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6
Exemption
clauses
Key Points
This chapter will help you to:

• Understand what exemption clauses are and how they can be used to
allocate risks;
• Examine the courts’ approach to incorporation, interpretation and
invalidity of exemption clauses in an attempt to control their abuse;
• Understand the statutory controls contained in the Unfair Contract
Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations
1999; and
• Think about how the statutory regime could be improved by looking
at the Law Commission’s proposals for reform.
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Introduction
Exemption clauses provide that one party will not be liable in certain situations; they
defeat or limit liability. Exemption clauses have traditionally had a bad press because
they have been misused, often to the detriment of consumers (ie you and me and the
general public who buy goods and services), and the courts have responded to this by
repeatedly looking for ways to cut them down. Nevertheless, you should keep in mind
that they are not irredeemably evil or objectionable. Exemption clauses can be used
perfectly sensibly by the parties to allocate risk between them. Sometimes it is more
efficient for one party to take on a certain risk, perhaps because he has insured
against that risk or he wants the contract to be priced as low as possible, and an
exemption clause can allocate the risk in this particular way. To take a simple exam-
Chapter 6 Exemption clauses

ple, if you have already purchased annual travel insurance, you may not want to pay
the full price for a holiday which includes a money-back guarantee if you are too ill
to travel or if there are any other disruptions to travel arrangements, and so you may
prefer to pay a lower price and agree that the holiday company can exclude any
responsibility it might have in these eventualities. Freedom of contract theory insists
that the choice is the parties’ and not that of the courts. Parties can bargain with or
without exemption clauses but they must live with the consequences of their bargain.

126
6.1 The control of exemption
clauses
So why are the courts so set against exemption clauses, apparently in defiance of the par-
ties’ freedom of contract? The answer is that the courts do not object to exemption
clauses in themselves, but they object to the abuse of exemption clauses. The whole
ideology of freedom of contract is based on the assumption that the parties have a free
choice and, in an ideal world, a consumer will always have a choice between companies
who use exemption clauses and companies who do not. In practice, you often find that
many if not all the companies offering a particular type of service use standard forms
which contain exemption clauses and so there is no real choice. Furthermore, these
exemption clauses are often in such small print and so long and boring that no-one (not
even the conscientious law student) ever reads them. In these circumstances, choice is just
an illusion; if you want the goods or service on offer then you have to accept the exemp-
tion clause whether you are conscious of it or not. Even if there is some difference
between the terms on offer from different suppliers, the chances are that you won’t have
enough time or patience to discover which provider offers the best terms. Parties who use
exemption clauses are often in strong bargaining positions and can use standard form
contracts to surreptitiously impose extremely wide and unreasonable exclusions of liabil-
ity, safe in the knowledge that the other party will not even read these clauses, let alone
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object to them. It is this type of behaviour, this abuse of the parties’ freedom to contract,
that the courts are concerned to prevent.

The use and abuse of exclusion clauses

Imagine that you buy a computer direct from the manufacturer, Compubuild.com. Naturally,
you expect that the manufacturer will replace the computer if it is faulty because you
bargained for a working computer, not a dud one. Compubuild will need to factor into its
prices the cost of replacing broken computers so that at the end of the day it still makes a
profit. If it costs £500 to replace a computer and the manufacturer expects to supply 10
defective computers out of a year’s supply of 1,000 then it needs to bring in extra turnover
of £5,000, £5 per computer, to cover the cost of replacing computers. However, if a differ-

The control of exemption clauses

ent manufacturer, Cheepcomputers.com, is allowed to exclude its liability for defective com-
puters it can simply leave you with a defective computer and not bother charging the extra
£5 per computer (which superficially makes its computers appear initially to be a more
attractive buy than Compubuild’s). To avoid the risk of being left with a defective computer
you could buy insurance against defects. If you can buy insurance for less than £5 then
Cheepcomputers offer the best deal; you pay a lower price (even with the added cost of
independent insurance) than if you bought off Compubuild.com, whilst still being covered
against the risk of defects. If you cannot or do not want to buy such insurance, you may well
feel you are better off paying £5 more to Compubuild rather than allowing Cheepcomput-
ers, by means of an exemption clause, to transfer to you the risk of the computer supplied
by them being defective. The courts will be particularly reluctant to enforce such a clause
transferring the risk to you if you were unaware of it because it was expressed in obscure
language and buried in the small print which you had no real awareness or choice about. 127

The most obvious defence against such abuse would be to declare unreasonable exemp-
tion clauses invalid. The Court of Appeal tried to do this on a number of occasions in the
mid-twentieth century by means of the ‘fundamental breach’ doctrine (see section 6.8
below) but the House of Lords put it firmly in its place when it emphatically confirmed in
Photo Productions v Securicor (1980) that the courts had no common law power to strike
down unreasonable exemption clauses. Such a common law power was no longer neces-
sary by then anyway because Parliament had stepped into the fray with the Unfair Con-
tract Terms Act 1977 (‘UCTA’) which provided a statutory basis for invalidating
unreasonable exemption clauses. The EU subsequently introduced a Directive requiring
all Member States to legislate against unfair terms in consumer contracts, resulting in
another layer of legislative control, the Unfair Terms in Consumer Contracts Regulations
(‘UTCCR’), and both these layers of control will be discussed later after we have consid-
ered the courts approach at common law which is still of some significance. Although the
primary weapon of declaring unreasonable exemption clauses invalid is unavailable at
common law, the courts have used two other hurdles, incorporation and interpretation,
which they developed in order to bring down objectionable attempts to exclude liability.
If the courts can rule that an exemption clause has not been incorporated into a contract,
or interpret it in such a way that it does not cover the liability in dispute, then this can be
almost as good as finding the clause to be invalid. The major problems with these two
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Control of Exemption Clauses

Interpretation
Incorporation Validity
Does the exclusion clause
Is the exclusion clause validly Is the exclusion clause so
cover the liability sought
incorporated into the contract? unreasonable that it is invalid?
to be excluded?

Danger that these common Courts Parliament

law rules will be House of Lords said
Chapter 6 Exemption clauses

Power provided in
subverted to compensate courts have no power UCTA 1977 and Unfair
for the court’s lack of to declare an Terms in Consumer
Diagram 6.1 power to declare an exemption clause Contracts Regs.
exclusion clause invalid invalid.
Control of or that these rules will
exemption clauses simply be ineffective.

common law controls are the danger that the courts will distort the normal rules of incorp-
oration and interpretation in order to indirectly control unreasonable exemption clauses
and the converse problem that sometimes these devices are simply ineffective to counter
128 a very obvious and clearly worded but unreasonable clause. Given the statutory power
now available to strike down unreasonable clauses, neither of these problems is quite so
acute as once was the case and the rules of incorporation and interpretation can be
applied today in a somewhat less pressurized environment.

6.2 Incorporation
6.2.1 Signature

An exemption clause, like any other term, will be incorporated into a contract if it is con-
tained in a signed document, as in L’Estrange v Graucob (1934) where the purchaser of
a vending machine was bound by a very wide exemption clause contained in the small
print on the order form which she had signed. Scrutton LJ said: ‘When a document con-
taining contractual terms is signed, then, in the absence of fraud, or, I will add, misrepre-
sentation, the party signing it is bound, and it is wholly immaterial whether he has read
the document or not.’

The basis for this rule lies in the objective approach to intention. If a party has signed a
document then it is reasonable to conclude that he agrees to all the terms in that
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document. The party may not have even read the terms but the important point is that
his signature makes it appear as though he has. As we shall see in chapter 8 the object-
ive approach will not apply when one party negligently causes the other party to have a
different subjective intention (see Scriven Bros v Hindley (1913)). The rule in L’Estrange
does not therefore apply, as was signalled by Scrutton LJ, when the signature is obtained
by misrepresentation (ie when one party causes the other to think that the document he
is signing contains terms different to those it contains in reality). This is nicely illustrated
by Curtis v Chemical Cleaning Co. (1951) where a woman took a wedding dress to the
Chemical Cleaning Co. to be dry-cleaned. When she asked why she had to sign a receipt
which in fact contained a clause excluding liability ‘for any damage howsoever caused’
she was told unwittingly by the assistant that it was because the cleaning company did
not accept liability for any damage to the beads or sequins on her dress. This was quite
untrue and a misrepresentation (albeit one made innocently) because the clause clearly
excluded liability for all damage. The cleaning company stained the wedding dress but
they were prevented from relying on the exemption clause to exclude their liability since,
in the words of Denning LJ, ‘a false impression was created’. You might want to consider
what the position would have been had the beads or sequins been damaged rather than

Incorporation
the dress; would the clause, as represented, covering beads and sequins, have been
incorporated into the contract?

Link to . . . Mistake (chapter 8)

Chapter 8 explains that the objective approach will not apply when one party makes a
mistake and the other party knows that he has made a mistake (see Smith v Hughes 129
(1871)). Spencer (1973) has argued that a mistake known to the other party, even if
there has not been a misrepresentation, should also act as exception to the rule in
L’Estrange, so that if a party knows that the other party has not read the exclusion clause, it
should not form part of the contract. On this analysis, even though the party’s signature to
the clause makes it appear as though he intended to include it as a term of the contract, the
other party cannot rely on this objective approach to intention if he knew that the signing
party did not subjective intend this. However, so far the courts have only very rarely
allowed a mistake to override a party’s signature when it is so severe that the document is of
a totally different character to the one he thought he was signing and the mistaken
party can say it ‘is not my deed’ (the doctrine is known as non est factum, see
Gallie v Lee (1971)).

6.2.2 Notice

It is obvious that not every contractual document will be signed and the law recognizes
this by allowing terms to be incorporated by notice. This might be as simple as showing
the other party a written set of terms but not requiring him to sign them, although the
cases below show that the facts can become much more complicated. In Parker v South
East Railway Co. (1877) Mr Parker paid to leave his bag in the Railway Company’s cloak-
room, but unfortunately it was lost or stolen. Mellish LJ was faced with the question of
whether the printed terms on the back of a ticket given to Mr Parker, one of which
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excluded liability for packages exceeding £10, had been incorporated into the contract
between Mr Parker and the Railway Company. He thought that first of all Mr Parker had
to see or know that there was writing on the ticket and if he knew there was writing and
knew or believed that the writing contained conditions (terms), then he was bound by
them. Provided he knew there was writing on the ticket, even if he did not know or
believe that the writing contained conditions, he would still be bound ‘if the delivering
of the ticket to him in such a manner that he could see was writing upon it, was, in the
opinion of the jury, reasonable notice that the writing contained conditions.’ The case is
the foundation of the courts’ general approach to the issue of incorporation by notice, ie
that what matters is not whether the claimant has become aware of the detail of the
exemption clause (although of course if there is full awareness the clause will be
incorporated) but whether the person seeking to rely on the clause has taken reasonable
steps to bring it to his attention. What is reasonable notice will obviously change from
Chapter 6 Exemption clauses

case to case depending upon the actual circumstances, but some general points can
be made.

