Exemption clauses and unfair terms

Question 1

What is the purpose of an exemption clause in a contract?

Answer 1

An exemption clause is a contractual term that purports to limit or exclude a liability that would otherwise attach to one of the contracting parties. It is used to limit or exclude liability in commercial contracts.

Question 2

What are the elements that can be included in an exemption clause?

Answer 2

Exemption clauses can include statements about whether liability is entirely excluded or limited to a stated amount, which types of claims or duties the exemption relates to, and which types of loss the exemption relates to.

Question 3

What is the purpose of the Unfair Contract Terms Act 1977?

Answer 3

The purpose of the Unfair Contract Terms Act 1977 is to impose further limits on the extent to which liability for breach of contract, negligence, or other breach of duty can be avoided by means of contract terms and otherwise.

Question 4

What are the two statutory controls that affect exemption clauses?

Answer 4

The two statutory controls that affect exemption clauses are the Unfair Contract Terms Act 1977 (UCTA) for contracts between businesses, and the Consumer Rights Act 2015 (CRA) for contracts between a business and a consumer.

Question 5

What are the three points to consider when determining if a party can rely on an exemption clause?

Answer 5

The three points to consider are: incorporation (Is the exemption clause part of the contract?), construction (Does the clause, as drafted, cover the alleged breach(es) and resulting loss?), and statutory controls (What is the effect on the clause of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015?).

Question 6

How does the Consumer Rights Act 2015 (CRA) regulate exemption clauses?

Answer 6

The Consumer Rights Act 2015 regulates exemption clauses in consumer contracts. It ensures that attempts to exclude or limit liability for death or personal injury resulting from negligence, breach of statutory implied terms about quality of goods, digital content, or services are not binding on the consumer. The CRA also regulates unfair terms in consumer contracts.

Question 7

What is the rule of contra proferentem and how does it apply to exemption clauses?

Answer 7

The rule of contra proferentem means that if there is any doubt as to the meaning and scope of an exemption clause, the ambiguity will be resolved against the party seeking to rely upon it. This rule is applied when interpreting exemption clauses and can be used to construe ambiguous clauses against the party that drafted them.

Question 8

Why are exemption clauses often construed contra proferentem?

Answer 8

Exemption clauses are often construed contra proferentem, meaning that any doubt as to their meaning and scope is resolved against the party seeking to rely on them. This is because courts and legislatures are concerned about limiting or excluding damages in a way that may be unfair to the innocent party.

Question 9

What is the significance of clear words when excluding liability for negligence?

Answer 9

Clear words must be used if a party is seeking to exclude liability resulting from its own negligence. The requirement is most obviously met when the word ‘negligence’ itself is used, but it can also be satisfied if the words used are wide enough to extend to negligence.

Question 10

What is the reasonableness test in the Unfair Contract Terms Act 1977?

Answer 10

The reasonableness test in the Unfair Contract Terms Act 1977 requires that a term must have been fair and reasonable to be included in the contract, taking into account the circumstances known or reasonably contemplated by the parties at the time of making the contract. The test is judged at the time of the contract and considers factors specified in Schedule 2 of UCTA.

Question 11

How does the doctrine of privity affect the operation of exemption clauses?

Answer 11

The doctrine of privity establishes that, at common law, a party outside the contract cannot benefit from its terms or have an obligation imposed upon them by the contract. This means that the doctrine applies to exemption clauses as well, limiting their effect on third parties.

Question 12

What is the significance of reasonable notice when incorporating an exemption clause?

Answer 12

Reasonable notice is important when incorporating an exemption clause, especially if the clause is onerous. Clear and emphatic notice may be required to ensure that the other party is aware of the clause and its implications.

Question 13

What is the role of the Contracts (Rights of Third Parties) Act 1999 in relation to exemption clauses?

Answer 13

The Contracts (Rights of Third Parties) Act 1999 reduces the effect of the doctrine of privity in certain circumstances. It allows third parties to benefit from the terms of a contract and have obligations imposed upon them, potentially affecting the operation of exemption clauses.

