Unfair Contract Terms Act

The Unfair Contract Terms Act of 1977 applies to contracting parties where one of them is either dealing with a consumer or is dealing on its own written standard terms of business.

The Act provides that where that party is in breach of contract, it cannot rely on a term to exclude or restrict any liability it would otherwise have in respect of that breach, unless the contract term it relies upon satisfies the requirement of reasonableness. Similarly, a party that contracts with a consumer, or on its own standard terms of business, cannot claim to be entitled to render a contractual performance substantially different from that which was reasonably expected of it, unless the contract provision relied upon is deemed reasonable.

Section 11 of the Act deals with the "reasonableness" test and provides that in examining whether a term is reasonable, one has to have regard to the circumstances which were, or ought to have been, known or in the contemplation of the parties when the contract was made. Schedule 2 to the Act also provides certain guidelines for the application of the reasonableness test.

This schedule provides examples of matters which should be taken into account, including the relative strength of the bargaining positions of the parties, whether the other party received an inducement to agree to the terms now relied upon, and whether the other party ought reasonably to have known of the existence and extent of the term.

It is commonplace within the construction industry to find contracts that include clauses which seek to limit or exclude one party's liability. An example would be clauses which prevent the reimbursement of loss and/or expense caused by delay or disruption unless notice has been given within a certain number of days.

Of course, the Unfair Contract Terms Act will have no application unless one party is a consumer, or the contract is based upon one party's standard written terms. As a result, the Act does not come into play in contracts between two businesses, or in contracts incorporating terms based upon an industry standard form.

The Act was examined recently by the Court of Appeal in a case with the noticeable name of Expo Fabrics (UK) v Naughty Clothing Co Expo had supplied cloth to Naughty composed of 80% polyester and 20% viscose. A bill for approximately £74,000 had been rendered, but Naughty had refused to pay on the basis that the cloth was not of satisfactory quality.

Expo denied that the cloth was defective, but in any event relied upon certain terms within its contract of sale, which it contended restricted the buyer's right to make complaints and refuse payment for cloth that had been supplied defective.

Clause 6A of the contract of supply provided that any claim by Naughty based on a defect in the quality or condition of the goods, or the failure of the goods to correspond with the specification, should be notified in writing to Expo within 20 days from the date of the delivery.

This clause went on to say that if Naughty did not notify Expo accordingly, Expo would have no liability for such defects or failure. Moreover, Naughty would be bound to pay the price as if the goods had been delivered in accordance with the contract.

Clause 6B went on to state that where there was a valid claim in respect of the goods based on any defect or quality of the condition of the goods, Expo would be entitled to replace the goods free of charge or refund to Naughty the price of the goods. Should this be the case, Expo would have no further liability.

Finally, Clause 7 said that where the fabric had been cut or subjected to any process, