The common law went to great lengths to protect a party with weak bargaining power, whether or not in the position of a consumer, and this is apparent through the decisions and reasoning in cases which have formed the common law rules. The situation with the present extensive consumer law development is that the need to do this has diminished – the courts now assuming a greater role in interpreting the legislation, particularly where a wide-ranging word like ‘reasonable’ is involved.
One particular effect of legislation in general is to indicate that since consumers and those dealing on standard terms are now very well protected, businesses which negotiate individually may be assumed to know what they are doing when they enter into contracts with each other. This is especially true of limitation clauses, as opposed to exclusion clauses, and here the courts are more willing to agree that it is reasonable for a business to set a limit on what it can afford to pay in the event of a breach, especially bearing in mind the ability to insure. This approach was already seen in two cases involving Securicor, the security firm. In both Photo Production v Securicor (1980) and Ailsa Craig Fishing Co v Malvern Fishing Co and Securicor (1983) the House of Lords believed that the parties must have made a reasonable assessment of the likely loss in reducing their liability by a limitation clause in each case. The security firm were therefore not liable for the consequences of a fire in the first case and damage to the hull of a ship in the second, while they were on security patrol.
The effect of the legislation in general is to restrict the use of unfair terms, and particularly unfair exemption clauses in consumer contracts. Richard Stone, an academic expert on contract law, is of the view that the effect of the legislation is to cut ‘a deep furrow right across the doctrine of freedom of contract.’ This echoes the appraisal of Lord Denning in George Mitchell v Finney Lock Seeds (see p. 124), where he said of the reform by statute:
So the idol of ‘freedom of contract’ was shattered. In cases of personal injury or death, it was not permissible to exclude or restrict liability at all. In consumer contacts any exemption clause was subject to the test of reasonableness … it heralds a revolution in our approach to exemption clauses; not only where they exclude liability altogether and also where they limit liability; not only in the specific categories in the Unfair Contract Terms Act 1977, but in other contracts too.
Further reform
It can be seen that there is a fair amount of overlap between the statutory provisions of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999. Because of this the Law Commission
How might the judiciary view appraisal of a legal issue by a politician?
has reviewed the whole package of legislation at the request of the Department of Trade and Industry. Their report entitled Unfair Terms in Contracts (2005) made a number of recommendations, including a Draft Bill, but has not yet been implemented. It proposed, among other things, the following:
• One single Act would replace the current legislation, retaining the essence of s. 2(1) on terms purporting to exclude liability for personal injury or death.
• Any other terms apart from ‘core’ terms, e.g. price, will be subject to a test of reasonableness, with the burden of proof in a consumer contract being on the party trying to rely on the clause.
• A new category of contract would be created, that of Small Business Contract, for those with nine or less employees. These would be given some protection under the new proposals regarding non-negotiated terms.
An interesting aspect of the proposals concerning the assessment of reasonableness is whether the clause is ‘transparent’, that is clear and understandable.
Conclusion
A consequence of both common law and statutory restrictions on unfair terms is that an inroad has been made in the freedom to contract, but also into the freedom to take advantage of others who are under pressure and who may lack bargaining power. To take this to extremes would be paternalistic, of course, but a reasonable amount of protection is surely no more than a developed society has come to expect of the modern law of contract.
Summary
There are two types of exemption clause:
• Limitation clause: limits one party’s liability toward the other in a contract.
• Exclusion clause: avoids one party’s liability toward the other in a contract.
Incorporation
The exemption clause must:
• not come too late – Olley v Marlborough Court.
• be brought to the other party’s attention in a reasonable way – Parker v South Eastern Railway, Thornton v Shoe Lane Parking.
• be of a contractual nature – Chapelton v Barry;
• not be obscured – Sugar v LMS Railway.
• not be part of a ‘course of dealing’ – Hollier v Rambler Motors.
Construction
• The main purpose rule – Glynn v Margetson.
• The contra proferentem rule – Houghton v Trafalgar Insurance.
• An overriding oral statement – Mendelssohn v Normand.
• An overriding misrepresentation – Curtis v Chemical Cleaning and Dyeing Co.
Legislation
The Unfair Contract Terms Act 1977
• Mostly applies to a consumer – section 12.
• A contract term cannot now exclude or restrict liability for death or personal injury resulting from negligence – section 2(1).
• A contract term can only exclude or restrict other liability resulting from negligence if it is reasonable to do so – section 2(2).
• When dealing on one party’s standard business terms, a contract term cannot exclude or restrict liability for non-performance or for performance which is substantially different from what was agreed, unless it is reasonable to do so – section 3.
Reasonableness should be based on the position at the time of contract, including resources available and the possibility of insurance – Stewart Gill v Horatio Myer Ltd. For examples of reasonableness, see Green v Cade, George Mitchell v Finney Lock Seeds, Smith v Bush and Harris v Wyre Forest, Woodman v Photo Trade Processing.
The Unfair Terms in Consumer Contract Regulations 1999
Based on a European directive, and wider than Unfair Contract Terms Act 1977 in scope, covering unfair terms in general, not just exclusion clauses.
Includes a requirement of terms to be in plain and intelligible language.
Regulation 5(1) states that a term will be unfair and therefore not binding if it ‘contrary to the requirement of good faith causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’.
The courts should consider factors such as:
• the bargaining strength of parties,
• any inducement to contract,
• special requirements of the customer,
• whether the supplier has acted equitably.
Note the supervisory role of the Director-General of Fair Trading.
For reasonableness in limitation clauses see Photo Production v Securicor and Ailsa Craig Fishing Co v Malvern Fishing Co and Securicor.
Questions
1 Kelly, a painter, visits NewArt gallery and leaves her coat at a cloakroom where she pays a fee and is given a receipt.
While Kelly is walking around one of the exhibition rooms an attendant who is moving some paintings accidentally knocks over a ladder which hits Kelly, causing her considerable injury.The attendant apologises to Kelly, but points to a sign at the entrance which states,
‘NewArt gallery takes no responsibility for injury to visitors however caused’.
When Kelly returns to the cloakroom to collect her coat she finds that it has been given to someone else. The cloakroom assistant points out a statement on Kelly’s receipt which reads, ‘NewArt gallery takes no responsibility for loss or theft of items, however this may arise’.
Discuss any potential claims that Kelly may have against New Art Gallery.
OCR 2007
2 Alison visits Bestever Theme Park and, wishing to spend some time on rides, leaves her coat at a cloakroom where she pays a fee and is handed a receipt. While Alison is queuing for a ride, a park attendant, Callum, driving a small vehicle collides with her, causing injury to her shoulder and leg. Callum apologises on behalf of the Park, but points to a sign at the entrance which states, ‘Bestever Theme Park takes no responsibility for injury to visitors however caused’. Alison decides to leave the Park, but when she returns to collect her coat she finds that it has been given to the wrong person.The assistant, Dana, points out a statement on her receipt which reads,‘All items are left at owner’s risk. Bestever Theme Park takes no responsibility for loss or theft of items, however this may arise’. Advise Alison whether she may make a claim against Bestever Theme Park concerning her injury and the loss of her coat.
OCR 4-module specimen paper
3 Critically examine the process by which the court decides whether an exemption clause is valid.
4 ‘The amount of legislation concerning exemption clauses renders the common law principles of little use.’
Consider the accuracy of this statement.
5 ‘Exemption clauses are now outlawed’.
Discuss whether this claim is accurate.
6 Does the current state of the law on exemption clauses now afford a consumer satisfactory protection against exploitation?
A further ‘dilemma’ style question on exemption clauses can be found in Part 7 of the book.