Question 14

What types of terms are considered unfair under the Consumer Rights Act 2015 (CRA)?

Answer 14

According to the Consumer Rights Act 2015, a term is considered unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. However, terms specifying the main subject matter of the contract and the price cannot be assessed for fairness.

Question 15

How does the court interpret exemption clauses in contracts between commercial parties of equal bargaining power?

Answer 15

In contracts between commercial parties of equal bargaining power, the court is less likely to read a clause contra proferentem. Instead, the court favors a more commercial and less mechanistic approach to interpreting exemption clauses.

Question 16

What types of liability cannot be excluded or restricted by an exemption clause under the Unfair Contract Terms Act 1977?

Answer 16

Under the Unfair Contract Terms Act 1977, liability for death or personal injury resulting from negligence cannot be excluded or restricted by an exemption clause. Similarly, liability for breach of statutory implied terms about the quality of goods, as specified in the Sale of Goods Act 1979, cannot be excluded or restricted unless the term satisfies the requirement of reasonableness.

Question 17

What is the Canada Steamship test and how does it apply to exemption clauses?

Answer 17

The Canada Steamship test helps determine whether an exemption clause should be interpreted as excluding liability for negligence. It is used when the clause is ambiguous and may be less useful in some commercial cases. The test considers whether the clause falls into the category where liability is based solely on negligence or where the party would be liable irrespective of negligence.

Question 18

What does it mean for a party to deal on its own written standard terms of business under the Unfair Contract Terms Act 1977?

Answer 18

Under the Unfair Contract Terms Act 1977, if a party deals on its own written standard terms of business, it cannot rely on a contract term to exclude or limit its liability for any breach of contract, unless the term passes the reasonableness test. This applies to rendering a contractual performance substantially different from what was reasonably expected and claiming entitlement to render no performance at all.

Question 19

What is the distinction between an exemption clause and a limitation of liability clause?

Answer 19

An exemption clause purports to limit or exclude a liability that would otherwise attach to one of the contracting parties, while a limitation of liability clause typically caps liability in relation to particular events at a particular sum.

Question 20

What types of liability are not binding on the consumer under the Consumer Rights Act 2015 (CRA)?

Answer 20

Under the Consumer Rights Act 2015, liability for death or personal injury resulting from negligence and breach of statutory implied terms about goods, digital content, or services is not binding on the consumer. However, limitations on liability under section 49 cannot prevent the consumer from recovering the price paid.

Question 21

What factors are taken into account when applying the reasonableness test in the Unfair Contract Terms Act 1977?

Answer 21

When applying the reasonableness test in the Unfair Contract Terms Act 1977, factors such as the relative bargaining positions of the parties, inducements received by the customer, knowledge of the existence and extent of the term, practicability of compliance with conditions, and whether the goods were manufactured, processed, or adapted to the special order of the customer should be taken into account.

Question 22

How can an exemption clause be incorporated into a contract?

Answer 22

An exemption clause can be incorporated through signature, notice, or course of dealing. In almost all cases, the terms of a signed contract will be binding. Terms can also be incorporated by reasonable notice or by a course of dealing.

Question 23

What is the meaning of the word ‘construction’ when considering whether a party can rely on an exemption clause?

Answer 23

Construction means interpreting the exemption clause to determine whether the clause as drafted covers the breach and loss that has occurred

Question 24

In relation to exemption clauses and negligence, in what circumstances may the contra proferentum rule and the Canada Steamship rules be less relevant?

Answer 24

When an exemption clause occurs in a commercial contract between parties of equal bargaining power

Following Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] when an exemption clause occurs in a commercial contract between parties of equal bargaining power, the contra proferentem rule and the Canada Steamship test might well be less useful than considering the normal meaning of the words construed in the light of the other provisions of the contract

Question 25

What is the purpose and scope of the Unfair Contract Terms Act 1977?

Answer 25

The Act regulates exemption clauses that seek to exclude or restrict liability where both parties are acting in the course of a business

Question 26

According to the Unfair Contract Terms Act 1977, when is the requirement of reasonableness judged?

