The Unfair Contract Terms Act - Case Study Example

In order to meet the private and business transport of one of its directors Smith Co purchased a car from Thomas Co. The Smith Co had made several such car purchases from Thomas Co in the past. The usual practice adopted by Thomas Co was to make its customers sign its standard terms. These terms contained the clause: 'Thomas Co limits its liability for any breach of the terms implied by sections 13 to 15 of the Sale of Goods Act 1979 to 100'. In this particular car purchase by Smith Co, the complete transaction was performed over the telephone and Smith Co was not asked to sign the standard terms form. The delivered car was found to be seriously defective and it evidently required repairs that would cost around a 1000. The practice prevailing in Thomas Co was that it always offered its customers the opportunity to purchase a two years service contract covering parts and labour on cars purchased from them. Smith Co had always declined such offers from Thomas Co. The remedies available to the Smith Co, under the statute, are discussed hereunder. A contract is an agreement giving rise to obligations which are enforced or recognised by law. The factor which distinguishes contractual from other legal rights is that they are based on the agreement of the contracting parties. It is important to bear in mind that every breach of a contract allows the plaintiff a remedy at law. The Sale of Goods Act states that consumers have been defined as people purchasing for purposes unrelated to their trade, business or profession. Section 12(1) of the Unfair Contract Terms Act 1977, defines a consumer and this has three elements, the party dealing as a consumer must neither make the contract in the course of business nor hold himself out as doing so; the other party must make the contract in the course of business and finally, if the contract involves the transfer of goods, then they must be of a type ordinarily supplied for private use or consumption. The burden of proving that a person is not dealing as a consumer lies with the other party. In R&B Customs Brokers Co Ltd v United Dominion Trust Ltd, the plaintiff a private company purchased from the defendant a car supplied to it by a motor dealer. The car was purchased for the personal and business use of the company's directors. Several similar purchases had been made before. The contract excluded liability for breach of certain statutory implied terms and the exclusion clause was subject to section 6 of the UCTA. The Court of Appeal held that the purchase of the car was only incidental to the company's business activity, which meant that the purchase was not made in the course of business and so the plaintiff company was dealing as a consumer. Thus the defendant could not exclude liability for the breach of implied terms1. Similarly, in our case the car was purchased for both private and business use. Hence, the status of the claimant can be considered as that of a consumer according to this act and the judgment in the above case. In Stevenson v Rogers the Court of Appeal held that a sale to a person who had no business connection to the seller would be considered a consumer2. Hence, in our case Smith Co can be considered as a consumer, since they had purchased the car for the private and business purposes of its director, this is in conformity with the broader view taken by the Appellate Court in respect of the term consumer in the case Stevenson v Rogers. Section 3 of the UCTA covers a number of different types of exclusions or restrictions in respect of liability and makes them all subject to the test of reasonableness. These tests are of four types and apply to the different types of exclusions. These are, first, in relation to a contract term the clause should have been fair and reasonable to have been included, having regard to the circumstances, and which could reasonably be expected to have been known to the parties. Second, contracts in relation to goods (section 6 and 7 UCTA) and section 11(2) and schedule 2 of the UCTA have specified five matters to which the Courts have to bestow especial attention in order to determine whether a clause satisfies the requirements of reasonableness. These are the relative bargaining strengths of the parties, whether there was a possibility of contracting with others without such terms, whether the contractor received any inducement to agree to the contract, whether the customer aught reasonably to have known of the existence or extent of the term and if the liability was dependent on conditional compliance, whether it was reasonable to expect the same at the time of sale and whether the goods were made or adapted to the customer's specific orders. Third, tortious liability, which states that in relation to a non - contractual exclusionary notice, the Court must be satisfied that such terms are fair and reasonable. Fourth are clauses which limit