Exemption Clauses in Consumer and Commercial Contracts

The recommendation of the Law Commission is with respect to the exemption clauses which affect obligations and duties arising in the course of a business, wherein it recommends that exemption clauses in consumer transactions for the supply of goods and services be treated differently from those in commercial transactions (The Law Commission and The Scottish Law Commission, 1975, p. 33). Therefore, the recommendation is to draw a difference between consumer and commercial transactions. This essay discusses the extent to which the current law achieves the recommendation of the Law Commission in relation to express, implied and standard terms. The essay finds that the recommendation of the Law Commission is achieved to a great degree because of the distinction drawn between consumer contracts which come within the scope of Consumer Rights Act 2015 and commercial contracts which come within the scope of the Unfair Contract Terms Act 1977 with respect to any exclusion clauses in these contracts. Prior to the enactment of the Consumer Rights Act 2015, the courts achieved this distinction by considering the principle of fairness and conscionability in context of consumer contracts (the application of the fundamental breach principle has been used to achieve this) and the principle of freedom of contract in context of commercial contracts. For students seeking clarity on this topic, seeking law dissertation help can provide valuable insights and guidance.

The Unfair Contract Terms Act 1977 made major changes in relation to exemption clauses in both consumer and commercial contracts. The Consumer Rights Act 2015 made further changes by removing the consumer protection aspects of the 1977 Act (Furmston, 2017, p. 242). Consequently, the Unfair Contract Terms Act 1977 concerns itself only with exemption clauses outside the field of consumer protection, the latter falling within the domain of the Consumer Rights Act 2015. Furthermore, the Unfair Term Consumer Contract Regulations of 1994 and 1999 related to consumer protection fall within the scope of the Consumer Rights Act 2015. The Unfair Contract Terms Act 1977 controls exclusion of liability to a business buyer for breach of sales contract. This needs to be understood in the context of the Sale of Goods Act and the Supply of Goods and Services Act, which impose duties on a seller of goods and where the sellers cannot exclude their liability under certain circumstances. Implied terms can be excluded against a commercial buyer if it is reasonable to exclude liability according to Unfair Contract Terms Act 1977, Sections 20 and 21 (applicable to Scotland). Section 16 of the Unfair Contract Terms Act 1977 specifically provides that exclusion term is inapplicable where it restricts liability arising in respect of death or personal injury or if not fair and reasonable to incorporate the term in the contract. Section 16 also specifically notes that it is not applicable to terms in consumer contracts. Consumer Rights Act 2015, Part 2 and Schedule 2 have re-implemented the Unfair Contract Terms Directive 93/13/EEC into UK law; this is applicable to consumer contracts and notices, such as the one that Paul read in the pamphlet (Consumer Rights Act 2015, Section 62). In case there is a notice meant for consumers informing them of an exclusion clause, such notice is also covered under the Section 62 of Consumer Rights Act 2015 and must satisfy the test of fairness in Section 62(4), which is that exclusion clause is void if it is contrary to the requirement of good faith, and causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. In other words, the prospect of unfairness due to the unequal bargaining power between the consumers and the traders is read into the statute.

The Consumer Rights Act 2015 controls attempts to limit or exclude liability to consumers and makes certain exclusion clauses invalid. A consumer contract is a contract that is entered between a ‘trader’ and a ‘consumer’ (Consumer Rights Act 2015, Section 61(1)). A trader a “person acting for purposes relating to that person’s trade, business, craft or profession” (Consumer Rights Act 2015, Section 2(1)). A ‘consumer’ is “an individual acting for purposes that are wholly or mainly outside the individual’s trade, business, craft or profession” (Consumer Rights Act 2015, Section 2(3)). Because the word ‘individual’ is used, a company is not a consumer. With respect to consumer contracts, it is provided in Section 62(1) that any unfair term of a consumer contract is not binding on the consumer. It may be noted that consumer contracts are treated more strictly than contracts where the buyer is a business. Section 31 is applied to consumer contracts wherein the seller is barred from excluding liability for the implied terms in Sale of Goods Act, including that the goods should be of satisfactory quality, fit for a particular purpose, and match description, to name a few. Clauses made in the contract that reduce or exclude these obligations in relation to a consumer are invalid under the Consumer Rights Act 2015. Section 65 further provides that clauses in contracts that exclude the liability of the seller for death of or personal injury to the consumer caused by the seller's negligence are invalid.

