Unfair Contract Terms

Regulation by statute

Unfair Contract Terms Act 1977 and Consumer Rights Act 2015

In addition to the protection offered by the common law, there exists statutory protection from unfair terms in the form of the Unfair Contracts Terms Act 1977, and the Consumer Rights Act 2015. The Unfair Contract Terms Act 1977 applies only to businesses and does not apply to consumer contracts or consumer notices. The Consumer Rights Act 2015 repeals and replaces the Unfair Terms in Consumer Contracts Regulations and replace the Unfair Contract Terms Act in relation to consumer contracts and notices.

Unfair Contract Terms Act 1977

The Unfair Contract Terms Act 1977 applies only to liability arising in the course of a business and in relation to liability arising towards other businesses. It does not therefore provide comprehensive protection against unfair terms. Also it provides for specific instances of unfair terms. In particular, penalty clauses are outside its remit. The Unfair Contract Terms Act provides different levels of protection. Some provisions provide absolute protection whereas some will be subject to a consideration of whether the term was a reasonable one to include. The Unfair Contract Terms Act extends beyond liability arising from contracts and extends to tortious liability arising from negligence or liability arising from the Occupiers Liability Act 1957.

The main provisions cover:

s.2 - Exclusion of liability for negligence
s.3 - Exclusion of liability for breach of contract
s.6 - Exclusion of liability in contracts for the sale of goods and hp
s.7 - Exclusion of liability in hire contracts
s.8 - Exclusion of liability arising from a misrepresentation
s.11 - Sets out the reasonableness test
Sch 2 - Provides further guidance on application of the reasonableness test where the contract is a non-consumer contract and ss 6 or 7 are under consideration.

s.2 - Exclusion of liability for negligence

S.2(1) provides that a business cannot exclude or restrict liability for death or personal injury arising from negligence. This provision is absolute and not subject to the requirement of reasonableness.

S.2(2) provides that a business may exclude or restrict liability for other types of loss only if it is reasonable to do so. The question of what is reasonable is decided by applying the reasonableness test set out in s.11.

S.2(3) provides that where a person is aware of an exclusion clause this is not to be taken as a voluntary acceptance of risk.

S.3 - Exclusion of liability for breach of contract

S.3 only applies where there exists a standard form contract. The provisions are subject to the reasonableness test in s.11 and provide restrictions on the ability to:

Exclude or restrict liability for breach of contract
Provide substantially different performance to that reasonably expected
Provide no performance at all

s.6 - Exclusion of liability in contracts for the sale of goods and hp

S.6 applies to contracts for the sale of goods and contracts of hire purchase. The provisions relate to liability arising under the implied terms under the Sale of Goods Act 1979 and the Supply of Goods (Implied Terms) Act 1973.

S.6 provides:

A party can never exclude liability relating to title - absolute
party can only exclude liability relating to quality, description, fitness for purpose or sample where it is reasonable to do so. Reasonableness is judged under s.11 reasonableness test and the factors set out in Sch 2.

S.7 Exclusion of liability in contracts of hire

S.7 applies to contracts of hire and provides:

Provisions relating to description, sample, quality and fitness for purpose can only be excluded in so far as it is reasonable to do so - reasonableness is decided by reference to the reasonableness test under s.11 and the factors set out in sch 2.
Provision relating to title under s.2 Supply of Goods and Services Act 1982 cannot be excluded - absolute.

S.8 Liability arising for misrepresentation

S.8 amends s.3 of the Misrepresentation Act 1967 and makes provision for exclusion or restriction of liability arising from a misrepresentation, subject to the requirement of the reasonableness test under s.11 UCTA

S.11 - The reasonableness test

The term is required to be a fair and reasonable one to include in the contract.
This is judged by all the circumstance which were known, or ought to have been known or in the contemplation of the parties
The fairness and reasonableness is decided at the time the contract is entered - not with hindsight knowing of the events which in fact occurred
Where the term is restricting rather than excluding liability regard is to be had to the resources of the party seeking to rely on the term and the availability of insurance.
The burden is on the party seeking to enforce the term to show that it was fair and reasonable.

Sch 2

Sch 2 provides the factors for the court to consider in applying the reasonableness test when looking at non-consumer sales in relation to s.6 & 7 UCTA. The factors are:

The strength of the bargaining positions of the parties taking into account alternative suppliers available to the purchaser.
Whether the customer received an inducement to accept the term. Eg whether they were given the opportunity to pay a higher price without the exclusion clause.
Whether the customer knew or ought to have known of the term and whether such terms are in general use in a particular trade.
Where exclusion relates to non-performance of a condition whether it was reasonably practicable to comply with the condition.
Whether the goods were made or adapted to the special order of the customer.

Some cases which have considered the application of schedule 2:

Phillips Products v Hyland [1987] 1 WLR 659 Case summary

Photo Production v Securicor [1980] AC 827 Case summary

Smith v Eric Bush [1990] 1 AC 831 Case summary

Ailsa Craig Fishing v Malvern [1983] 1 WLR 964 Case summary

George Mitchell v Finney Lock Seeds [1983] QB 284 Case summary

Consumer Rights Act 2015

This applies to contracts entered after Oct 2015 and replaces the Unfair Terms in Consumer Contracts Regulations and the Unfair Contract Terms Act 1977 in consumer contracts and notices. Provisions relating to unfair terms are contained in Part 2 Consumer Rights Act. According to S.61 - Part 2 CRA 2015 applies to:

1.Consumer contracts between a trader and consumer
2.Consumer notices between a trader and consumer

s.62 (4) A term or notice is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.

Where a term or notice is found to be unfair, it is not binding on the consumer under s.62 (1 & 2) Consumer Rights Act 2015. The consumer may rely on the term or notice if they choose to do so (s 62(3).

S.62(5) Whether a term or notice is fair is to be determined by —

(a)taking into account the nature of the subject matter of the contract or notice, and

(b)by reference to all the circumstances existing when the term or notice was agreed and to all of the other terms of the contract or of any other contract on which it depends.

Schedule 2 contains an indicative but non exhaustive list of what may be regarded as unfair

S.63(6) A term of a consumer contract must be regarded as unfair if it has the effect that the consumer bears the burden of proof with respect to compliance by a distance supplier or an intermediary with an obligation under any enactment or rule implementing the Distance Marketing Directive.

There will be no assessment of fairness in relation to a term that relates to the subject matter of the contract or the price —S.64 (1) Consumer Rights Act 2015

A trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence S.65(1) Consumer Rights Act 2015

There is a requirement of transparency and for consumer notices and contractual terms to be expressed in plain and intelligible language which is legible S.68 Consumer Rights Act 2015

Where there is any ambiguity it should be resolved in favour of the consumer according to S.69 Consumer Rights Act 2015.

Unfair Contract Terms

Regulation by statute