Timing of notice
First, and rather obviously, notice of terms must be given before or at the time the contract
is made. In Olley v Marlborough Court Ltd (1949) a contract was formed at the hotel recep-
tion desk and the hotel owner could not rely on an exemption clause that was only notified
to the guest when she entered the bedroom and saw a notice on the wall.

130 When faced with a question of notification of terms the most important step is to estab-
lish when the contract was formed. The courts do not seem to worry about split seconds
so that where an exemption clause is notified on the back of a ticket, the notice will be
sufficiently contemporaneous with the contract even though technically the contract (the
offer and acceptance) will have taken place a split second before the ticket was handed
over. Where the contract is formed at a staffed ticket booth it is conceivable that a
passenger who objects to the terms notified on the back of his rail ticket can return the
ticket and demand his money back on the basis that no agreement has been reached.
Automatic ticket machines present a different problem and cannot be dealt with in this
way. In Thornton v Shoe Lane Parking (1971), in order to get into the defendant’s multi-
story car park a driver had to drive up a ramp, pay his money and take a ticket from a
machine. Lord Denning MR said that the contract was concluded at this point and any
notice of terms on the ticket came too late. The reason behind this strict approach to
timing is that, unlike the situation where one is dealing with another person rather than
a machine, the driver ‘may protest to the machine, even swear at it; but it will remain
unmoved. He is committed beyond recall’.

Contractual documents
Secondly, the notice must be made on a ‘contractual’ document. In a sense this is a
circular statement; if the notice forms part of the contract then of course the document
is a contractual one, and if the notice is not part of the contract then the document has
no contractual significance. The important point to remember is that the document
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must be one on which the reasonable person would expect to find contractual terms.
It is ‘contractual’ in the sense that it looks like it might contain contractual terms.
No reasonable person would search through an in-flight magazine for the terms of a
contract, but a reasonable person might check the back of his airline ticket for such
terms (although we have never been tempted to do so). In Chapelton v Barry UDC
(1940), an exemption clause written on the back of a ticket for the hire of a deckchair
was not incorporated into the contract. The Court of Appeal held that the ticket was
a ‘mere receipt,’ given out so that a deckchair user could prove that he had paid for his
chair. It was not reasonable to expect deckchair users to check this receipt for notifica-
tion of terms, in part because it was usual practice that people would sit on the
deckchairs for some time before payment was collected and a receipt given out. Be
aware that not all receipts will fail to incorporate terms into the contract; everything
depends on the facts and whether it is reasonable to find terms of the contract on a
receipt of that kind.

Notice of existence not contents

Thirdly, only reasonable notice of the existence of terms is normally required, not their

Incorporation
detailed contents. A good illustration of how harshly this rule has at times operated in the
past can be seen in Thompson v London, Midland & Scottish Railway Co. (1930) where a
clause excluding liability for negligently caused personal injury was incorporated into a
contract with an illiterate passenger by notice on the face of the ticket saying ‘Excursion.
For conditions see back’ and on the back of the ticket it was stated in small print that the
conditions could be found in the company’s timetables (in fact on page 552 of a timetable 131
costing 20 per cent of the price of the ticket).

thinking point
Do you think that many passengers of the above railway company were ever subjectively aware of
the term excluding liability? Even out of those passengers who had bought a timetable, do you
think many would have understood and actively accepted the term? Does the passenger have an
opportunity to reject the offer of travel if he does not want to accept the term excluding liability?
What is the downside of requiring a company to give notice of the exact contents of terms to
its passengers? How big would a railway ticket have to be if it included all terms governing the
relationship between company and passenger? Should it matter whether the passenger is a
regular traveller with that railway company?

Higher degree of notice for onerous or unusual terms

Fourthly, and by way of qualification to the previous point, a higher degree of notice is
required when the term is onerous or unusual. Lord Denning said in J Spurling Ltd v
Bradshaw (1956) (and quoted himself on this point in Thornton – you know you’ve
made it when you can quote your own previous judgment in the Court of Appeal) that
some exemption clauses ‘would need to be printed in red ink on the face of the docu-
ment with a red hand pointing to it’. Therefore, reasonable notice means different things
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depending on how unusual or onerous an exemption clause is. Clarke (1976) CLJ 51
objected that the courts turned to declaring a clause unincorporated because they had
denied themselves the power of declaring it void for being unreasonable: ‘a discredited
rule of public policy has been reinstated as a rule based on an inference from the
intentions of the parties; the plaintiff is only deemed to know of and assent to terms that
are usual.’ On the other hand, the rule can be seen as a legitimate application of the
objective approach to intention in that an unusual term is more likely to take a reason-
able man by surprise and slip past his attention, rendering explicit notice of that term
necessary.

It is important to ask when a clause will count as unusual or onerous. If it is unusual

because it is unreasonable (as suggested by Lord Denning MR in Thornton) then the rule
does seem to be a subversive way of striking out at the validity of exemption clauses (as
Chapter 6 Exemption clauses

argued by Clarke). In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1988)
a term of the contract imposed a fine for any hired transparencies that were returned late
(it does not matter that the clause was not an exemption clause, the rules of incorpor-
ation apply to all terms). The Court of Appeal thought that the plaintiffs had not done
what was necessary to draw this unreasonable and extortionate clause fairly to the
attention of the defendants. In AEG (UK) Ltd v Logic Resource Ltd (1996), in respect of a
clause which made the business purchasers of defective electrical equipment responsible
for the (£4,000) cost of transporting them back to the manufacturer for repairs, the only
remedy afforded to them by the contract, Hobhouse LJ (although he was in the minority
in deciding that the clause was incorporated) made some interesting comments on
132 Thornton and Interfoto.

In my judgment, and this is where I part company from my Lords, it is necessary before excluding
the incorporation of a clause . . . to consider the type of clause it is. Is it a clause of the type which
you would expect to find in the printed conditions? If it is, then it is only in the most exceptional
circumstances that a party will be able to say that it was not adequately brought to his notice by
standard words of incorporation. If a party wishes to find out precisely how a clause of a normal
sort has been worded, he should ask for the actual text of the clause. This case is not analogous
to either of the two cases upon which the appellant founds. The Interfoto case involved an extor-
tionate clause which did not relate directly to the expected rights and obligations of the parties.
In the Shoe Lane Parking case, it related to personal injuries and the state of the premises and
not to the subject matter of the car parking contract, which would, in the view of the Court of
Appeal, have been concerned with damage to property.

The earlier cases, on this view, are based on the terms being of a type which one would
not expect to find in the particular contract, rather than them simply being harsh or
unreasonable. The latter problem, Hobhouse LJ not unpersuasively argues, is better
addressed directly through the Unfair Contract Terms Act 1997 (see section 6.5.1 below)
under which all three judges in the AEG case agreed the clause was unreasonable and
unenforceable.
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Control of Exclusion Clauses

Validity
Incorporation Interpretation
(UCTA 1977)

By Signature: By Notice:
Really striking at the
All terms in a signed Terms can be incorporated by
validity of
document are incorporated giving reasonable notice to the
unreasonable terms?
(L’Estrange), unless; other party (Parker);
• fraud • must be before or at time of
• misrepresentation (Curtis v contracting (Olley, Thornton)
Chemical Cleaning) • must be in a document in • when the term is unreasonable
• mistake? (see Spencer) which it is reasonable to expect (Lord Denning Thornton)
• non est factum (Gallie v to find terms (Chapelton)

Incorporation
Lee) • it is sufficient to give notice of • when the term is of an unusual
where the details of the term type (Hobhouse LJ in AEG (UK))
can be found (Thompson)
Diagram 6.2 • more explicit notice is
Incorporation of necessary for ‘unusual terms’
exclusion clauses
by signature and
notice as a control 133
mechanism

6.2.3 Course of dealing

Even if there are no signed terms and no reasonable notice it is still possible to incorpo-
rate terms into a contract if there has been an established course of dealing between the
parties. In other words, if the parties have usually contracted on certain terms in the past,
it will not matter that on one particular occasion they did not incorporate those terms into
the contract in the usual way. In Hardwick Game Farm v Suffolk AA (1969) the parties had
contracted three or four times a month over a period of three years on terms that
excluded the seller’s liability for latent defects in pheasant food. On one particular occa-
sion the pheasant food contained poison and the sellers sought to rely on the exemption
clause. It was held that the terms could not be regarded as incorporated by notice
because, on this particular occasion, they had been notified to the buyer after the con-
tract had been formed (see Olley v Marlborough Court Ltd above) but the terms were
incorporated by reason of the long course of dealing. It was reasonable to assume that
both parties thought they were contracting on the same terms they had always con-
tracted on. By contrast, in Hollier v Rambler Motors (AMC) Ltd (1972) Mr Hollier signed
a document containing terms for his car’s service on each of the previous three or four
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times he visited Rambler Motors over a five-year period, but, on one occasion when he
was not asked to sign the terms, they were not incorporated into the contract by their
previous course of dealing. It seems that the course of dealing must be longer and more
consistent that three or four times over five years.

Businesses and consumers

Hardwick Game Farm and Hollier raise an interesting distinction between businesses and
consumers which runs throughout the law’s approach to exemption clauses. In Hardwick
Game Farm both parties were businesses whereas Mr Hollier was a consumer, a normal indi-
vidual like you or I, who bought goods and services for his own personal use. The law tries
to protect consumers because they often have less knowledge and resources and a weaker
bargaining position than businesses and are therefore more susceptible to having unreason-
Chapter 6 Exemption clauses

able or unfair clauses imposed upon them. You could therefore argue that an additional rea-
son why an exclusion clause was not incorporated in Hollier, but was in Hardwick Game
Farm, was because the courts wanted to protect Mr Hollier, a consumer, from Rambler
Motors, a business, that tried to exclude its liability.