liability for a fixed sum, as per provisions of section 11(4) of the UCTA. In ST. Albans City and District Council v International Computers Ltd, the defendant's liability was due to software supplied by it for a database application, which resulted in a loss of 1, 314, 846/-. The limitation clause limited the defendant's liability to 1, 00,000/-. The Court of Appeal held that this clause was unreasonable. The following factors are of particular relevance in determining unreasonableness; first, the parties were of unequal bargaining power. Second, ICL had not justified the figure of 1, 00, 000/-, which was not commensurate with neither the loss nor the risk. Third, the defendant was insured for a sum of 50 millions world - wide. Fourth, ICL was better able than the council to insure itself against such loss3. Hence, in our case also, the restriction of liability to a mere 100/-, is incommensurate with the loss suffered by the purchaser. The question arises as to whether exclusion can be implied in a contract based on a previous course of action between the parties. In McCutcheon v MacBrayne Ltd it was held that if a particular transaction was inconsistent with the previous course of dealings then that clause cannot be implied from the previous course of dealings4. In Smith Co, the particular transaction in which a claim was preferred was inconsistent with the previous car purchases. This was so because in this particular instance the contract was concluded solely over the telephone and hence, exclusion clauses could not be invoked as having being implicit in the contract on the basis of previous transactions between these parties. The Director General of Fair Trading must consider any complaint made to him about the fairness of any contract term drawn up for general use. He may apply to the Court for an injunction to prevent the use term considered by him to be unfair. He has exercised his powers under the 1994 Regulations, and one such instance is where he made nine mobile phone air time suppliers remove unfair terms in their contracts, which included price variation clauses and long periods of notice to terminate the contract. Due to this intervention of the Director General of Fair Trading Vodafone was forced to change its contract terms significantly. The Office of Fair Trading has set up an unfair terms contract unit to implement the relevant legislation. In the case of Director General of Fair Trading v First National Bank plc, the Court of Appeal held that a bank's standard conditions of business on which the bank supplied credit, which provided for payment of interest upon default was not a core provision and was hence unfair5. After considering all the aspects with regard to unfair terms in contracts, it can be deduced that the terms of the contract in our present case are unreasonable, since; the seller of the cars restricted the liability to a paltry or insignificant amount. Further, in Davies v Sumner it was held by the Court that though a car was a means to earn money in a courier by car service or a taxi service all the same the sale of the car to such a business could not be considered integral to the business 6. Similarly, in Stevenson v Rogers Potter LJ held that only if the business is buying and selling of cars then a sale of car is integral to the business7. Since, in our case the business of the company is not that of purchasing and selling cars, hence, the purchaser is deemed to be a consumer. An exclusion or exemption clause excludes or limits some right, which one of the parties would otherwise have had under the common law or which reduces the remedies available to the consumer. The Statute sets out that no contract term can exclude or limit liability in any way for negligently causing death or injury8. Furthermore, if there is other loss or damage, liability for negligence cannot be excluded or restricted if the term of notice is unreasonable. In addition, if a contract term or notice efforts to exclude or restrict liability for negligence, agreement to or awareness of this is not of itself to be taken as indicative of the voluntary acceptance of any risk9. Unsigned documents or signs constitute the main problems in relation to incorporation of clauses into the contract. In the absence of signatures on the documents it has to be queried what other means can be used to establish that the clauses in the document are part of the contract. If the clause is known to both parties no dispute is involved, when such is not the case then it has to be determined whether the contract is valid or void. Clauses cannot be incorporated from unsigned documents or signs, if they are not introduced into the transaction until after the conclusion of the contract. Once the offer and acceptance have taken place, no party to the contract can insist that such clauses form part of the contract. The contract is based on the terms of the offer which had been already accepted. In