Answer 26

At the time the contract was made

Question 27

The Consumer Rights Act 2015 regulates unfair terms in consumer contracts. How is unfairness assessed?

Answer 27

A term is unfair if it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer

Question 28

Which of the following is not correct regarding the Consumer Rights Act 2015? The Act regulates unfair terms generally A customer is not bound by a term that attempts to exclude or restrict the trader’s liability for breach of the requirement that goods are fit for their particular purpose The Act makes unenforceable any term which restricts liability for breach of the requirement that services are performed with reasonable care and skill The Act is concerned with contracts between businesses and consumers

Answer 28

The Act makes unenforceable any term which restricts liability for breach of the requirement that services are performed with reasonable care and skil This is the correct answer because this proposition is not correct. S.57(1) provides that a customer is not bound by a term in a contract to supply services to the extent that it would totally exclude the trader’s liability to perform the service with reasonable care and skill, but a restriction of liability (to a specific sum) will not be binding to the extent that it would prevent the consumer from recovering the price paid, but otherwise could be binding. The other three answers are all correct interpretations of the 2015 Act and its effects

Question 29

A hairdressing salon (‘the salon’) purchases 10 hairdryers from a supplier. Before purchasing the hairdryers, the salon owner is asked to sign a fifteen-page document. Had the salon owner read the document, she would have seen the following clause at the top of the first page: ‘The supplier accepts no liability for any loss to property or injury to persons.’ The salon owner signs the document without reading it. On the first day of use, one of the hairdryers catches fire causing damage to the property of the salon. Fortunately, no one was injured. Which one of the following statements best explains the legal position? The supplier has breached an implied term under the Sale of Goods Act 1979 as the hairdryer was not of satisfactory quality. Although, the exemption clause was incorporated by signature, the Unfair Contract Terms Act 1977 states that it would only be possible to limit liability for the property damage in so far as the exemption clause satisfies the requirement of reasonableness. The supplier has breached an implied term of the Consumer Rights Act 2015 as the hairdryer was not of satisfactory quality. The exemption clause has not been incorporated by signature as it was an onerous clause. The supplier has breached an implied term under the Consumer Rights Act 2015 as the hairdryer was not of satisfactory quality. Although, the exemption clause was incorporated by signature, the Consumer Rights Act 2015 states that this term will not bind the salon. The supplier has breached an implied term of the Sale of Goods Act 1979 as the hairdryer was not of satisfactory quality. The exemption clause has not been incorporated by signature as it was an onerous clause. The supplier has breached an implied term of the Sale of Goods Act 1979 as the hairdryer was not of satisfactory quality. The exemption clause was incorporated by signature. The exemption clause will be effective as the Unfair Contract Terms Act 1977 only prevents exclusion of liability for death or personal injury.

Answer 29

The supplier has breached an implied term under the Sale of Goods Act 1979 as the hairdryer was not of satisfactory quality. Although, the exemption clause was incorporated by signature, the Unfair Contract Terms Act 1977 states that it would only be possible to limit liability for the property damage in so far as the exemption clause satisfies the requirement of reasonableness. Correct. This answer sets out the correct breach under the Sale of Goods Act 1979 and recognises that the clause has been effectively incorporated but would be subjected to the requirement of reasonableness under the Unfair Contract Terms Act 1977. Although the other answer options sound plausible they are all incorrect. This contract does not fall under the Consumer Rights Act 2015. The clause has been validly incorporated through signature. As there is no personal injury loss s2(1) Unfair Contract Terms Act 1977 is not engaged. The fact that this clause could relate to personal injury caused by negligence does not invalidate the clause vis a vis other heads of damage.