6.2.4 Trade custom

Even if there has been no signature, no reasonable notice and no past dealing it is still
possible to incorporate a term on the ground that it is so common in the parties’
134
area of business that they must have intended it to be a term of the contract. In British
Crane Hire Corporation v Ipswich Plant Hire Ltd (1974) both parties rented out heavy
plant equipment in the course of their business. Ipswich Plant Hire desperately needed
a crane at short notice and so they quickly agreed a price for hire from British Crane
Hire but the normal contractual terms were not signed. Lord Denning MR thought
that the objective intentions of each party were that the usual trade terms of British
Crane Hire were incorporated into the contract. He emphasized the fact that both par-
ties operated in the same trade and knew the type of conditions usually incorporated
in a contract for the hire of a crane. They were in an equal bargaining position and in
those circumstances it was reasonable to conclude that the terms formed part of the
contract.

6.3 Interpretation
If an exemption clause has been incorporated into the contract then the courts’ next line
of defence is through interpretation. The courts have to work out what the parties
intended their words to mean, always bearing in mind that the objective approach
focuses on what the parties appear to have intended rather than what they actually
(subjectively) intended. Even when the parties’ subjective intentions are removed from the
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picture, there is plenty of scope for ambiguity and argument over the meaning of the
terms. In short, even the reasonable person encounters difficulties interpreting the terms
of the contract.

Lord Hoffmann summarized the principles judges should follow when interpreting terms
(not just exemption clauses) in ICS v West Bromwich Building Society (1998). He empha-
sized that judges should take a ‘purposive’ approach that looks for the parties’ objective
intentions rather than a ‘literal’ approach that looks for a dictionary definition for the
words used.

contra 6.3.1 Contra proferentem

proferentem
a term meaning
‘against the person The person responsible for including the clause in the contract has the opportunity to
proffering it, or putting make the wording clear and so should be the one to lose out if there is any ambiguity.
it forward’ and the For example, a term of an insurance contract in Houghton v Trafalgar Insurance Co. Ltd
exemption clause will
be interpreted against (1954) excluded liability if the car was carrying an excess ‘load’ but this was interpreted

Interpretation
the person seeking to as not applying to the situation where the car was carrying too many passengers,
rely on it so as to
exclude their liability. ‘load’ was interpreted as restricted to baggage and not passengers. In Andrews Bros
(Bournemouth) Ltd v Singer & Co. (1934) the contract for the sale of cars provided
that ‘all conditions, warranties and liabilities implied by statute, common law or other-
wise are excluded’ but this was ineffective to exclude liability for breach of an express
term.
135
Lord Diplock warned against taking the contra proferentem approach too far in Photo Pro-
ductions v Securicor (1980): ‘in commercial contracts negotiated between businessmen
capable of looking after their own interests . . . it is, in my view, wrong to place a strained
construction on words in an exemption clause which are clear and fairly susceptible of one
meaning only.’ Even when the contract involves a consumer it is obvious that a very clearly
worded exemption clause will stand up to the courts’ strict approach – see the exemption
clause in L’Estrange v Graucob for an unambiguous example which went one step further
than that in Andrews v Singer by referring to ‘any express or implied condition, statement
or warranty, statutory or otherwise . . .’ (emphasis added).

6.3.2 Excluding liability for negligence and fraud

strict liability Negligence
strict liability describes
a no-fault obligation; ie A particularly strong line is taken against clauses which seek to exclude liability for
an obligation on a
negligence. The rationale behind this is that the parties generally want and expect each
factory not to pollute
the environment, as other to take reasonable care and so very clear wording is necessary to exclude liability
opposed to an for negligence. It is one thing to exclude my strict liability under the contract which
obligation to take
reasonable care to would otherwise be imposed whether or not I was at fault but quite another to deny my
avoid polluting the liability to compensate you even if I have been negligent. The Privy Council provided some
environment.
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guidance in Canada Steamship Lines v The King (1952) the effect of which can be
summarized as follows:

(a) Does the clause expressly exempt from negligence, in which case it is effective, or
(b) Are the words wide enough in their ordinary meaning to cover negligence, in
which case the clause may still be effective, unless
(c) There is some head of damages other than negligence (not fanciful or remote)
which the words could be construed as applying to rather than to negligence.

negligence
A party is negligent when he breaches a duty to take reasonable care; a claimant must therefore prove fault
(in the sense that the defendant did not take reasonable care). The duty can be imposed by law (eg the tort
of negligence) or by contract (where the parties agree to take reasonable care in performing their promises).
Chapter 6 Exemption clauses

In other words, a very clearly worded clause which expressly excludes liability for
negligence by using that very word or a synonym (such as neglect or default – see
Monarch Airlines v Luton Airport (1998)) will be effective, and even an exemption clause
which is less explicit may be treated as wide enough to cover negligence, but not if effect
can be given to it by saying it covers some other potential liability but not negligence. A
good (though somewhat painful) example of the latter process can be found in White v
John Warwick (1953) where a clause purporting to exclude liability ‘for any personal
injuries’ to the rider of a tricycle whose saddle tipped up was given effect to by saying it
covered the defendant’s strict liability under the contract but was then effectively
136
exhausted and did not cover the liability for negligence in tort. In contrast, in Alderslade
v Hendon Laundry (1945) the only responsibility of the laundry in relation to lost
items was to take reasonable care, ie not to be negligent (there was no strict liability
under the contract, unlike John Warwick), and so the clause, even though it did not
mention negligence or a synonym, did cover negligence – otherwise it would be of no
effect at all.

Two other cases can be contrasted. The exemption clause in The Raphael (1980) provided
that the defendants were ‘not liable for . . . any act or omission’ and, despite not expressly
mentioning negligence, it was wide enough to cover negligence but not so wide as to
cover any other liability. On the other hand, the clause in EE Caledonia v Orbit Valve
(1994) was wide enough to cover negligence but it could also realistically cover liability
for a breach of statutory duty, and so it was ineffective to exclude liability for negligence.

You should remember that the Canada Steamship guidelines are exactly that; they are
guidelines and not rules to be applied automatically. Even if an exemption clause falls
within the guidelines, the courts may still interpret it in such a way that liability for negli-
gence is not excluded. In Hollier v Rambler Motors (section 6.4 above) the exemption
clause normally signed by Mr Hollier stated that ‘the company is not responsible for
damage caused by fire to customers’ cars on the premises’. Whilst this did not expressly
cover negligence it was clearly capable in principle of doing so and, rather like the
situation in Alderslade, the only legal liability on the garage that it could refer to was in
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 137

relation to negligently caused fires – garages are not generally liable for fires on their
premises unless they have been negligent. However, the Court of Appeal in this case was
not prepared to allow the garage to exclude its liability in negligence and construed it as
simply a warning to the customer that the garage was not liable for fires unless there was
negligence. Salmon LJ said of the ordinary man (rather optimistically you may think) that
he would say to himself, ‘Well, what they are telling me is that if there is a fire due to any
cause other than their own negligence they are not responsible for it.’ His Lordship
concluded that ‘if the defendants were seeking to exclude their responsibility for a fire
caused by their own negligence they ought to have done so in far plainer language than
the language here used . . .’ This extremely strict interpretation, which robs the clause of
any real legal effect, can be explained firstly on the ground that Mr Hollier was a consumer
and secondly because Parliament had not yet given the courts power to strike down
unreasonable exemption clauses under UCTA 1977.

Fraud and deliberate wrongdoing

It should be obvious that if the courts are so reluctant to allow the exclusion of liability
for negligence, they are not going to allow a party to exclude liability for his own

Interpretation
fraudulent conduct. By definition, fraud involves dishonesty and it would be intolerable
if an individual was able to act in such a manner with impunity and there is a rule of
public policy prohibiting this – see S Pearson & Son Ltd v Dublin Corp. (1907) dealing
with exclusion of responsibility for fraudulent misrepresentation. Nevertheless, Lord
Loreburn recognized that, at least where a company is acting through its agents, differ-
ent considerations might apply and it might then be a matter of construction: ‘I will 137
not say that a man himself innocent may not under any circumstances, however peculiar,
guard himself by apt and express clauses from liability for the fraud of his own agents.
It suffices to say that in my opinion the clauses before us do not admit of such a
construction.’

The point is that a principal is liable for his agent’s fraud even if the principal did not
himself act fraudulently; in this peculiar ‘inherited’ fraud situation there are less policy
objections against allowing a party to exclude his liability for (his agent’s) fraud. If exclusion
of such responsibility is in theory possible, Lord Bingham in HIH Casualty and General Insur-
ance Ltd v Chase Manhattan Bank (2003) at [16] emphasized that such intention must be
expressed in very clear and unmistakable terms on the face of the contract. Although
concerned with a somewhat different situation, Photo Productions v Securicor (1980), dis-
cussed below in section 6.8.1, is in fact a good example of a company successfully seeking
to shift the risk of one of its own employees acting criminally, rather than fraudulently, on
to the other party to the contract. To fully understand the House of Lords decision in this
case, one has to say something of the now defunct doctrine of Fundamental breach.

6.3.3 Fundamental breach

Some terms are so fundamental to the purpose of the contract that it is almost inconceiv-
able that the parties could have agreed to exclude liability for their breach. Lord Roskill in
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The TFL Prosperity (1984) confirmed that the courts will rarely conclude that the parties
intended to exclude liability for a fundamental breach. He said that the charter in that case
‘virtually ceases to be a contract for the letting of the vessel’ if the exclusion clause is inter-
preted so that fundamental terms could be breached without financial redress.

Fundamental breach
If I agree to provide you with a taxi ride to the airport and I turn up with a tandem cycle
instead of a taxi (or provide a drunken driver rather than a sober one) it would be very
strange if I could claim that I should be able to rely on an exemption clause to avoid any
liability under the contract. The whole point of your promise to pay me for the taxi was that
you would get a promise in return and the option to sue me if I fail to perform my promise
ie provide a taxi (or a sober driver). An exclusion clause would degrade my promise to
provide a taxi (with a sober driver) into a mere statement of intention (to provide a taxi if I
Chapter 6 Exemption clauses

felt like it), something you could have got for free.

In the mid-twentieth century, the Court of Appeal, led by Lord Denning MR, had
attempted to introduce a stronger rule that completely outlawed the exclusion of liabil-
ity for fundamental breach. The proposed rule was one of law, which meant that it would
apply regardless of the parties’ intentions, whereas under a rule of interpretation (see The
TFL Prosperity above) the parties could make it explicitly clear that they intended to
exclude liability for fundamental breach and the courts could do very little about it.

