2019 WEEK THREE HANDOUT - CONTRACT TERMS AND CONSUMER LAW

The Terms of the Contract – Chapter 7 Card and James

Terms are contractual undertakings that set out the rights and obligations of the parties to the
contract. If these are not complied with there has been a breach of the contract, and a legal remedy
is available. Representations on the other hand, are merely statements that are made to induce the
other party to contract, but these are not intended to form a part of the contract and are not
intended to give rise to an action for breach of contract. The courts will look objectively at the words
and conduct of the parties to determine whether a statement made is a term of the contract or a
mere representation. Lord Denning in Oscar Chess Ltd v Williams stated that the status of a
statement depends on the conduct of the parties, on their words and behaviour, rather than on their
thoughts. Factors such as the timing of the statement, its importance, whether it is merely opinion,
and the knowledge of the parties will be important in determining this.

See Thake v Maurice where the surgeon’s statement to Mr Thake that he would perform an
operation to make him irreversibly sterile was not enough to amount to breach of contract when
Mrs Thake fell pregnant. The claim failed.

Terms can be classified in a number of ways, but the important distinction is between express and
implied terms. They are both terms of the contract and so any breach will entitle the victim, the
innocent party to a remedy at law, but the type of remedy available to the innocent party will
depend on the type of terms the defendant has breached. We need therefore to distinguish
between:

(i) Express terms

(ii) Implied terms
(iii) Innominate terms

The express terms are those that have been expressed, either in writing or verbally, like cost, price
etc, whereas implied terms have not been expressly agreed but are considered by law to be
standard to the particular type of contract eg Sale of Goods Act 1979 (now the Consumer Rights Act
2015), in, for example a contract for the sale of groceries with Tesco

A. Types of express terms

Having ascertained that a term is an express term, we must then identify what type of express term
it is. Again, this is important in terms of remedy. The following are types of express term:

(i) Conditions – are express terms that are crucial to the contract
(ii) Warranties – are express terms that are more trivial therefore breach is not as
serious
(iii) Innominate terms – are express terms that are disputed, and not easily identifiable
as either. In this event we must look at seriousness of breach to decide what the
remedy to the victim should be.
 (iv) Another type of express term that is common in commercial contracts is the
exclusion (exemption) clause – which clause will enable a party to avoid liability for
breach. These we will consider below in some detail, as the significance of the
exclusion clause is vital in terms of protection of the consumer in business to
consumer contracts.

B. The relative importance of terms

As we have identified, not all terms are as important as each other and so breach therefore
gives rise to different consequences and different remedies.

(a) Conditions are the most important terms, from the heart of the contract, and may lead
to REPUDIATION ie the injured party has the right to treat themselves as free of any
further liability under the contract eg Poussard v Spiers 1876 – in this case an actress not
able to perform on opening night, employers were entitled to terminate the contract. In
Schuler v Wickman – the use of the word ‘condition’ is not conclusive.

(b) Warranties are more trivial, they are more minor terms. Breach does NOT entitle the
injured party to repudiate, and he is only entitled to compensatory damages for loss
suffered. Eg Bettini v Gye 1876 – where a singer failed to turn up for rehearsal, and it
was held that theatre was not entitled to repudiate, and the theatre therefore remained
contractual bound to allow the singer to perform her contract to sing and be paid for
doing so.

(c) Innominate terms, are terms that are not readily identifiable as either conditions or
warranties, and therefore the court will look at the breach and its impact, and then
decide if it is a condition or a warranty. The seminal case on this is Hong Kong Fir
Shipping 1962 – where a contract stated the ship was to be ‘fitted for cargo service’.
This was a very wide term, as to fit a ship for cargo service could include serious things
such as any holes in the hull should be covered - to any broken toaster in the canteen
should be repaired. The ship was not fit for service for a variety of reasons and so there
had been a breach clearly. But what was not clear to the court was whether the term
breached was a condition or a warranty. The ship, in any event was out of service for 20
weeks out of 104 weeks of charter party (hire contract) – but the court held the breach
was not serious enough to permit the defendants to terminate and repudiate the
contract. The defendant was only entitled to damages, to compensate for the loss
sustained while the ship was out of service in breach of the contract to fit the ship out
for cargo service. Lord Diplock said you had to look at the events which had occurred as
a result of the breach and decide if the breach deprived the injured party of the whole of
the benefit of the contract – only then could you terminate.