Question 30

A customer orders a mountain bike from a bike shop. The bike is 'made to order' – the customer chooses various parts and the bike is assembled in accordance with that choice and later delivered. The customer agrees to pay £1,200 on delivery. The customer discovers that the combination of parts he has chosen is actually readily available as a pre-assembled bike with numerous retailers for only £800. The customer no longer wants to pay the sum of £1,200 for the bike. Which of the following correctly summarises the situation as to whether the bike shop can enforce the payment obligation? The court would determine whether the clause satisfies the test of reasonableness in order to determine whether it is enforceable. The clause is enforceable only to the extent that the customer can be required to pay £800. This clause is enforceable. The court would determine whether the clause causes a significant imbalance in the parties' rights and obligations to the detriment of the customer in order to determine whether it is enforceable. The clause is unenforceable.

Answer 30

This clause is enforceable. Correct. This is a consumer contract. The Consumer Rights Act 2015 includes a broad provision that makes terms generally not binding on the consumer if they are unfair. However, the court cannot assess terms specifying the main subject matter of the contract or assess the fairness of the price of goods. The payment obligation cannot be interfered with. If the court was able to assess this term for fairness, the test would be whether it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer.

Question 31

A student joins a kayaking course with an adventure company. Her instructor on the course negligently takes her into rapids far too dangerous for someone of her ability and experience. She capsizes and collides with several rocks, causing facial injuries. The contract she signed when she registered for the course included a clause (the ‘Clause’) which stated that the adventure company would not be liable for any facial injuries or disfigurements caused during the kayaking and would only be liable for broken limbs and fingers. Which one of the following is correct? The Clause will not be effective to exclude liability for the student’s injuries The Clause will be effective to exclude liability for the student’s injuries if it passes the test of fairness under the Consumer Rights Act 2015. The Clause will be effective to exclude liability for the student’s injuries. The Clause will be effective to exclude liability for the student’s injuries if it passes the test of reasonableness under the Unfair Contract Terms Act 1977. The Clause will be effective to exclude liability the student’s injuries depending on the severity of the personal injuries.

Answer 31

The Clause will not be effective to exclude liability for the student’s injuries

Question 32

A homeowner engages a professional decorator to decorate her house. She signs a written contract provided by the decorator which includes terms that: [clause A] the decorator's liability for any injury caused by a failure to perform the service with reasonable care and skill will be limited to £5,000 [clause B] Nothing in clause restricts liability for death / personal injury resulting from negligence. The decorator carries out the work carelessly, causing damage to the homeowner's house in excess of £10,000. Which of the following best summarises the legal situation in relation to the clauses referred to above? The clause will be effective because it is a limitation rather than exclusion of liability. The extent to which the clause is effective is likely to depend on the price paid by the homeowner. The clause will be effective only so far as it satisfies the requirements of reasonableness. The clause will be ineffective because the decorator is not permitted to exclude or restrict liability for death or personal injury resulting from negligence. The clause will be ineffective because it has not been incorporated.

Answer 32

The extent to which the clause is effective is likely to depend on the price paid by the homeowner. Correct. The clause has been incorporated – it is contained within a signed contract. This is a consumer contract for services, and this situation is governed by the Consumer Rights Act 2015. The obligation which the decorator seeks to exclude is the obligation under s 49 of the Act to provide the service with reasonable care and skill. Any attempt to entirely excludethis term will not be binding on the consumer. Any attempt to restrict / limit liability under section 49 will not be binding to the extent that it would prevent the consumer from recovering the price paid – so effectively, liability cannot be limited to less than the price paid, but a restriction / limitation that does not have this effect is not necessarily problematic (although it could be if it falls under the broader regulation of 'unfair terms'). For this reason, the price paid is important.