138 Fundamental breach as a rule of law

In Karsales v Wallis (1956) Denning LJ said (in a case where a consumer bought a car that
was incapable of self-propulsion) that ‘the general principle [is] that a breach which goes
to the root of the contract disentitles the party from relying on the exemption clause.’ The
House of Lords in Suisse Atlantique (1967) took the opportunity to reject this rule of law
when Lord Reid said in an obiter dicta that the validity of an exemption clause could not
depend on whether there has been a fundamental breach. He thought that the rule was
too indiscriminate because it treated business and consumer contracts alike, but the solu-
tion should be left to Parliament, a more appropriate forum for making such policy deci-
sions (Parliament enacted the Unfair Contract Terms Act 1977 a decade later). Lord
Denning however did not give up and managed to conclude in Harbutts Plasticine Ltd v
Wayne Tank & Pump Co. Ltd (1970) that the House of Lords had affirmed rather than
rejected the doctrine of fundamental breach so that when a contract is terminated for
breach of a fundamental term, the contract and any exemption clause in it comes to an
end (rather like the claimant’s factory which the defendant’s breach had caused to burn
down). Harbutts was itself firmly overruled by the House of Lords in Photo Production v
Securicor (1980), where it was pointed out that termination does not bring a contract to
an end, it simply cancels any future obligations with the result that the contract and any
exemption clauses still stand, a proposition which is also enshrined, unnecessarily it now
seems, in UCTA s.9(1). Thus in Photo Production, Securicor were able to exclude their
responsibility for their employee deliberately starting a fire which ultimately burned down
the factory which he was supposed to be guarding. There are a number of key features
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 139

1956, CA: Karsales v Wallis: start of rule

of law that you can’t exclude liability for 1967, HoL: Suisse Atlantique: no such rule.
breach of a fundamental term. Must distinguish between business and
consumer contracts, this is a job for
Parliament.

1970, CA: Harbutts Plasticine: Suisse

Atlantique treated as affirming that once a
contract has been terminated by breach of a 1978, HoL: Photo Productions: contract does
fundamental term, the contract and all not come to an end on termination, only the
exclusion clauses come to an end. future obligations of the parties cancelled.
Exclusion clauses remains intact and effective if
sufficiently clearly worded to cover the breach.
UCTA now available to control unreasonable
clauses.
UCTA 1977
s.9(1) – reasonable exclusion
clauses survive termination of
contract.
1984, HoL: The TFL Prosperity: still a rule
of interpretation that the courts will be

Limitation clauses
reluctant to find that the parties intended to
Diagram 6.3 exclude liability for a fundamental breach.
Fundamental
breach in the
Court of Appeal
and the House of
Lords

of the case that should be borne in mind in trying to understanding why the House of 139
Lords was prepared to interpret the clause as covering this disastrous breach:

(a) the parties were assumed (perhaps too readily) to be of equal bargaining power;
(b) Securicor were (relative to the value of the factory) not paid very much for the
security they provided; and
(c) the clause qualified the exemption it conferred by the words ‘unless such act or
default could have been foreseen and avoided by the exercise of due diligence by
the company as his employer.’

The clause therefore transferred the risk, of a properly vetted and trained employee
unforeseeably doing something crazy, to the factory owners who could cover themselves
by insurance.

6.4 Limitation clauses

A limitation clause does not completely absolve a party from liability but instead places a
limit, a ceiling, on the maximum liability. For example, in Ailsa Craig Fishing v Malvern Fish-
ing (1983), (another spectacular Securicor case) a limitation clause limited liability to
£1,000, so that the damages could be less than but not more than £1,000 (even though
the actual loss caused was assessed at £55,000).
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Link to . . . Damages (chapter 11)

Liquidated damages: It is worth comparing a limitation clause to a liquidated damages
clause (see chapter 10) which acts as a pre-estimate of damages. If a liquidated damages
clause provides for damages of £1,000 that is what the innocent party will receive regardless
of his actual loss (if the actual loss is less than the pre-estimate then liability will actually have
been extended). By contrast, a limitation clause simply places a maximum limit on the
damages that can be recovered and the party’s actual loss will determine the precise value of
damages (up to this maximum limit).

In holding that the limitation clause was effective to limit Securicor’s liability to £1,000,
Lord Wilberforce said:
Chapter 6 Exemption clauses

Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclu-
sion; this is because they must be related to other contractual terms, in particular to the risks to
which the defending party may be exposed, the remuneration which he receives and possibly also
the opportunity of the other party to insure.

With respect, the same considerations may be applicable to exclusion clauses, as we saw
in the discussion of Photo Productions and the distinction is often only a matter of degree
when one considers how close to zero in percentage terms the limitation of liability can
become. Liability was limited to 1.8 per cent of the actual loss in Ailsa Craig and 0.33
per cent in George Mitchell v Finney Lock Seeds (1983). Nevertheless, the less strict
140 approach to the interpretation of limitation clauses was approved by the House of Lords
in the latter case so it is a distinction you should be aware of and should be prepared to
comment on. A subsequent House of Lords decision, Bovis v Whatlings Construction
(1995), shows that even limitation clauses can still be construed with a degree of strict-
ness, even if not to the same extent as exclusion clauses. Thus the clause limiting dam-
ages for delay to £100,000 did not cover delay which amounted to a repudiatory breach
leading to complete non-performance.

6.5 Statutory control

6.5.1 The Unfair Contract Terms Act 1977
Background to UCTA
Under the common law, the courts can only attack an exemption clause by refusing to
incorporate it into the contract or by interpreting it in such a way that it does not exclude
the liability incurred. They cannot simply declare a clause invalid. We saw above that Lord
Denning took objection to this limitation on the court’s power at common law and in
Thornton he tried to distort the rules of incorporation by notice to such a degree that it
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 141

would be virtually impossible to incorporate an unreasonable exemption clause. In a series

of Court of Appeal decisions he heralded the introduction of a rule of law prohibiting the
exclusion of liability for a fundamental breach. The traditional attitude of the majority of
the judges meant that the courts took the limitation on their power seriously and they
largely rejected Lord Denning’s attempts to strike, directly or indirectly, at the validity of
unreasonable exemption clauses.

They were ultimately happy to do so because Parliament provided redress against unrea-
sonable exemption clauses in many situations when it enacted UCTA 1977. It handed the
courts the weapon that Lord Denning had fought for: the power to declare certain terms
invalid. Of course, the courts still had to decide whether a term had been validly incorpo-
rated and interpret that clause, but there was no longer the same pressure to distort these
processes.

In the Law Commission Report number 69 (1975) on which the Act was based, the Law
Commission recognized that all exemption clauses are not of the same type, the situa-
tions in which they occur vary significantly and the need for control is more pressing in

Statutory control
some situations than in others. This is the key to understanding the Act because the Act
is based on a number of significant distinctions and definitions which form the basis of
the Act’s control of exemption clauses. Identifying these distinctions and definitions and
understanding their rationale will enable you to remember the important provisions of the
Act and to apply them in a sensible manner.

This may be the first time in your course that you have had to look in detail at an Act of 141
Parliament as opposed to case law. To deal successfully with a major Act like this you need
first of all to understand what prompted the Act and what its principal aims were, as just
discussed. You then need to develop a picture of the overall structure of the Act, how it
fits together and which are the important sections, before going on to consider the mean-
ing of the important sections in more detail and looking at the interpretation they have
received.

Scope of UCTA
It would be sensible to have a copy of the Act in front of you whilst you read this section
and to focus initially on the layout of the Act and how the sections work together. You
should observe that UCTA is divided into three Parts with Pt I providing most of the law
relevant to England and Wales (the subject matter of this book). Part II deals with
Scottish law and Pt III deals with miscellaneous provisions relevant to the whole UK, such
as s.27, which deals with evasion of the Act by choice of foreign law, which need not
concern us too greatly at this stage. With your attention now firmly focused on Pt I you
can see that s.1 sets out some of the boundaries of the Act by defining key terms such as
‘negligence’ and ‘liability’ and referring to excluded contracts in Sch.1. Later sections
(ss.12, 13 and 14) also provide definitions of ‘dealing as a consumer,’ ‘exemption clause’
and general interpretation guidelines. Sandwiched in between those definitions are the
key operative sections that distinguish between different types of contractual terms and
how they fall to be examined under the Act (s.2 to s.7). The main provisions we shall look
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Boundaries of the Act

s.1(1) meaning of ‘negligence’
s.1(2) → Sch.1 (excluded contracts,
eg insurance and land contracts)
s.1(3) ‘liability’ and ‘business liability’
s.12 ‘dealing as a consumer’
s.13 meaning of ‘exemption clause’
s.14 general interpretation
Chapter 6 Exemption clauses

The Key Operative Sections

s.2 (terms excluding liability for negligence)

s.3 (terms excluding liability for breach of contract
when dealing as consumer or on written standard terms)
s.6 (terms excluding liability for breach of a term implied
by SoGA 1979 etc.)

142 Reasonableness Test

s.11 and Sch.2

Anti-avoidance
s.9 exemption clause survives termination of contract
s.10 evasion by a secondary contract
s.27 evasion by choice of law
Diagram 6.4
Scope of the
Unfair Contract
Terms Act 1977

at are: s.2 (terms excluding liability for negligence); s.3 (terms excluding liability for breach
of contract); and s.6 (terms excluding liability for breach of terms implied by Sale of Goods
Act 1979). The application of these central sections can produce one of two possible out-
comes. It may provide outright that the exemption clause is ineffective, or, in other cases,
it may make the effectiveness of the clause subject to the test of reasonableness, which
is outlined in s.11 and Sch.2. Two other sections, ss.9 and 10, prevent evasion of the Act
(as does s.27 in Pt III, mentioned above).

All that may seem like a lot to take in at this stage, but remember that you are only
aiming for an overview of the Act before you begin to tackle the most important details.
Diagram 6.4 might help.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 143

6.5.2 Boundaries of operation of UCTA

Business liability
One of the first things to note about the operation of the Act comes appropriately
enough in s.1(3) which provides that the main provisions of the Act (ss.2–7) only apply
to business liability and therefore not, in the main, to any exclusions of liability made by
a private individual not acting in the course of a business. The main reasons for this are
that such exclusions are comparatively rare and even where they occur there is unlikely
to be any opportunity to impose unfair terms on the weaker party. However, the restric-
tion to business liability does not apply to s.6, which controls clauses excluding liability
for breach of the terms implied by statute into contracts for the sale or hire purchase of
goods (although this exception is more apparent than real since many of such terms
can only arise on the sale of the course of the business and the more drastic part of the
section dealing with consumer contracts can only effectively applied to business
liability). The restriction to business liability also does not apply to s.8 dealing with the

Statutory control
exclusion of liability for misrepresentation. It is not easy to say precisely why these
sections are not restricted to business liability except to say that they are largely
re-enactments, with minor modifications, of provisions initially founded in earlier
statutes, namely the Supply of Goods (Implied Terms) Act 1973 and the Misrepresent-
ation Act 1967.