C. Types of Implied Terms

The majority of terms in a contract will be express, but there will often be gaps, and
sometimes the law may seek to protect the position of the weaker party to the
 bargain/contract by implying certain terms into the contract. This we will see in the
consumer law provisions considered below. These are perhaps the best example of implied
terms.

Implied terms fall under two headings:

(i) The courts can imply terms on the basis of custom (The Moorcock 1886) or business
efficacy, on the basis that the parties meant to include the term but for some reason
did not.
(ii) But mainly terms are implied by law, and more usually by virtue of statute.
Consumer law is the obvious and significant example of this. Again, Lord Denning
has offered assistance in this area, stating that terms implied by law concern ‘all
those relationships which are a common occurrence. Such as the relationship of
buyer and seller, owner and hirer, master and servant, landlord and tenant…and so
on.’ See Shell UK Ltd v Lostock Garage Ltd. He went on to say that these obligations
are not founded on the intention of the parties, but rather on the definitions already
given to them under the law, whether that arises out of a case, or a statute.
Recent case law (common law) has indicated that the courts will imply a duty of
good faith into certain commercial contracts: see Yan Seng v International Trade
Corp [2013]

Terms Implied by Statute – Consumer Law

There are other areas of law, intimated by Lord Denning’s statement above, where terms are
implied into contracts because of the relationship between the parties, and we will now consider
consumer law, that is the law that regulates contracts made between certain buyers and sellers of
goods. But terms are also implied by law into employment contracts, and lease or tenancy
agreements. We will consider some of these when we study employment law. Now however we will
look at terms implied into consumer contracts. A person deals as a consumer when they act as
individuals and are acting outside of an individual’s trade, business, craft or profession: s. 2(3)
Consumer Rights Act 2015.

This area of law has undergone some key changes and very recently. The Consumer Rights Act 2015
came into force on October 1st 2015, and in relation to consumer contracts replaces much of the old
legislation that had for a long time regulated the relationship between buyers and sellers of goods,
that being principally the Sale of Goods Act (SGA) 1979 and the Supply of Goods and Services Act
(SGSA) 1982; the Unfair Contract Terms Act (UCTA) 1977 and the Unfair Terms in Consumer
Contracts Regulations (UTCCR)1999 (from Europe). However, the CRA is largely a consolidating Act,
and seeks to clarify the law in this area which had become complex and confusing. Many of the
statutory provisions in the new Act are merely re-statements of the old law, into the one Act, but
there are a number of significant changes which we will address below.

The CRA is divided into 3 parts, and we are concerned with the first 2 of these. Part 1 deals with
consumer contracts for goods and services, and Part 2 deals with unfair terms.
Consumer Contracts - Part 1 Consumer Rights Act 2015

Generally: Under the new CRA (s. 12) pre-contract information, which is listed in the Schedules and
includes things such as the identity of the trader, total delivery price, delivery charges and
complaint’s procedure, must be provided, and will form part of the implied terms of the contract.
Sellers should be aware therefore that if this information is not provided, this will leave them open
to having to refund the customer .

Sellers should also note that key terms governing price and subject matter must be ‘prominent’ (ie
brought to the customer’s attention in such a way that the average customer would be aware of the
term) and ‘transparent’ (in the sense that it uses plain and intelligible language).

