A party drawing up a contract will commonly seek to minimise the amount of liability which may be incurred by it in the performance of that contract. Contractual clauses which have this effect are referred to as ‘exclusion clauses’ or ‘limitation clauses.’ The following is a reminder of the current law in relation to such clauses, and an overview of the changes to the law that are likely to come into effect as a result of the joint report and draft Bill from the Law Commission and the Scottish Law Commission on unfair contract terms.
Current law
The current law on exclusion and limitation clauses is commonly criticised for being a quagmire of overlapping legislation, with unnecessarily complicated language and structure. The legislation and regulations most relevant to building and engineering projects are:
• the Unfair Contract Terms Act 1977 (UCTA), which applies to contracts generally
• the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), which apply to contracts with “consumers”.
UCTA
UCTA affects the operation of exclusion clauses and limitation clauses. Under UCTA, the exclusion or limitation of liability for:
• death and personal injury is not permitted in any circumstances
• other losses caused by negligence is permitted
• breach of contract or negligence (where one party deals as a consumer or on the other’s written standard terms of business) is permitted only if it is “reasonable”.
“Reasonableness?”
The “reasonableness” of exclusion or limitation clauses is to be decided by the courts. The criteria that the court will take account of includes:
• the information available to both parties when the contract was drawn up
• whether the contract was negotiated or in standard form
• whether the party had the bargaining power to negotiate better terms.
Recent case law on “reasonableness” and standard terms (Regus (UK) Limited v Epcot Solutions Limited [2007] All ER (D) 93 Mercantile Court) suggests that in a business to business contract, where standard terms of business are so draconian that they let the service provider off the hook for that business’s failure to provide basic or fundamental services (in this instance relating to the proposed exclusion of any remedy for malfunctioning air-conditioning by a supplier of serviced office accommodation) there is a high probability that the clause will be held by the courts to be unreasonable.
Proposed changes to the law
In 2005, the Law Commission and the Scottish Law Commission published a final report, together with the draft Unfair Terms in Contracts Bill. The Bill aims to clarify and unify the legislation into a single, clearly written and accessible statute. Although the Government has accepted the recommendations, these are currently subject to a regulatory impact assessment before the Bill is enacted. It is not clear at this stage when (or if) the Bill will be enacted.
In particular the draft Bill:
• sets a “fairness and reasonableness” test based on the transparency of the term, its effect and substance and the surrounding circumstances at the time the contract was concluded – a non-exhaustive list similar to the “reasonableness” test currently used
• allows businesses to negotiate terms to exclude or restrict their liability for breach of implied obligations that goods correspond to their description or sample, are of satisfactory quality and fit for their intended purpose. However, the Bill makes it clear that in business to business contracts, the fair and reasonableness test will still apply when one party’s standard terms of business are used
• retains the current UCTA clauses which prohibit the exclusion of liability for death and personal injury caused by negligence and which prohibit unreasonable clauses excluding or restricting liability for loss or damage caused by negligence
• proposes additional protection to “small businesses” (any person having nine or fewer staff) where contracts are worth less than £500,000. If a larger organisation uses its standard terms in a contract with a small business, the small business will be able to challenge any standard term in that contract unless it:
- has been challenged through negotiation
- relates to the subject matter of the contract or the price.
The onus will be on the small business to show that a standard term is unfair by reference to the “fairness and reasonableness” test.
Thoughts/points to bear in mind
In the event that the Bill is enacted:
• It will unify and clarify a currently complex and inconsistent area of law.
• You will also be able to negotiate terms to exclude or restrict your liability for breach of implied legal obligations that goods correspond to their description or sample, are of satisfactory quality and fit for their intended purpose. However, terms which exclude or restrict your liability in your standard terms of business will still be subject to the fair and reasonableness test.
• In the event that you are contracting with a “small business” in a contract of less than £500,000, that small business may be able to challenge any non-negotiated standard term in your contract unless it relates to the subject-matter of the contract or the price.