The general restriction to business liability means that the Act will normally steer clear of
contracts between two private individuals and instead focus on the cases where a busi- 143
ness is seeking to exclude or restrict its liability (whether to another business or to a
consumer), highlighting the Act’s main concern of controlling those potentially in strong
bargaining positions. Where neither party is in business, they are assumed to be on
roughly an equal footing and the Act will not rush to their assistance if one party seeks
to exclude its non-business liability to the other. Conversely, some businesses can wield a
huge amount of power and the Act looks carefully at their attempts to exclude ‘business
liability’ because of the inherent risk of abuse.

Under s.1(3) the liability sought to be excluded is ‘business liability’ (and so subject to
regulation under the Act) if it arises from the breach of an obligation arising:

(a) from things done or to be done ‘in the course of a business’; or

(b) from the occupation of premises used for business purposes of the occupier (but
not if access is given for recreational or educational purposes and those purposes
are not the business purposes of the occupier).

So, for example, a farmer’s liability to hikers who cross his land is not a business liability
because their access is for the purpose of recreation and recreation is not the nature of
the farmer’s business (farmers plough fields so that they can grow crops, not so that hik-
ers can walk across them safely). In contrast, a sports centre also allows people access for
recreation but it is in the business of recreation and so it owes a ‘business liability’ to those
people.
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The Act fails to give much further guidance on the meaning of ‘in the course of a busi-
ness’ and in ss.1(3)(a) and 14(1) simply advises that ‘business’ includes a profession and
the activities of government departments and local or public authorities, but this does not
provide firm limits to the meaning of ‘business’, demonstrating only that businesses need
not be run for profit.

Totally ineffective clauses and those subject to

reasonableness
The second thing to notice about the Act is that, as has already been mentioned, some
exclusions of liability are rendered completely ineffective, whereas others are only
effective ‘insofar as they satisfy the test of reasonableness’. Generally speaking those
singled out for total ineffectiveness are those which are the most objectionable or which
Chapter 6 Exemption clauses

are most likely to result from inequality of bargaining power. Thus the main examples of
sections rendering clauses totally ineffective are s.2(1) dealing with exclusion of liability
for death or personal injury caused by negligence and s.6 (1) and (2) dealing with the
implied terms in contracts of sale and hire purchase of goods. The latter are singled out
partly because the exclusion is of a liability which is implied in law ie one which the law
ordains ought to be imposed as a matter of policy. Even here the effectiveness of the
exclusion of liability depends on a further distinction, ie whether the purchaser is ‘deal-
ing as a consumer’ (apart from the implied terms as to title which can never be excluded
– see s.6(1) and (4) – because they are contrary to the basic purpose of a contract to pass
title in goods). One then has to go to s.12 to find out what this expression means (and,
144 as will be seen, it has a significance beyond s.6 alone – see s.3 of the Act) and in s.12 one
finds a three-fold test essentially that:

(a) the purchaser is not contracting in the course of a business nor holding himself
out as doing so;
(b) the seller is contracting in the course of a business;
(c) the goods are of a type ordinarily supplied for private use and consumption (this
requirement is inapplicable if the purchaser is an individual – see s.12(1A)).

Again this test is designed to single out those cases where the exclusion is likely to be
particularly objectionable and where there is most likely to have been an abuse of a
superior bargaining position. Part (a) of the test was given a somewhat surprising
interpretation in R & B Customs Brokers v United Dominions Trust Ltd (1988). R & B
Customs bought a car for its director’s business and private purposes. The Court of Appeal
held that the company was not acting ‘in the course of a business’ when it bought the
car. The purchase was not ‘integral to the business’ nor did it form ‘part of a regular course
of dealing by the business’. You might find it surprising that a company can act in a way
other than in the course of a business – what else are companies for? – and consequently
be regarded as ‘dealing as a consumer’. The result was that the company could take the
benefit of s.6(2) which totally prohibits any exclusion of liability under SoGA 1979 against
a person dealing as a consumer, whereas under s.6(3), if the purchasing company had not
been dealing as a consumer, the sellers would at least have been permitted to argue that
their exemption clause was a reasonable one to include in a contract with another
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 145

business. Although the same line was taken in Feldaroll Foundry plc v Hermes Leasing
London Ltd (2004) the Law Commission has recommended that the position should be
reversed (see Law Com No. 292 discussed further below in section 6.8).

Most of the other exclusions of liability which the Act affects are not made totally ineffect-
ive but are merely subjected to a reasonableness test. However, even these are selected on
various criteria because the Act does not apply to all exemption clauses and the Act only
imposes the reasonableness test in those situations where control is likely to be necessary.
Again, understanding why the Act selects certain criteria will help you to remember the
criteria themselves. Thus s.2(2) subjects clauses excluding liability for negligently caused loss
or damage other than death or personal injury to the reasonableness test, reflecting the
well-established concern at common law about clauses excluding liability for negligence.
Similarly, s.3 imposes a reasonableness test on clauses excluding contractual liability – not

Statutory control
Type of Liability Effect and
Type of Term
excluded/restricted Applicable Section

for death or
Ineffective s.2(1)
personal injury

Negligence
145
for other loss or
Reasonableness test s.2(2)
damage

Terms which
Breach of Contract
Exclude or
(if one party deals as aconsumer or on Reasonableness test s.3
Restrict
the other’s written standard terms)
Liability

for title warranties

Ineffective s.6(1)
(eg s.12 SoGA 1979)

Sale and
Hire
other terms – against a
Purchase Ineffective s.6(2)
consumer
Implied
terms
Diagram 6.5
Split between
consumer/non- other terms – against a
Reasonableness test s.6(3)
consumer clauses non-consumer
whether
ineffective or
subject to
reasonable test?
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 146

all contractual liability because there are often good reasons for excluding such liability,
especially where it is strict – but only where the person affected by the clause is either:

(a) dealing as a consumer (see above, although the third limb of the test is not
relevant here); or
(b) dealing on the other’s written standard terms (where the probability that he has
had little choice about accepting them is obvious).

Thus far the provisions of the Act identifying the main types of terms and situations to
which the Act is applicable have been considered and that has involved looking at ss.1,
2, 3, 6 and 12. The main issue that remains is the application of the reasonableness test,
but before dealing with that issue it is worth saying something about the meaning of the
concept of an exemption clause under the Act.
Chapter 6 Exemption clauses

6.5.3 The nature of exemption clauses under the Act

The operative sections which we have looked at, ss.2, 3 and 6, each control terms which
‘exclude or restrict’ liability. This reflects the normal view of an exclusion or limitation
clause; such clauses either totally exclude or limit a liability which has previously arisen.
The sequence of events might go as follows: formation of a contract – breach of contract –
formation of a secondary obligation to pay damages (ie a liability) – exclusion or limitation
of this latter liability by an exemption clause.
146
Duty defining clauses
However, the Act does not simply apply only to these run-of-the-mill types of exemp-
tion clauses. There are much more subtle ways of excluding liability without actually
stating it in so many words. The logic behind this more secretive method of evading
liability is that if an obligation is defined in such a loose way that it will be difficult to
breach, then no liability will arise to start with, making it unnecessary to include or rely
on a term excluding liability. Looking at the sequence in the diagram 6.6, if the
obligation is defined so that will hardly ever be breached, then the case will never even
reach stage 2 and so there can be no liability (stage 3) or any need for an exclusion of
liability (stage 4). In practice, what is the difference between excluding a liability once
it has arisen and framing an obligation so that the liability never arises? The main point
is that strangling a liability at birth is as potentially abusive as excluding the liability later
in its life.

Coote (Exception Clauses, 1964) in particular has argued that any apparent difference
between the two practices is illusory. All exemption clauses are actually duty (obligation)
defining clauses. This is because it is nonsense to say that an obligation exists when the
liability for its breach has been excluded. In other words, stages 2, 3 and 4 in diagram 6.6
below are false because there cannot be a breach if liability has effectively been excluded.
Exclusion clauses therefore amend the obligations of the parties, striking out of the con-
tract those obligations for which there can be no liability. On this view, there is no such
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 147

Exclusion
Clause

Secondary obligation
Obligations Breach of Exclusion Clause
to pay damages
Formed Obligation removes liability
arises (liability)
1 2 3 4

Diagram 6.6
The orthodox view
of an exemption
clause
thing as a term that excludes a liability once it has arisen because an effective exclusion
clause prevents it arising in the first place.

duty defining terms

Statutory control
Exclusion clauses traditionally wait for a liability to arise and then act to exclude this liability (see diagram
6.6). Duty defining terms act by defining the parties’ obligations in such a way that the liability never arises.
In both case one party will succeed in avoiding liability, either by exclusion or by definition.

Excluding liability v preventing it arising

I sell you a ‘sound’ bike and you ride it off-road and the chassis snaps in two. You sue me
147
for breach of contract (claiming that the bike was not sound) and I point to an exclusion
clause in the contract that excludes any liability for damage caused by taking the bike off-
road. We can say that I am originally liable for the damage to the bike but this liability is
excluded as soon as it arises.
Compare the scenario where I sell you a bike ‘sound except for off-road riding’. There is
no obligation for me to provide a bike suitable for off-road riding and so there can be no lia-
bility when you ride it off-road and break the chassis. There is no exclusion clause but the
result is the same as if there had been one. I have excluded any liability for off-road damage
by definition, rather than by outright exclusion.

In order to catch these duty-defining clauses, the last sentence of s.13(1) extends the
scope of the Act so that s.2 and s.6 (the relevant sections for our purposes) will ‘prevent
excluding or restricting liability by reference to terms and notices which exclude or restrict
the relevant obligation or duty.’ The main point to understand about this difficult section
is that it is unclear. Any attempt to provide a watertight explanation of exactly which
clauses s.13 intends to cover will send your head spinning and is doomed to fail. The test
could potentially apply to all terms of the contract because by defining the obligations in
one particular way, the parties have necessarily rejected other possible obligations. Think
of the parties as starting with a blank sheet of paper. As they begin to write down their
obligations they necessarily favour some obligations over others; the ones they write
down provide not only a record of their obligations under the contract, but also a
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 148

negative of the obligations they have excluded from the contract. In this way all terms of
the contract are exemption clauses.