Question 33

A carpenter contracts with a company to carry out plumbing services. At the time of contracting an agent of the company signs a form, without reading it, containing the following clause, ‘Our total liability to you, including but not limited to our liability in negligence, shall not exceed £500’. The carpenter carries out the services with a lack of reasonable care and skill causing damage to company property. Which one of the following statements best explains the legal position? The carpenter has breached an implied term of the Consumer Rights Act 2015 by failing to carry out the service with reasonable care and skill. The exemption clause limits liability for negligence at common law, however the company will not be taken to have voluntarily accepted any risk merely because he agreed to or knew about the exemption clause. The carpenter has breached an implied term of the Consumer Rights Act 2015 by failing to carry out the service with reasonable care and skill. The carpenter cannot rely on the clause because it has not been read by the agent of the company. The carpenter has breached an implied term of the Supply of Goods and Services Act 1982 by failing to carry out the service with reasonable care and skill. The exemption would be void under the Unfair Contract Terms Act 1977 as it attempts to limit liability caused by negligence. The carpenter has breached an implied term of the Supply of Goods and Services Act 1982 by failing to carry out the service with reasonable care and skill. The exemption will not be construed to cover the carpenter's breach. The carpenter has breached an implied term of the Supply of Goods and Services Act 1982 by failing to carry out the service with reasonable care and skill. The exemption clause limits liability for negligence at common law, however the clause will only be effective in accordance with the Unfair Contract Terms Act 1977 if it satisfies the requirements of reasonableness.

Answer 33

The carpenter has breached an implied term of the Supply of Goods and Services Act 1982 by failing to carry out the service with reasonable care and skill. The exemption clause limits liability for negligence at common law, however the clause will only be effective in accordance with the Unfair Contract Terms Act 1977 if it satisfies the requirements of reasonableness. Correct. This answer sets out the correct breach under s 13 SGSA and recognises that the clause is effective at common law (passing incorporation and construction) but would be subjected to the requirement of reasonableness under the Unfair Contract Terms Act 1977.

Question 34

What does the Unfair Contract Terms Act do?

Answer 34

(a) it prevents the defendant from excluding or restricting their liability by reference to the term (eg in relation to death/ personal injury caused by negligence – UCTA 1977, s 2(1)) and the seller’s implied undertaking as to title (ownership) of goods sold or transferred (UCTA 1977, s 6(1)(a) and s 7(3A)); or (b) it has no effect on the term, and so the defendant can rely on the term (eg a clause in a freely negotiated contract that exempts liability for breach of an express term – UCTA 1977, s 3); or (c) it subjects the term to a ‘requirement of reasonableness’. This means that the defendant can rely on the term only if it satisfies this requirement. If it does not, UCTA 1977 will prevent the defendant from excluding or restricting their liability by reference to it. Indeed, if UCTA 1977 does apply, then, more often than not, it subjects the exemption clause to the requirement of reasonableness.

Question 35

When does the Unfair Contract Act reasonableness test apply?

Answer 35

* loss or damage (other than death and personal injury) caused by negligence (including breach of the term implied by SGSA 1982, s 13) – UCTA 1977, s 2(2); * breach of the statutory implied terms relating to goods – description, quality and fitness for purpose – UCTA 1977, ss 6 and 7 (s 6 applies to sale of goods contracts and s 7 applies to goods supplied under a work and materials contract); and * breach of an express term contained in the standard written terms of the person seeking to exempt liability – UCTA 1977, s 3.

Question 36

Under the Consumer Rights Act when is a term not binding in sale contracts?

Answer 36

(a) exclude or restrict a right or remedy in respect of breach of ss 9– 11; (b) make such a right or remedy or its enforcement subject to a restrictive or onerous condition; (c) allow a trader to put a person at a disadvantage as a result of pursuing such a right or remedy; or (d) exclude or restrict rules of evidence or procedure.

Question 37

Under the Consumer Rights Act when is a term not binding in service contracts?

Answer 37

(a) exclude or restrict a right or remedy in respect of liability for breaches of s 57 of the CRA 2015 effectively provides that a trader cannot exclude (compare restrict) liability for breach of s 49 (the implied term to perform a service with reasonable care and skill); (b) make such a right or remedy or its enforcement subject to a restrictive or onerous condition; or (c) put a person at a disadvantage as a result of pursuing such a right or remedy, or exclude or restrict rules of evidence or procedure.

Question 38

When can third parties rely on exemption clauses?

Answer 38

Provided a third party is named in an exemption clause or identified as a member of a class entitled to benefit from it, the third party can rely on the exemption to the same extent as the relevant contracting party.