the case Thornton & Shoe Lane Parking Ltd, it was held that if the car is damaged by the negligence of the parking company, it will be liable despite the exclusion clause. Further it was stated by Lord Denning J in his observations in this case that Thornton was not aware of the conditions printed on the reverse of the ticket. He further opined that an exclusion clause to be valid has to be brought to the notice of the other party in an explicit manner and not just of terms in general10. The validity of the exclusion clauses, are to be tested under the Unfair Contract Terms Act 1977 (UCTA), and Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). The Director General of Fair Trading is duty bound to investigate the complaints in respect of unfair terms in contracts11. The applicability of the above ruling to our case is that once the offer and acceptance portion of a contract are over, no additional conditions can be incorporated into the contract. Primarily, it has to be considered whether the exclusion clause has been incorporated in the contract or not. In the case Olley v Marlborough Court12 the plaintiff booked a room in the defendants' hotel. A stranger gained access to her room and stole her mink coat. A notice on the back of the bedroom door stated that "the proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody." The Court of Appeal held that the notice was not incorporated in the contract between the proprietors and the guest. The contract was made in the hall of the hotel before the plaintiff entered her bedroom and before she had an opportunity to see the notice. Accordingly, damages were suitably awarded to the plaintiff. This shows that there can be no incorporation if the notice was visible only after the contract was made. In Parker v South Eastern Railway13 it was discussed whether sufficient notice had been given to the plaintiff. It was decided that greater prominence had to be given as the conditions incorporated were of an unusual nature. In the Court of Appeal, Mellish LJ opined as follows. First, if the person receiving the ticket did not see or know that there was any writing on the ticket, he was not bound by the conditions. Secondly, if he knew there was writing on the ticket and he knew or believed that the writing contained conditions; he would be bound by the conditions. Thirdly, if he knew there was writing on the ticket, but did not know or believed that the writing contained conditions. Nevertheless he would be bound, if the ticket was delivered to him in such a manner that he could see there was writing upon it and this would constitute reasonable notice that the writing contained conditions. In our present case, Smith Co had agreed over the telephone, though no documents had been signed in this regard, to the conditions of the sale. Moreover, Smith Co had purchased a number of cars on these very same terms, from Thomas Co. In all these transactions they had never been asked to sign the standard terms of the contract. In other words there had never been any explicit notice of the terms and conditions of the contract to Smith Co. In McCutcheon v MacBrayne14, exclusion clauses contained in 27 paragraphs of small print were displayed both inside and outside a ferry booking office and in a 'risk note' which passengers sometimes signed. It was held that these exclusion clauses were not incorporated and that there was no course of conduct, because of the inconsistency in the dealing. Hence, on the basis of this judgement, it can be concluded all the more strongly that no proper notice was given to Smith Co. In conclusion it can be stated that Smith Co is deemed to be a consumer in respect of the sale and purchase of a car. Further, the different types of redressal for the supply of the car to Smith Co, by virtue of their being consumers, when the product has been determined to be faulty at the time of sale, are that either first, a full refund has to be made within a reasonable time of the sale. Secondly, a reasonable amount of compensation or damages up to six years has to be made form the date of sale. Thirdly, repair or replacement to be performed if feasible. Finally, a partial refund of the amount paid while purchasing the car has to be made15. Bibliography. 1. Kidner, R (1987) 'The Unfair Contract Terms Act 1977 - Who Deals As Consumer' 38 Northern Ireland Legal Quarterly 46. 2. Law Commission No 24 (1969), Exemption Clauses in Contract First Report: Amendments to Sale of Goods Act 1893 (London: HMSO) HC 403 of 1968-69. 3. Director General of Fair Trading V. First National Bank Plc (2002) 1 AC 481 retrieved From http://www.butterworths.co.uk/lawcampus/dataitem. 4. Finance & Banking Update, Allens Arthur Robinson, January - May 2003 Hume v. United States, 132 U.S. 406 (1889). 5. Earl of Chesterfield v. Janssen, 2 Ves.Sen. 125, 155, 28 Eng. Rep. 82, 100 (Ch. 1750). 6. Campbell Soup Co. v. Wentz, 172 F.2d 80, 84 (3d Cir. 1948). Read More