However, it would be an intolerable intrusion into the parties’ freedom of contract if all
terms became subject to review under the Act. Careful attention must be paid to the
reference in s.13(1) to excluding or restricting the ‘relevant obligation or duty’. This means
that not all of the obligations excluded by definition (ie those omitted from the parties’
sheet of paper) need to count as ‘excluded or restricted’ under the Act. But how are the
courts to decide when a ‘relevant’ obligation has been excluded by definition? One way
is to imagine that there are certain obligations which should be in a contract and any term
which excludes or restricts such obligations falls within s.13(1). This provides a defined
core of ‘relevant’ obligations against which the parties’ chosen obligations can be meas-
ured. For instance, we might say that there should be a term that a driver of a mechan-
Chapter 6 Exemption clauses

ical digger will take reasonable care. If the contract defines the driver’s obligations
differently then this will amount to an exclusion of the driver’s duty of care (an exclusion
of negligence which will fall within s.2). A term that defines other obligations of the
driver (such as wearing a certain uniform) will necessarily exclude alternative obligations
(such as the alternative obligation of the driver wearing his own clothes) but this will not
be considered to be an exclusion of liability because the driver’s appearance is not
considered important enough to be part of the obligations which should be in the
contract. By having a core set of obligations to measure the parties’ obligations against,
it is possible to make sense of the s.13(1) phrase ‘exclude or restrict the relevant
obligation or duty’.
148
Transferring or excluding liability
Two cases, Phillips Products Ltd v Hyland (1987) and Thompson v T Lohan (Plant Hire) Ltd
(1987), dealt with condition 8 in the standard form contract drafted by the Construction
Plant-hire Association. Both cases involved a hirer who hired a digger (plant) from the
owner who also supplied a driver for the digger. It is important to realize that normally
the owner would be vicariously liable for the driver, his employee, but condition 8 stated
that: ‘. . . the hirer shall be responsible for all claims arising in connection with the
operation of such plant by the said drivers or operators.’

In Phillips the driver negligently damaged the hirer’s property whilst operating the digger
and, when the hirer claimed damages from the driver and the owner, they pointed to the
clause arguing that it transferred all liability to the hirer and so it did not fall within s.2(2)
UCTA which only applied to exclusions of liability. Slade LJ was in no mood to argue over
these linguistic technicalities. He said: ‘There is no mystique about “exclusion” or “restric-
tion” clauses. To decide whether a person “excludes” liability by reference to a contract
term, you look at the effect of the term. You look at its substance.’ He concluded that the
clause did exclude the liability of the owner, both under the normal meaning of exclusion
and its extended meaning under s.13(1). ‘On the facts of this particular case, the effect
of condition 8, if valid, is to negate a common law liability in tort which would otherwise
admittedly fall on the plant-owner.’ This ‘but for’ test requires the court to ask, ‘would
the party seeking to avoid liability be liable if this clause did not exist?’
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As noted above, this could potentially be applied to all of the terms of a contract because
they all exclude other alternative obligations. The real question should not be ‘what would
the position be without this term?’ (because all terms exclude some other obligation) but
‘does this term exclude an obligation that should be in the contract (ie a “relevant”
obligation)?’ The problem then encountered is that the courts will look as though they
are implying terms into the contract. Also, what should be the test for deciding which
obligations should be in a contract; only reasonable obligations? In Thompson, the driver
negligently killed a third party, Mr Thompson, and so the analysis was different from
Phillips because the person claiming damages (Mr Thompson’s widow) was not subject
to condition 8; it was clear that she should have damages, the outstanding question was
whether the owner or the hirer paid them. The court held that on this occasion condition
8 did not fall within s.2(2) because it transfered liability for negligence from the owner to
hirer. The widow was not left without somebody to sue (as was the case in Phillips). Such
a transfer of liability is known as an indemnity, and such clauses are subject to the
reasonableness test under s.4 UCTA only if the contract is with a consumer (as was clearly
not the case in the two cases above).

Statutory control
The whole area of duty-defining clauses is not at all easy to understand. If the above
discussion has seemed a little impenetrable then the following summary may help to
make things clearer.

The whole purpose of the Act is to stop certain parties from unfairly avoiding liability for
their acts. The most obvious example of this is when a party uses an exemption clause
to exclude his liability for something he is obliged to do. However, the Act also aims to 149
catch instances where one party should be under an obligation to do a certain act (eg
to take reasonable care) but the parties have framed their obligations in such a way that
that party is not under such an obligation. This ‘duty-defining clause’ is as much an exclu-
sion of liability as is a traditional exemption clause. The difficulty is deciding which obli-
gations a party should be under; s.13(1) attempts to do this by referring to such
obligations as ‘relevant obligations’ but this simply begs the questions rather than pro-
viding guidance.

Other terms having the effect of an exemption clause

Section 13(1) also extends s.2 and s.6 to cover terms which make it excessively difficult
or prejudicial to enforce a liability and terms that try to introduce restrictive rules of
evidence. As with duty defining clauses, these can have the same effect as excluding
liability outright.

The last sentence of s.13(1) does not apply to those terms governed by s.3 (terms exclud-
ing liability for breach of contract in certain situations other than sales of goods etc.).
However, for these breach of contract cases (dealing as a consumer or on written
standard terms), s.3(2)(b) catches terms which purport to allow a party to render no
performance or a substantial different performance to that which was reasonable
expected which is analogous to a term which restrictively defines the duty.
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Substantially different performance

Contract A is an agreement to deliver a rental car at 9 a.m. tomorrow subject to a clause

stating that the rental company will not be liable for any loss suffered where the car is deliv-
ered up to three hours late.
Contract B is an agreement to deliver a rental car at 9 a.m. tomorrow morning, ‘delivery time
guaranteed to within three hours’.
The two contracts are essentially to the same effect but the first obviously involves an exemp-
tion clause whilst the second may appear not to do so and thus appear to be outside the
controls imposed by the Act. However, assuming that the person receiving delivery of the
car was dealing as a consumer or on the other’s written standard terms, s.3(2)(b) prevents
a person by reference to any contract term claiming to be entitled to render a performance
substantially different from that reasonably expected of him.
Chapter 6 Exemption clauses

Suppose that the car is not delivered until 11.59 a.m. Under contract A, there is clearly a
breach but one which is on the face of it covered by an exemption clause and the question
will be whether the clause was reasonable. Under contract B, there does not appear to be
an exemption clause but the question is whether performance has been rendered which is
substantially different from that reasonably expected. The answer might turn on factors such
as how clearly communicated the reference to three hours was, how much was being paid
and how long the rental was for – if it was only for the rest of the day then the section is
perhaps more likely to apply than if the rental was to last for another week, because in the
latter case the loss of the morning is proportionately less significant. Even if the Act does apply
(ie if the performance was substantially different from what was reasonable expected) that
150 is not the end of the matter – one then has to ask whether the term providing for the three-
hour window was itself reasonable, a concept we will consider in the next section after you
have studied diagram 6.7 below.

6.5.4 The reasonableness test

The stock criticism of tests of reasonableness in any branch of the law is the uncertainty
and unpredictability that they can introduce and so it is important to know how far the
Act provides guidance as to the application of the reasonableness test (always remem-
bering that it is not all terms to which the test is applicable). The principal section
providing such guidance is s.11, which itself also refers to specific criteria in Sch.2 (the
latter is strictly speaking only applicable to exclusions of implied terms in contracts under
which goods pass but there is no doubt that they constitute useful pointers in relation to
other types of contracts).

The first point to note about s.11 is its last subsection, subs.(5), which puts the burden of
proving reasonableness on the person relying on the clause, which is a crucial point when
there are factors pointing either way, as in St Albans City and District Council v
International Computers Ltd (1996). This represented an important change from the
original provision in a precursor of the Act, the Supply of Goods (Implied Terms) Act 1973.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 151

Type of Liability Effect and

Type of Term
excluded/restricted Applicable Section

for death or
Ineffective s.2(1)
personal injury

Negligence

for other loss or

Reasonableness test s.2(2)
Duty s.13(1) last damage
defining term sentence

for title warranties (eg

Ineffective s.6(1)
s.12 SoGA 1979)

Sale and
Terms making Hire
s.13(1) last other terms – against a
claim more Purchase Ineffective s.6(2)
a) b) c) consumer
difficult Implied

Statutory control
terms

other terms – against a

Reasonableness test s.6(3)
non-consumer

Performance substantially
Diagram 6.7 different to what reasonably
expected s.3(2)(b)
How s.13 and
s.3(2) prevent
151
evasion of the Act
and ‘feed into’ the Breach of Contract
(if one party deals as aconsumer or on Reasonableness test s.3
operative sections
the other’s written standard terms)

The test of whether the term was a fair and reasonable

one to include
Section 11(1) marks another potentially significant change from the position under the
earlier statute which controlled exemption clauses in sale of goods contracts. The
question under the 1977 Act is whether the clause was a fair and reasonable one to have
included at the time of entering the contract, rather than whether it is fair and
reasonable to allow reliance on it now. This shifts the emphasis from the particular dam-
age actually suffered, and from the circumstances of the breach, and clearly emphasizes
instead the fairness of the bargain when it was struck and this can have quite significant
effects on whether the clause is likely to be upheld. For example, it might be fair and
reasonable to allow reliance on a clause given the actual damage suffered and the
liability actually excluded on the particular facts but the clause may not have been a fair
and reasonable one to include in the contract because of its potential width and its poten-
tial to be relied on in other fact situations which could not be regarded as fair. Conversely,
if the clause was fair and reasonable having regard to what the parties knew or ought
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:19 PM Page 152

reasonably to have contemplated at the time the contract, the fact that it is later found
to operate harshly should in principle be irrelevant.

That this is the correct approach under the Act was confirmed in Stewart Gill Ltd v
Horatio Myer & Co. (1992) were Lord Donaldson stated: ‘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.” This has to be determined as at the time when the contract is made and
without regard to what particular use one party may subsequently wish to make of it.’