The provisions considered above show that the law does draw a distinction between consumer and commercial transactions in the context of the exclusion clauses in the contracts. Even before the application of the Consumer Rights Act 2015, when the Unfair Contract Terms Act 1977 was used for both the consumer as well as commercial contracts, courts found themselves constrained to limit the scope of exclusion clauses with respect to consumers. On the other hand, the courts allowed the wide construction of exclusion clauses in commercial contracts on the basis of freedom of contract doctrine as in the case of Photo Production v Securior (Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2, 1980). Therefore, two principles may be considered here with respect to consumer contracts and commercial contracts respectively as these impact the way courts consider the interpretation of consumer contracts. The central objective of the courts in this may be to consider the element of ‘fairness’ of a deal (Howells & Weatherill, 2017). In consumer contracts, the test of conscionability or fairness of contracts is adopted by the courts because the parties are not of equal bargaining power, which reflects in the formulation of consumer contracts or standard form of contracts with exemption clauses (Chitty, 2012, pp. 7-135). Even prior to the adoption of the Consumer Rights Act 2015, there has been a conscious determination by the courts towards narrow interpretation of such clauses on the ground that the consumer occupies an unfair bargaining position vis a vis the other party (St Albans Dc v International Computers Ltd [1996] 4 All ER 481, 1996).

The same approach is not taken with respect to commercial contracts, in which the parties are said to occupy similar bargaining positions; the narrow interpretation of exclusion clauses in such cases may amount to restricting of the principle of freedom to contract (National Westminster Bank plc v Morgan [1985] UKHL 2, 1985). Therefore, a distinction is drawn between commercial and consumer contracts wherein the latter is treated to a more narrow interpretation in exclusion clauses. In Photo Production v Securicor, the court refused to take such a narrow construction, which may now be seen as justified because of the statutory protections for consumers in Consumer Rights Act 2015 (Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2, 1980); the commercial contracts can be left to broad exclusion clauses governed by the principle of ‘freedom of contract’. The approach is therefore most appropriate where the parties are businesses contracting on equal terms.

Consumer contracts in which the exclusion clause attempts to exclude liability for a fundamental breach may be void or subject to a test of ‘fairness’ as per the principles of the Consumer Rights Act 2015. The same is not applicable to commercial contracts for which the presumption of invalidity of exclusion clauses on the ground of fundamental breach has been rejected in AstraZeneca UK (AstraZeneca UK Ltd v Albemarle International Corp [2011] 1 All ER (Comm) 510, 2011) and Edmund Murray Ltd (Edmund Murray Ltd v BSP International Foundations Ltd [1992] 33 Con LR 1, 1992).

As is clear from the discussion on the statutory law as well as authorities decided by courts, there is a distinction drawn between the consumer and commercial contracts as far as exclusion clauses are concerned. Consumer contracts are treated to narrower interpretation in the consumer clauses and protection is provided to consumers under unconscionable consumer contracts under the Consumer Rights Act 2015. Commercial contracts are interpreted more broadly due to the application of the doctrine of freedom of contract. Moreover, the applicable law is Unfair Contract Terms Act 1977. While both Consumer Rights Act 2015 and the Unfair Contract Terms Act 1977 allow the incorporation of exclusion clauses, the former is stricter with regard to exclusion clauses that amount to fundamental breach, which are generally not allowed in consumer contracts.

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Bibliography

AstraZeneca UK Ltd v Albemarle International Corp [2011] 1 All ER (Comm) 510 (2011).

Chitty, J. (2012). Chitty on Contracts: General principles Vol. 1 . Sweet & Maxwell.

Edmund Murray Ltd v BSP International Foundations Ltd [1992] 33 Con LR 1 (1992).

Furmston, M. (2017). Cheshire, Fifoot, and Furmston’s Law of Contract . Oxford University Press.

Howells, G., & Weatherill, S. (2017). Consumer Protection Law . Routledge.

National Westminster Bank plc v Morgan [1985] UKHL 2 (1985).

Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2 (1980).

St Albans Dc v International Computers Ltd [1996] 4 All ER 481 (1996).

The Law Commission and The Scottish Law Commission. (1975). Exemption Clauses, Second Report (Law Com No. 69 and Scot Law Com No.39) . London and Edinburgh: The Stationary Office.