the Supply of Goods and Services Act 1982 (SGSA 1982).
S7 Miscellaneous contracts under which goods pass
(2) As against a person dealing as consumer, liability in respect of the goods' correspondence with description or sample, or their quality or fitness for any particular purpose, cannot be excluded or restricted by reference to any such term.
(3) As against a person dealing otherwise than as consumer, that liability can be excluded or restricted by reference to such a term, but only in so far as the term satisfies the requirement of reasonableness.
(3A) Liability for breach of the obligations arising under section 2 of the Supply of Goods and Services Act 1982 (implied terms about title etc. in certain contracts for the transfer of the property in goods) cannot be excluded or restricted by reference to any such term.
(4) Liability in respect of -
(a) the right to transfer ownership of the goods, or give possession; or
(b) the assurance of quiet possession to a person taking goods in pursuance of the contract,
cannot (in a case to which subsection (3A) above does not apply), be excluded or restricted by reference to any such term except in so far as the term satisfies the requirement of reasonableness.
S3 SGSA 1982 implies a condition that goods transferred fit their description and S4 implies a condition that goods transferred in the course of business are of satisfactory quality and reasonably fit for any purpose made known. Therefore, under S7 UCTA 1977, liability for a breach of terms implied by S3 or S4 SGSA 1982 cannot be restricted against a person
dealing as a consumer. Furthermore, under S7 UCTA 1977, if the buyer is not dealing as a consumer the seller may only restrict liability for a breach of implied terms if the exemption clause satisfies the reasonableness test.
Section 2: negligence
Section 2 UCTA 1977 applies to clauses which exempt liability for negligence, including a breach of the term implied by section 13 of the Supply of Goods and Services Act 1982 (service exercised with reasonable care and skill).
S2 Negligence liability
(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.
(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.
Unlike S6 and S7 UCTA 1977, S2 does not distinguish between consumers and businesses. However, there is a distinction between the nature of the loss or damage suffered as a result of the 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
(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.
(2) 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.
S3 UCTA 1977 will only apply if one party deals as consumer or if a party deals on the other party's written standard terms of business. Under S3, a business must satisfy the reasonableness test if it wishes to restrict liability for a breach of an express term.
Unfair Contract Terms Act 1977: reasonableness test
The reasonableness test is used to evaluate an exemption clause in a number of circumstances under the UCTA 1977: S6 and S7 if the party is not a consumer, S2 if the loss or damage is not personal injury or death and it is always used if S3 applies.
The test is defined in S11 UCTA 1977.
S11 The 'reasonableness' test
(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act... is that 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, known to or in the contemplation of the parties when the contract was made.
(2) ln determining for the purposes of section 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract.
(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.
(5) lt is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.
S11(1) UCTA 1977 means that for an exemption clause to satisfy the reasonableness test it must have, at the time the contract was formed: been fair and reasonable to include the clause, taking account of the circumstances known (or that ought to have been known) to the parties or within their contemplation. Under S11(5), the burden of proof lies with the party seeking to rely on the exemption clause.
Generally, S11 UCTA 1977 provides little information about how the reasonableness should operate. Therefore, more practical information about implementing the test can be found in Schedule 2 and S11(4) UCTA 1977.
The guidelines found in Sch 2 apply to the reasonableness test when it is being considered in relation to S6 and S7 UCTA 1977. In practice, the court will consider the guidelines when applying the reasonableness test in other situations.
Sch 2 'Guidelines' for Application of Reasonableness Test
The matters to which regard is to be had in particular for the purposes of sections 6(3), 7(3) and (4), 20 and 21 are any of the following which appear to be relevant -
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.
The guidelines in S11(4) UCTA 1977 apply to limitation clauses only.
(4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to -
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
A defendant may seek to rely on part of an exemption clause. Therefore the issue arises: whether the court should consider the whole clause under the reasonableness test or just the relevant part.
Traditionally the courts have treated an exemption clause as a whole.
The Court of Appeal held that the 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....
However, recently a more liberal approach has been taken in some cases.
Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317
The Court of Appeal held that an exemption could be split into two parts, and the reasonableness test could be applied to each distinct part.
Case law involving the reasonableness test provides examples of the guidelines being utilised by the courts and also additional factors that have been considered under the test.
Lord Griffiths suggested that the difficulty of the task and the practical impact of the court's decision could be considered alongside the guidelines in Schedule 2 UCTA 1977.
The defendant supplied computer software to the plaintiff, a local authority. The software was used by the plaintiff to calculate an appropriate local community charge. The software contained an error which led a miscalculation of the local population figure. Relying on the wrong figures, the plaintiff set the community charge too low and lost £484 000 in receipts. The plaintiff suffered further losses and claimed £1 314 846 damages. The defendant sought to rely on a limitation clause, limiting their liability to £100 000. The plaintiff was aware of the limitation clause, which commonly found in contracts dealing with computer software.
Could the defendant rely on the limitation clause?
At the first instance, Scott Baker J found the defendant was in breach of an express term. Therefore, he applied S3 UCTA 1977 and the reasonableness test. He found that the limitation clause was unreasonable on the basis of Schedule 2 guidelines. Essentially that the defendant was a large company which could afford the liability and had sufficient insurance but had they had not shown why it was reasonable to limit their liability. In addition, they had a strong bargaining position as only a few companies supplied the software, who all used a similar limitation clause and the plaintiff was not a traditional business. The practical impact of deciding that the clause was reasonable would have meant that the local citizens suffered through increased tax or reduced services and this made the practical consideration in favour of finding the clause unreasonable ( Smith v Eric Bush ).
The Court of Appeal agreed the term failed the reasonableness test but lowered the damages awarded to the plaintiff.
Privity of contract means that only a party to the contract can rely on a clause in the contract.
The general rule is that an exemption clause cannot protect a third party.
The plaintiff was injured when boarding a ship. The plaintiff had a contract with a Shipping Company who were protected by an exemption clause. Therefore, the plaintiff sued the defendants, the ship master and boatswain, who sought to rely on the exemption clause.
Could a third party rely on the exemption clause?
The defendants could not rely on the exemption clause as they were not parties to the contract.
However, there is a statutory exception to this rule.
S1 Right of third party to enforce contractual term
(1) ... a person who is not a party to a contract (a 'third party') may in his own right enforce a term of the contract if -
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.
(6) Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation.
A third party may rely on a term, including an exemption clause (S1(6)) if the contract expressly allows him (S1(1)).
Unfair Terms in Consumer Contracts Regulations 1999
The UTCCR 1999 are a set of regulations deriving from an EU Unfair Consumer Contract Terms Directive. It only applies to contracts between a seller of goods or supplier of services and a consumer, so is narrower than UCTA 1977. However, it is wider in that it applies to all contract terms, which are not individually negotiated, and not only exemption clauses.
Reg 5 Unfair Terms
(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.
Reg 8 Effect of unfair term
(1) An unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer.
For exemption clauses, the unfairness test means that the outcome under the UTCCR 1999 is likely to be the same as under the UCTA 1977. Similarly, it is not necessary to consider UTCCR if an exemption clause is void under UCTA.