The clause in question was sought to be used to prevent the purchasers setting off (see
s.13(1)(b) of UCTA) their claim for damages against their liability to pay the balance of the
price. This particular aspect and use of the clause by the sellers was regarded as reason-
able but the clause could not be relied upon because it also prohibited the setting off any
Chapter 6 Exemption clauses

credits or payments against the purchase price which was clearly a much wider and a
totally unreasonable prohibition. The potential use to which the clause might be put
therefore made it unreasonable even though the use to which it was actually being put
was not unreasonable. The term as a whole had to be evaluated, and not just the part
being relied upon in this instance, since the reasonableness test looks at whether the term
was reasonable to include at the time of the contract. Nor should the unreasonable parts
be severed from the reasonable and only the latter upheld because questions such as
whether a customer ought reasonably have known about the extent of a term (see UCTA
Sch.2 para.(c)) do not make much sense if the customer could not know in advance to
what extent the clause might be relied upon.
152
The not unattractive result is that anyone drafting an exemption clause has to ensure that it
is sufficiently widely worded to cover the damage to be excluded in accordance with the com-
mon law test and yet at the same time has to take care not to make the clause any wider
than is necessary since that will only increase the risk of it being judged unreasonable whereas
a narrower clause might have been reasonable and still sufficient to protect the defendant.
The wise drafter will also break down the various exemptions into separate clauses and sub-
clauses so that the unreasonableness of one particular clause will only affect that one and
will not infect the other separate clauses which may still remain valid if reasonable.

A further point to note about the test of reasonableness is that the question is merely
whether the particular term was a reasonable one to include in this contract, not whether
the term would be reasonable in any other circumstances. Coupled with the observations
of Lord Bridge in George Mitchell v Finney Lock Seeds to the effect that the appellate
courts will be reluctant to interfere with the findings of trial judges as to whether a clause
is reasonable, this means that decided cases are going to be of relatively little help in
predicting how the same clause might fare in a different set of circumstances before a
different trial judge. This can clearly be illustrated if one looks at Waldron-Kelly v BRB
(1981) and compare it with Wight v BRB (1983). In the former case a clause limiting
liability for lost luggage by reference to its weight rather than its value was held to be
unreasonable but in the latter case the same clause was held to be reasonable on the
particular facts in a different county court.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:19 PM Page 153

The Schedule 2 criteria

More specific criteria are provided by Sch.2 for clauses excluding liability for the terms
implied in contracts involving the supply of goods and it is generally agreed that these can
also be relevant to other situations so it is worthwhile being able to summarize them and
understand them. Again, the criteria have been selected for good reasons and
understanding their rationale makes it easier to remember them.

Paragraph (a), in referring to relative strength of bargaining power is a fairly obvious

consideration and ‘alternative means by which the customer’s requirements could have
been met’ is geared to the question of how far the supplier is a monopolist (although
there has been a fair amount of scepticism about how well-equipped the courts are
to recognize inequality of bargaining power see, eg Nicol and Rawlings (1980) 43
MLR 567).

Paragraph (b) covers inducements to agree to the term. If you are charged a lower price
in return for the exclusion, that is likely to make the clause reasonable – see Green v Cade

Statutory control
Brothers (1978) where a limitation clause in relation to uncertified seed potatoes was
upheld because the purchaser could have bought certified seed for a higher price. This
paragraph are also talks about the ‘opportunity for entering a similar contract with other
persons, but without having to accept a similar turn’, ie was it effectively a take it or leave
it situation or did the customer have a choice?

Paragraph (c) refers to whether the customer ought to have known about the existence
and extent of the term. This may sound like the common law incorporation test coming
153
back in again and most clauses which are actually incorporated will probably be reason-
able under this criterion but it may bite where the incorporation test operates harshly, eg
in cases of signed documents like L’Estrange v Graucob. We saw earlier that the incorp-
oration test is principally or normally concerned with whether reasonable notice of the
existence of the term has been given rather than with whether the customer ought to
have been aware of its extent but paragraph (c) makes this latter consideration directly
relevant to whether a clause is reasonable under the Act (see also the discussion of the
views of Hobhouse LJ in the AEG case above).

Paragraph (d) is fairly self-explanatory and refers to situation where liability is conditional
on the compliance with a condition; eg a clause whereby liabilities are excluded unless a
complaint is made in writing within a short period such as seven days. Such a clause was
held to be unreasonable in Green v Cade Brothers since a defect in seeds was not cap-
able of being easily detected until much later.

Paragraph (e) reflects the fact that where the supplier is complying with a special order it
may be perfectly reasonable to exclude all obligations save conformity with the
specification. The purchaser can hardly complain that a product is not fit for its purpose
if it complies with the specifications laid down by the purchaser.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:19 PM Page 154

Limitation clauses
Section 11(4) specifies two factors which are particularly relevant to limitation as opposed
to exemption clauses:

(a) the resources available to the party excluding the liability – obviously the smaller
those resources, the more understandable is a limitation of liability; and
(b) the availability of insurance, again the less the opportunity to insure against a
liability, the more understandable is the attempt to limit the liability.

In Singer v Tees & Hartlepool Port Authority (1988) it was argued that the fact that the
defendants had ample resources and were a position to insure should be ‘virtually deci-
sive’ in showing that a limitation clause was unreasonable. Steyn J disagreed. All relevant
factors had to be looked at. The points mentioned in s.11(4) were outweighed by a
Chapter 6 Exemption clauses

number of others including the fact that there was an option to contract at a higher price
without the limitation clause.

6.6 Unfair Terms in Consumer

Contracts Regulations 1999
154
(UTCCR)
6.6.1 Background to UTCCR

The Unfair Contract Terms Act 1977 represented the domestic response to the well
recognized problem of the abuse of exemption clauses by those in a superior bargaining
position. At a wider level, the European Community adopted a directive on unfair terms
in consumer contracts in 1993 which was first implemented in the UK by the 1994
regulations which came into force in 1995 and which have now been supplanted by the
Unfair Terms in Consumer Contracts Regulations 1999. Both the Directive and the
Regulations, which fairly literally reproduce it, were based on the somewhat wider
legislative controls on unfair contract terms first introduced in Germany in 1977 (the
Allgemeinen Geschafts Bedingungen, if you are interested in these things) – notably in
the very same year that our own Unfair Contract Terms Act was enacted and in response
no doubt to the same pressures and concerns. Unlike our own somewhat misleadingly
entitled Unfair Contract Terms Act, the Directive and the Regulations apply to a wide
range of unfair contract terms and not just to exemption clauses (however widely
defined). There is, however, clearly a large degree of overlap between UCTA and UTCCR
and there has been no attempt as yet (although there are proposals for one in the future)
to rationalize or assimilate the two layers of statutory control.
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6.6.2 Scope of UTCCR

Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR)

You therefore have to consider independently the question of whether an exemption
clause survives UCTA before considering the separate question of whether it survives the
UTCCR. However, the UTCCR, as their name suggests, only apply to ‘consumer contracts’
and a consumer is defined in reg.3 as a natural person (contrast the R & B Customs
Brokers case in section 6.11.2 above) so one does not need to consider the regulations in
a business-to-business contract. Furthermore, the regulations only apply to terms which
have not been ‘individually negotiated’ (reg.5(1)) which, whilst being a rather similar
concept to ‘written standard terms’ in s.3 of UCTA, performs a much broader function in
the Regulations since it is a precondition for their operation rather than being one of the
criteria for the operation of a particular section. Where the regulations do apply, they do
not automatically invalidate any particular type of term and, rather than imposing a test
of ‘reasonableness’, they ask whether the term is ‘unfair’. A term is ‘unfair’ under reg.5 if
‘contrary to the requirements of good faith, it causes a significant imbalance in the party’s
rights and obligations arising under the contract, to the detriment of the consumer’.

The concept of ‘good faith’ is an important and reasonably well-understood notion in

German law and in some other continental legal systems but there is no European wide
consensus about its meaning and it is a somewhat alien transplant into the common law.
The House of Lords in Director General of Fair Trading v First National Bank (2002)
nevertheless felt able to interpret and apply the meaning of unfairness to the facts of the
application before them without seeking a ruling from the European Court of Justice and
155
found that the particular term was not unfair. Further guidance is indeed provided as to
the assessment of unfairness in reg.6 which provides that it should be done ‘taking into
account the nature of the goods or services for which the contract was concluded and by
referring, at the time of conclusion of the contract, to all the circumstances attending the
conclusion of the contract and to all the other terms of the contract . . .’ The emphasized
words (emphasis added) mean that the approach in this respect is not dissimilar to the
assessment of reasonableness under s.11 UCTA under which we have seen that the
emphasis is on whether it was fair and reasonable to include the term in the contract
rather than whether the reliance placed upon it now is fair and reasonable. The parallels
with UCTA continue in that further guidance as to the concept of unfairness is provided
in Sch.2 to the regulations. This schedule provides an ‘indicative and non-exhaustive list
of terms which may be regarded as unfair’ which probably means that terms of the type
listed in this so called ‘grey list’ will be presumed to be unfair unless the person seeking
to rely on them can show particular reasons why the term was a fair one to be included
in this particular contract.

A potentially significant limitation on the assessment of fairness is provided in reg.6(2)

which provides that:

it shall not relate –

(a) to the definition of the main subject matter of the contract, or

(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:19 PM Page 156

This is generally known as the exclusion of ‘core terms’ from the controls imposed by the
regulations which are not designed to, or apt to, interfere with the essential judgment
and decision of the consumer to enter into a particular bargain at a particular price (as
opposed to regulating the detailed terms, incidental to that essential bargain, which
details may have been unfairly included in it and which may unfairly undermine it). This
‘core terms’ exclusion was interpreted narrowly in the First National Bank case by the
House of Lords, which is generally regarded as a good thing in that it means a wider range
of terms will remain susceptible to control under the regulations as is illustrated in
Bairstow Eves v Smith (2004).

Bairstow Eves v Smith (2004)

Chapter 6 Exemption clauses

A term providing for a payment of commission to an estate agent at an ‘early payment

discounted commission rate of 1.5%’ was regarded as the core term. Thus a term providing
for payment at a rate of 3 per cent, if payment was not made within 10 days of completion,
even though described as the ‘standard commission rate’, was not part of the core terms
and was thus subject to review and held to be unfair. The bargain between the parties was
essentially one whereby both parties expected that the consumer would normally in
practice pay 1.5 per cent (and the regulations do not purport to interfere with this ‘core term’
or essential bargain or to evaluate the adequacy of this price) but the provision for doubling
this commission rate in certain eventualities was not a core term, was therefore not excluded
under reg.6(2) and was therefore subject to review and found to be unfair. In fairness to
estate agents, who often get a bad press, the dispute in this case was actually precipitated
156 by the consumer’s solicitors who lamentably failed to pass on to the estate agent within the
10-day period the full 1.5 per cent commission which they had already received from the
consumer.