A sale of goods contract is described as one where the seller transfers or agrees to transfer the
property in goods to the buyer for a money consideration called the price. Here the property in
goods means the title, you become the owner, eg sandwich from Tescos. Under the old SGA and
now Part 1 of the new CRA, the terms implied into consumer contracts

Specifically: Under ss 12-15 of the SGA and now replicated under the new CRA, a seller automatically
assumes certain obligations to the buyer , and the seller is required by the statute to promise that;

1. Seller has the lawful authority to transfer ownership – See s. 17 and cases such
as Rowland v Divall 1923 – defendant bought a stolen car but did so in good
faith, the thief could not pass good title, and neither could the defendant when
he sold the car to the claimant, so the claimant was entitled to get his money
back from the defendant

2. The goods will match their description – see s. 11 this may be given by word of
mouth or written notice, and the seller is responsible for any descriptions which
came from the manufacturer. Customers rely on labels! See Beale v Taylor 1967
– 2 halves of a car welded together. A further category is added by the new CRA
to cover goods purchased following a viewing or examination of a model of the
final product.

3. The goods will be of ‘satisfactory’ quality – see s. 9 - so the court objectively

assesses the quality of the goods. The requirement used to be ‘merchantable’
quality , but this was amended by the Sale and Supply of Goods Act 1994.
Satisfactory quality includes fitness for purpose; appearance and finish, freedom
from defects and safety and durability.

There are exceptions: if a defect is pointed out before the contract is concluded:
Bartlett v Sidney Marcus 1965, or where the buyer does not follow the
instructions: Aswan Engineering 1987.

4. The goods will be suitable for any purpose for which they are normally used and
as specified by the buyer. See s. 10 and cases such as Griffiths v Peter Conway
 1939 – where the buyer bought a fur coat, to which she had an allergic reaction.
It was held there was no breach of contract, as the coat was fit for purpose –
and she did not advise the seller of her allergy problem.

5. The goods will match any sample shown prior to the contract being made: s. 13,
and any model of the final product: s. 14

6. Remedies: See s. 19 and remember that as these are conditions, the buyer is
usually entitled to reject the goods and recover the price from the seller. Buyers
have a limited time to do this. But once the acceptance of the goods has taken
place, it is treated as a breach of a warranty, and therefore only compensation is
available. See Bernstein v Pamson 1987 – after 3 weeks the claimant’s new car
seized up on the motorway due to sealant coagulating in the cooling system. He
was only entitled to damages because he was because the car was not of
appropriate quality, but time had lapsed as he had accepted the car.
‘Reasonable time’ was enough time to road test the car and did not mean time
enough for defects to present. It would be unfair to prevent sellers from closing
their books on a transaction

NB: These terms all impose strict liability and are all defined in the CRA as being
conditions – so breach enables victims to refuse further performance of their
obligations. And enables then to recover any money or other property they have
tendered.

Contracts for the sale of goods and services: The terms implied by the old SGASA 1982 are also
replicated in the CRA: See Chapter 4 of the CRA in relation to contracts for sale of goods and
services.

The following are designated as conditions and apply to all goods under a contract of hire, or a
contract for goods and services, and barter contracts. So provisions (as above) in relation to title,
description, satisfactory quality and suitability for purpose, and correspondence to sample, apply to
contracts for goods and services as they do to contracts simply for the sale of goods.

The CRA also implies into contracts for services that these will be carried out: with reasonable care
and skill, within a reasonable time, and the price charged will be reasonable. These are innominate
terms only however, they are not conditions or warranties – they are a very good example of
innominate terms, and so the impact of the breach will be used to decide how important they are
and what the remedy is : Thake v Maurice 1986. See also Trebor Basset v ADT 2012 – Cadbury
claimed that a fire which destroyed a factory was due to defective fire systems designed by ADT
which was in breach of its duties under the old legislation to provide goods fit for purpose, and take
reasonable care. ADT was liable (but Cadbury was held to be contributory negligent since it did not
have adequate fire prevention systems).

