Posted: Monday, 2 November 2015 @ 12:01
This blog looks at the use of exclusion clauses to limit liability or perhaps the scope of performance under contracts between businesses. It does not apply to exclusion contracts between businesses and consumers, which are now governed by the Consumer Rights Act 2015.
Many businesses have their own standard terms which they will attempt to incorporate into any contract. Obviously those standard terms will be most favourable to them, and will seek to limit their liability if anything goes wrong, and will often also limit their responsibilities under the contract.
Quite often the first battle will be the battle of the forms. Just whose standard terms apply? For discussion on this see my earlier blog.
But whoever has won that particular battle may not have won the war. The standard terms can still be attacked and struck out if they fall foul of the Unfair Contract Terms Act 1977 (“UCTA”).
As far as business to business contracts are concerned UCTA kicks in where a contract is governed by a party’s written standard terms. In other words the terms have not been separately negotiated.
The business who has contracted on it’s standard terms cannot exclude or restrict liability for breach, or claim to be entitled to perform the contract obligations to a lesser extent than that which was reasonably expected of him, or with regard to the whole or part of the obligations render no performance at all, except in so far as the contract term satisfies the requirement of reasonableness.
So what is the reasonableness test? UCTA states that the test is whether the term “shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.” UCTA goes on to say that regard shall be had in particular to the Guidelines in Schedule 2 of the Act, but makes it clear that the court or arbitrator can still hold that a term which purports to exclude or restrict any relevant liability is not a term of the contract.
Where a person seeks to restrict liability to a specified sum of money, UCTA states that regard shall be had in particular to (a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance.
A very important provision of UCTA is that the burden of proving that a contract term or notice satisfies the requirement of reasonableness falls on the party seeking to rely on it.
So let us have a quick look at the Guidelines in Schedule 2 of UCTA.
The relevant matters are:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.
The temptation is often to attempt to incorporate standard terms by stealth and hope that the other party has not spotted the very limiting exclusion clauses. Certainly it may be better to have standard terms than no written terms at all, but if the contract does go pear shaped any attempt to exclude liability or performance will inevitably be met by a demand by the other party that the reasonableness test is satisfied. The alternative is to specifically draw the attention of the other party to the exclusion clauses at the contract negotiation stage, making it clear in writing why (with reference to the points above) you consider that the clauses are reasonable. If they do nothing then you will have a much stronger claim that they are reasonable.
Business and Litigation Solicitor
Tel: 0845 003 5639
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation
to discuss your particular circumstances.