The final point to note about the regulations is in many ways perhaps the most
important one. The regulations, unlike UCTA, do not depend for their enforcement on
the accidents of litigation between contracting parties. Regulations 10 to 15 provide for
the Director General of Fair Trading (now the Office of Fair Trading (‘OFT’)) and other
qualifying bodies to consider complaints about unfair terms and to apply for injunctions
prohibiting the use or recommendation of unfair terms (the First National Bank case above
was an example of such an application which eventually went to the House of Lords). The
relatively low number of cases so far in the courts is due to the fact that most cases under
the 1994 regulations were dealt with by the Office of Fair Trading by negotiation, with
applications for injunctions being seen as a last resort. The widening of the enforcement
provisions and the inclusion of the licensed bodies in the 1999 regulations may mean
there will be an increase in the number of cases coming to court (see S. Bright, ‘Winning
the Battle Against Unfair Terms’ (2000) 20 Legal Studies 331).
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6.7 Reform proposals

The Law Commission published its report on unfair terms in contracts (LC No. 292) in
February 2005 and noted at para.1.4 that the existence of UCTA alongside UTCCR means
‘that the nature and scope of the combined protection afforded to consumers by these
laws are wholly obscure to the inexpert reader’. The report goes on to set out at paras 2.6
and 2.7 the following principal features of the two regimes in order to highlight their
differences, a summary which you may find helpful in seeking to clarify your own
understanding of their complex interrelationship

UCTA:

(1) applies only to exclusion and limitation of liability clauses and indemnity clauses;
(2) makes certain exclusions or restrictions of no effect at all;

Reform proposals
(3) subjects others to a reasonableness test;
(4) contains guidelines for the application of the reasonableness test;
(5) puts the burden of proving that a term within its scope is reasonable on the party seeking to
rely on the clause;
(6) often applies whether the terms were negotiated or were in a ‘standard form’;
(7) does not apply to certain types of contract even when they are consumer contracts;
(8) has effect only between the immediate parties; 157
(9) has separate provisions for Scotland; and
(10) applies to terms and notices excluding certain liabilities in tort . . . .

UCTA also applies to contracts between businesses and certain ‘private’ contracts for the sale of
goods where neither of the two parties is a business.

In contrast, the UTCCR:

(1) apply to any kind of term other than the definition of the main subject matter of the contract
and the adequacy of the price;
(2) do not make any particular type of term of no effect at all;
(3) subject the terms to a fairness test;
(4) do not contain detailed guidelines as to how that test should be applied, but contain a so-
called ‘grey’ list of terms which ‘may be regarded’ as unfair;
(5) leave the burden of establishing that the clause is unfair on the consumer;
(6) apply only to ‘non-negotiated’ terms;
(7) apply to consumer contracts of all kinds;
(8) are not only effective between the parties but empower various bodies to take action to
prevent the use of unfair terms; and
(9) apply to the UK as a whole.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:19 PM Page 158

They do not apply to business or private contracts.

The Law Commission regarded it as ‘its first task is to consider how to replace these two
pieces of legislation with a single unified Act that will set out the law on unfair contract
terms in a clear and accessible way.’ To this end it produced a draft new ‘Unfair Contract
Terms Bill’ the main provisions and purpose of which it helpfully summarized as follows
(see Appendix A to the report):

For consumer contracts, the purpose of the Draft Bill is ‘to create a unified regime reproducing the
combined effect of UCTA and the UTCCR’ with only minor changes of substance, while imple-
menting the Directive in full. The substantive changes that do occur are, primarily, that (1) (as with
those terms of consumer contracts that fall within UCTA) any unfair term will be invalid whether
or not it was ‘individually negotiated’, unless it is a ‘core’ term such as the main definition of the
subject matter; and (2) (again as under UCTA) the burden of proving that a term is fair will be on
Chapter 6 Exemption clauses

the business.

For business contracts in general, the purpose of the Draft Bill is to retain the effect of UCTA, which
regulates various kinds of contract term excluding or restricting liability, but in a form that is con-
sistent with the unified regime for consumer contracts. It disposes of some provisions that are
unnecessary.

The Draft Bill also establishes an additional regime for contracts where at least one of the parties
is a small business. The purpose of these provisions is to extend to small businesses many of the
protections currently available to consumers. However, two consumer protections have not been
158 extended to small businesses. These are the possibility of challenging negotiated terms and the
burden of proof falling on the business.
......

The proposals have generally been welcomed as being a sensible rationalization and
simplification of the current position with the removal of some anomalies but the
retention of the key mechanisms which have been successful to date in dealing with
unfair exemption clauses generally and with other unfair terms in consumer contracts.
The Report also sensibly stepped back from the proposal in the earlier Consultation Paper
(CP No. 166, 2002) that contracts between businesses should be subjected to essentially
the same controls as apply under the UTCCTR to consumer contracts. This proposal was
regarded as too great an interference in freedom of contract between parties who are
generally well able to look after themselves and as potentially leading to unwanted and
possibly unforeseen side effects in the commercial sphere. Instead, as can be seen above,
there is a more restricted proposal to extend the protection from consumers to ‘small
businesses’ where there is much more likely to be inequality of bargaining power. There
will however be a cost in terms of complexity as to how to define a ‘small business’ which
may or may not be worth paying in return for the benefit gained. It remains to be seen
whether Parliamentary time will be found to implement the Law Commission’s
proposals but in the meantime the Report provides an excellent critique of the current law
which can be profitably read in order to really sharpen your understanding of the current
statutory regime.
06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:19 PM Page 159

Summary
1. EXEMPTION CLAUSES

Exemption clauses are used to allocate risks between the parties to a contract. The
courts can control the abuse of exemption clauses by means of the devices of
incorporation and interpretation (or construction) of the terms of the contract but they
cannot, at common law, declare exemption clauses invalid.

Parliament has now given them that power by means of the statutory controls in UCTA
and UTCCR.

2. INCORPORATION

Exemption clauses, like all other terms of a contract, can be incorporated by signature,
reasonable notice, course of dealing or trade custom.

A greater degree of notice must be given in order to incorporate unusual or onerous terms.

Summary
3. INTERPRETATION

Any ambiguity will be construed against a party attempting to rely on an exemption

clause (contra proferentem rule) and there are special rules of construction applicable
when a party attempts to exclude liability for negligence or fraud. 159
There is no rule of law that a party cannot exclude liability for a fundamental breach of
a contract, although the courts will strictly construe any attempt to do so.

Limitation clauses place a maximum limit on damages and tend to be construed less
strictly by the courts, although the reasons for doing this have been questioned.

4. STATUTORY CONTROL

UCTA controls the exclusion of ‘business liability’ against consumers and in some cases
against other businesses. There are complex provisions to discourage evasion by
dressing up an exemption of liability as a denial of duty or obligation in the first place.

The most objectionable exemption clauses, eg those imposed against consumers and
exclusions of liability for negligently caused death or personal injury are rendered
ineffective and other less objectionable terms are subjected to a reasonableness test.

The test of reasonableness is applied by examining whether the clause was reasonable
to include in the contract, not whether it is reasonable to rely on it now. The burden of
proof is on the person seeking to rely on the clause and Sch.2 provides further
guidance on reasonableness.

UTCCR provide a further layer of control over non-core terms in consumer contracts
which have not been individually negotiated. Such terms are never automatically
unenforceable and are subjected to a test of unfairness rather than reasonableness.
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Unfairness is also judged by reference to when the inclusion of the term in the contract
and further guidance is provided in a Schedule of terms likely to be unfair. The
assessment of unfairness does not extend to the core terms of the contract, including
the adequacy of the price, but this exclusion is restrictively defined so as not to
emasculate the regulations and, eg price escalator clauses can be caught.

The regulations do not depend purely on litigation between contracting parties but are
also enforced by the Office of Fair Trading and other qualifying bodies.

The Law Commission has recommended a simplified and unified scheme of statutory
control which would maintain the current controls in a single statute more rationally
and intelligibly set out. Consumers would continue to have a higher degree of
protection than businesses against exemption clauses and against unfair terms but
small businesses would be given similar protections to consumers.
Chapter 6 Exemption clauses

Questions
For a suggested 1 Bob regularly hires a rubbish skip from Tidy Skips. On each of the last five
approach to occasions, the invoice, received afterwards, has had the following printed on the
answering this
160 question visit reverse: ‘Tidy Skips shall not be liable for any loss or damage howsoever caused to
the Online
Resource Centre
the customer’s premises and if, notwithstanding the foregoing, any liability for
that accompanies damage to customer’s property should arise, that liability shall be limited to a total
this book.
of £100.’

Bob telephones Tidy Skips and orders a skip to be delivered to his home on the
following day. Syd, an employee of Tidy Skips, negligently drives the delivery
vehicle into Bob’s wall causing it to collapse on to Bob’s new car. The wall costs
£500 to rebuild and the repairs to the car cost £800.

Advise Bob.

2 Does the control of exemption clauses offend against the ideal of freedom of
contract? When have the courts deferred to the parties’ freedom?

3 Does UCTA only apply to clauses which exclude or limit liability?

4 What is the difference between the test of reasonableness under UCTA and the
test of unfairness under UTCCR? Is a distinction justified?

5 Why do consumers deserve special protection from exemption clauses? Are there
any other groups or bodies who deserve special protection?
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Further reading
BOOKS

Chen-Wishart, Contract Law (Oxford University Press, 2005) Ch.12.

McKendrick, Contract Law: Text, Cases and Materials (Oxford University Press, 2005) Chs 9,
13 and 14.
O’Sullivan and Hilliard, The Law of Contract, 2nd edn (Oxford University Press, 2006) Ch.9.
Law Commission Report No. 292, ‘Unfair terms in contracts’, February 2005.

ARTICLES

Adams and Brownsword, ‘The Unfair Contract Terms Act: a decade of discretion’ (1988)
104 LQR 94.
Bright, ‘Winning the battle against unfair contract terms’ (2000) 20 LS 331.
Collins, ‘Good faith in European contract law’ (1994) 14 OJLS 229.

Further reading
MacDonald, ‘Unifying unfair terms legislation’ (2004) 67 MLR 69.

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