Another new and significant feature of the new CRA is in relation to digital content. This removes a
gap in the previous regime as previously, digital property was not considered to be a ‘good’, and was
therefore not covered by the regulations. So eg a song was treated as a good if it was purchased on a
CD, but not if it was purchased and downloaded from the internet. So in the new CRA, Chapter 3 of
Part 1, ss 33-47 introduces a new comprehensive regime relating to digital content, treating this type
of transaction as a third category of regulated contract alongside ‘goods’ and ‘services’. The product
itself can be anything which can be defined as ‘data which are produced and supplied in digital form’
– so would include eg eBooks, in-app purchases, MP3s, anything with a digital element basically. So
from now on when purchasing digital content, it will be implied that the product be of satisfactory
quality, fit for purpose, and compliant with any description etc. This applies even if the content came
free with other goods the customer paid for.

Remedies available to the Consumer: Consumers rights have been significantly enhanced in this
regard.

Section 22 of the CRA fixes a time period of 30 days within which a consumer may reject faulty
goods and receive a full refund (previously the consumer had a ‘reasonable’ timeframe). This is in
addition to the existing 14 day period within which consumers can change their mind as provided for
in the previous regime (Consumer Contracts Regulations (CCR) 2013).

Sections 20-24 create a tiered system of remedies in relation to faulty goods, so in essentially, if a
consumer does not reject faulty goods within this 30 period, he or she may still require that the
goods be repaired or replaced. If the goods are still faulty after repair or replacement, the consumer
is then entitled to a higher tier of remedy such as price reduction or refund.

Remedies: see ss 19-24 - but in summary:

GOODS: Implied terms (conditions) from the CRA provide that in ALL cases you have up to 30 days to
get an immediate refund if your goods are faulty; up to 6 months if it can’t be repaired or replaced in
MOST cases you are entitled to a full refund; and up to 6 years if the goods do not last a reasonable
length of time, you MAY be entitled to some money back

SERVICES: Remember these are innominate terms, so it is not as clear cut, the seriousness of the
breach of the term, and the damage will be relevant to the remedy available. You can ask for a
service to be repeated or fixed it is not carried out with reasonable care and skill, or get some money
back or a refund if it cannot be fixed or repeated. If you have not agreed price or time before hand,
again the standard and test is one of reasonableness – the price must be reasonable, the time the
service takes must be reasonable.

DIGITAL CONTENT: The old CCR provide a 14 day right to change your mind (but this right is usually
cancelled once a download has been started); if your digital content fails to meet the implied terms
as to quality, fitness etc, then the consumer is entitled to a repair, a replacement, or a price
reduction. There is no direct right to a refund unless the digital content is a physical item, eg a DVD,
in which case the usual remedies for goods applies as set out above. If the fault has damaged your
property ie your digital device, you MAY be entitled to a repair or compensation.
Exclusion Clauses and Unfair Terms - (Chapter 9 Card and James)

This topic requires us to consider a particular type of term often found in contracts, and which is
most problematic when it is found in consumer contracts ie those contracts made between an
individual dealing as a consumer (see above) and where the other party is a business. The law
addresses the inequality in the bargaining position of the parties by affording the protection of
amongst other things, the consumer law provisions we have discussed above – implied terms as to
quality, fitness for purpose, rights to refund and so on (see above as contained in the CRA Part 1).

Of course not all contracts for are consumer contracts, and often we have business-to-business
contracts, and indeed consumer-to-consumer contracts. In these situations, the law will not need to
protect a weaker party as they are on the same footing (arguably). So it is important to remember
that the CRA relates to consumer contracts for the most part.

Clauses which seek to exclude or limit the liability of a party in breach of contract are viewed with
caution by the court. Contract law, as we have seen has developed to create a very rigorous
formality around contract formation, and this as critical is seen as critical to the commerce and
business environment to foster certainty and security for those conducting business. Business is
conducted using the contractual mechanism so that if a bargain is broken, a deal is gone back on,
then the victim has redress and remedy in law. The innocent party can either walk away from the
contractual obligation, or seek to enforce it, and of course, can be compensated for the damage and
loss he has suffered as a result of the broken deal, the breached contract. So if one party seeks to
put a clause in the contract which says that in the event of a breach, there will be no (or limited)
liability, it in a way undermines the whole purpose of contract law. The courts do not like this
obviously, but it happens all the time – eg in a car park, there is often a clause in our contract with
the carpark owner that as users of the carpark, our vehicle is left at owner’s risk. Such clauses are
often reasonable, but are susceptible to abuse, so law imposes controls as follows.

