The Unfair Contract Terms Act 1977 (UCTA) imposes statutory limits on the avoidance of civil liability through exclusion clauses in business contracts for breaches of contract, negligence, or other breaches of duty. UCTA is only concerned with exclusion clauses, and does not examine whether a contract is unfair generally.
An "exclusion clause" is not defined in UCTA, but Section 13 indicates that it can include any clause attempting to:
- restrict or exclude a liability;
- make a liability, or the enforcement of a liability, subject to restrictive or onerous conditions;
- restrict the rights and remedies of an aggrieved party; or
- restrict rules of evidence or procedure.
For example, a clause attempting to impose short time limits for an unsatisfied party to bring a claim could be deemed to be an exclusion clause by virtue of its attempt to restrict the time within which remedies are available. Exclusion clauses that are subject to the provisions of UCTA will either be void in all cases, or void where they fail a test of "reasonableness".
When does UCTA apply?
UCTA is concerned with upholding business liability, applying to contracts made in the course of business. It therefore does not apply to the occasional private transaction between individuals. In addition, there are certain circumstances (outlined in Schedule 1) where UCTA is not applicable. Those specific exceptions include employment contracts, contracts relating to interests in land, or contracts regarding intellectual property rights. When UCTA does apply to the contract, some sections apply differently depending on whether the purchaser is a consumer, or another business. Broadly, consumers benefit from a greater degree of protection under UCTA than businesses. Accordingly, in analysing the effects of UCTA it is important to determine whether the purchaser is a business or a consumer. Consumer contracts involve purchasers acting outside of the course of business. The product being sold will be of a type ordinarily supplied for private use or consumption, and it will be supplied by a person who is acting in the course of business. In contrast, a business includes "a profession and the activities of any government department or local or public authority". If the purchaser asserts that he or she is a consumer and the supplier disputes this, then it will usually be the responsibility of the supplier to show that the purchaser is not a consumer.
What does UCTA restrict?
Exclusion of liability for negligence
"Negligence" has a special definition in UCTA. Under Section 1(a), it means "the breach ... of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract" or "the breach ... of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty)" or " the breach ... of the common duty of care imposed by the M1 Occupiers’ Liability Act 1957 or the M2 Occupiers’ Liability Act (Northern Ireland) 1957". Under Section 2(1), UCTA will apply to contract clauses and notices which attempt to exclude liability for death or personal injury resulting from negligence. This Section renders the particular clause void, regardless of the status of the parties. Under Section 2(2), UCTA subjects any clauses or notices excluding liability for any other loss or damage (i.e. loss or damage other than personal injury or death) resulting from negligence to a test of reasonableness. Such loss or damage might include financial loss or damage to property. Where such a clause is unreasonable, it will be void. Again, this Section applies regardless of the status of the parties. These provision of UCTA will apply irrespective of whether the person seeking to dispute the validity of the clause or notice was aware of it, or gave his or her express agreement to it.
Exclusion of liability for breach of contract
Even where a breach of contract does not constitute negligence, UCTA may apply. Contractual exclusion clauses - those that do not exclude liability for negligence - will be subject to UCTA if one of the parties is dealing as a consumer, or the contract is conducted using written standard terms of business. If either of these conditions is met, the exclusion clause will be subject to the reasonableness test by virtue of Section 3.
Exclusion of terms implied by the Sale of Goods Act 1979
The Sale of Goods Act 1979 (SGA) implies specific terms into contracts for the sale of goods. For example, Section 14 stipulates (with limited exceptions) that goods sold will be of a satisfactory quality, including being fit for any purpose for which they are commonly used. Section 6 of UCTA steps in whenever a contracting party attempts to limit any liability imposed by certain provisions of SGA. First, Section 6(1)(a) of UCTA states that parties cannot exclude their liability for breach of Section 12 of SGA, which implies various provisions relating to the seller's rights to sell the goods in question. This applies to both consumer and business contracts. Second, when dealing with consumers, a seller cannot try to avoid any liability imposed by Sections 13, 14, or 15 of SGA. These sections cover such matters as sale by description, satisfactory quality, fitness for purpose, and sale by sample. Any clauses seeking to exclude the liability of the seller for breaches of the conditions imposed by these Sections of SGA will be void by virtue of Section 6(2) of UCTA. Where these Sections are implied by SGA into a business-to-business contract, Section 6(3) of UCTA will subject any relevant exclusion clauses to the reasonableness test.
How do I know if the clause is reasonable?
When an exclusion clause is subjected to the reasonableness test by UCTA, several factors will be taken into account by the court (or any other decision maker) in deciding whether to uphold the clause. Under Section 11 of UCTA, the court must take into account the "circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made". Therefore, any subsequent developments in the trading relationship, or the losses caused by any breaches, are not relevant. Further, Section 11(5) puts the burden on the party seeking to uphold the exclusion clause to show that it was a reasonable clause to include at the time of the contract.
Further considerations apply to specific scenarios. For example, Section 11(4) is relevant to clauses which attempt to limit liability to a specified sum of money. The legislation suggests regard should be had to the resources available to the party to meet the liability, should it arise, and the possibility of a party obtaining adequate insurance to cover the liability. In relation to clauses attempting to exclude terms implied by SGA, a set of guidelines for reasonableness are set out in Schedule 2 of UCTA. These suggest factors to be considered include any discrepancy between the bargaining power of the parties in relation to each other; whether the customer was induced to agree to the term; whether the customer even knew of the term and the extent of it; and whether the goods were adapted to meet a special order or different requirements.
Anyone working with contracts needs to be aware of the legal limitations upon exclusion clauses. Under English law, a good understanding of UCTA is perhaps the key to any such awareness (although there are other legal rules that affect exclusion clauses, notably common law rules relating to their interpretation and special rules in consumer protection legislation). This is one area where contract law isn't mere common sense, and expert guidance will often be required to navigate the legal maze. If you get into a serious dispute, exclusion clauses can become the most important of contractual provisions, and pre-contract legal advice on their drafting and enforceability can begin to look very good value indeed.
This article was researched and written by Lizzie Judd.