The law regulates exclusion (exemption) clauses and unfair terms in two ways: there are common
law limitations (so these we find in the case law); and there are statutory limitations (these we find
in a domestic piece of legislation, and European regulation).

1. Common Law Limitations

There are two categories of limitation, that is ways in which the courts will try and get rid of
the exclusion clause. Remember, the court is not trying to overthrow the whole contract,
destroy the deal – rather it seeks to uphold the contract but sever the exclusion clause, so
that an innocent party who suffers damage as a result of a breach is compensated or
receives other remedy. The common law (case law) limitations are those of :
 (a) Incorporation
(b) Construction and Interpretation

(a) Incorporation

The clause that the party is seeking to rely on must actually have been incorporated into the
contract, in other words, it has to be a part of the contract if someone is seeking to rely on
it.

Signature: Incorporation might be easily established if, for example, the clause is written
into the contract and the parties have signed it: L'Estrange v Graucob [1934]; Curtis v
Chemical Cleaning and Dying Co Ltd [1951].

The Document: If the document is a contractual document i.e. It looks like a legally binding
document, then its terms will usually be deemed incorporated, even if it has not been
signed: Chapelton v Barry UDC [1940]

Notice: An exclusion clause will not be incorporated if it is only brought to the party's
attention after the contract was entered into: Olley v Marlborough Court Ltd [1949]. It must
be brought to the attention of the other party before or at the time of contracting, and the
more onerous or the more unusual the term, the more notice the court's will require:
Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988].

There are exceptions, such as where there has been a previous course of dealings between
the parties and the term in question has been in the previous contracts: J Spurling Ltd v
Bradshaw [1956], or where such exclusion clauses are implied by custom or through trade
usage.

(b) Construction and Interpretation

If it is established that the term has been incorporated – i.e., it is in the contract, then the
next considerations are construction and interpretation The words used must be clear:
Andrew Bros (Bournemouth) Ltd v Singer and Co Ltd [1934], and if there is any ambiguity,
the courts will interpret the clause against the party seeking to rely on it: Houghton v
Trafalgar Co Ltd [1954]. This is known as the contra proferentem rule.

2. Statutory Limitations

As time progressed, these common law (case law) limitations needed supplementing by
statute as more and more use of exclusion clauses and unfair contract terms were seen in
consumer contracts. There were previously 2 pieces of legislation therefore which were
enacted to supplement the common law: The Unfair Contract Terms Act 1977 (UCTA), and a
 piece of EU law, The Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). These
pieces of legislation overlapped, and there was some inconsistency in their provisions, and
so Part 2 of the Consumer Rights Act 2015, the CRA, seeks to simplify the law and streamline
the legislation governing unfair contract terms in consumer contracts. The effect of the CRA
is that the UTCCRs are revoked – they did only apply, as the name suggests, to consumer
contracts, and this is what the CRA is all about remember. UCTA on the contrary applies to
unfair contract terms in other types of contract. As a result, the CRA amends UCTA
substantially so that it only now relates to business-to-business contracts, and consumer-to-
consumer contracts, and unfair terms in these and other forms of contract will be governed
by an amended UCTA. The provisions in relation to these contracts are largely unchanged,
and so we will still have to consider these (see below). In relation to consumer contracts and
unfair terms, the governing legislation is now (since October 2015) the CRA.

These terms in Part 2, ss 61-76 CRA are however very similar to those previously set out in
the UCCTRs. The key provision is s 62 which begins by stating that an unfair term in a
consumer contract is not binding on the consumer. The definition as to what constitutes an
unfair term is exactly the same as that found in the old UCCTRs, and Schedule 2 contains a
non-exhaustive list of terms that are deemed to be unfair. This is a replica of the 17 that
were set out in the UCCTRs plus another 3 new additions

The approach to exclusion clauses therefore is:

1. Is the clause incorporated ?– if so,
2. On construction and interpretation is it clear and does it cover what it purports to cover ? –
if so,
3. Does it satisfy the statutory requirements of UCTA (for non-consumer contracts) - and
4. Does it satisfy the statutory requirements of CRA (for consumer contracts)

The Unfair Contract Terms Act 1977 (UCTA)

UCTA has two effects: first, it renders certain exclusion clauses completely unenforceable,
and secondly, it subjects other exclusion clauses to the test of reasonableness.

Section 2(1) of UCTA provides that a person cannot exclude or restrict liability for death or
personal injury resulting from negligence

Section 2(2) goes on to provide that in relation to any other type of loss or damage (e.g.
financial loss or damage to property) then the clause must satisfy the test of reasonableness.
It can only be relied upon if in the circumstance the court considers it reasonable.

Section 11 and Schedule 2 of UCTA contain the reasonableness test and basically provide
that a term will be reasonable 'if it is a fair and reasonable one to be included, having regard
to the circumstances...'. The court in determining reasonableness will have regard to the
factors listed in Schedule 2, such as the strengths of the bargaining position of the parties,
whether there is insurance cover the liability or loss, whether the part knew of the existence
and extent of the term etc
Smith v Eric Bush (1989) – HL - the claimant bought a house on the basis of a surveyor’s
report. The report sought to exclude liability, and the report negligently overlooked some
serious defects. Held – the exclusion clause was unreasonable and not effective, for a
number of reasons – inequality of bargaining position, lack of special knowledge, insurance
cover, and the surveyor failed in a simple task.

See also Green v Cade Bros - allowed to rely on clauses because the buyer could have
bought product (potato seed) protected with a guarantee for a higher price. Virus destroyed
potato crop – no refund, seller could rely on clause.

Cf George Finney Lock Seeds 1983 – cabbage seed - clause was not reasonable because the
breach arose from the seller’s negligence, could have insured himself, and in the past the
seller had settled such claims.

The Consumer Rights Act 2015 – Part 2

These regulations apply to consumer contracts where one party is a seller or supplier to the
other party, the consumer.

The test in the CRA, at s. 62 is one of 'fairness' as opposed to 'reasonableness' in UCTA. The
test has 3 elements and the term will be unfair if:
1. it is contrary to the requirement of good faith
2. it causes an imbalance in the rights and obligations of the parties, and
3. the imbalance causes a detriment to the consumer.

Again in Schedule 2 of the CRA there is a list of (20) terms that may be regarded as unfair,
e.g. terms that exclude or limit liability for death or personal injury, or where the
compensation that the consumer has to pay for breaching the contract is disproportionately
high.

This is an indicative and non-exhaustive list of terms which may be regarded as unfair – for
example a clause enabling the seller to alter the product or service unilaterally will be
automatically deemed unfair, as will a clause obliging the consumer to fulfil all his
obligations where the seller or supplier does not perform all of his.

Another significant feature of the new provisions, which is mentioned above, is the
requirement at s. 68 that ‘core’ terms, eg as to price be ‘transparent’ and ‘prominent’. This
has been largely in response to the ancillary charges banks and insurance companies make
eg when advertising on comparison websites – unrealistically low prices to attract customers
then make profit from charges in the small print: Office of Fair Trading v Abbey National plc
2009 in which case the court held that these sorts of ancillary charges were exempt from the
assessment as to fairness. The price paid is not subject to a fairness test, but now s 64 of the
CRA says such clauses have to be prominent and transparent otherwise they will be subject
to the fairness test.

Overall, even though the CRA merely replicates and consolidates much of the previous
legislation, it is fair to say that it does make substantial changes in some areas. The CRA
represents a significant increase in the rights of consumers and in the powers of the court in
dealing with the protection and enforcement of these rights. This should have seen many
businesses revisit their standard terms and refund policies and procedure. We are yet to see
what real impact the new Act has made.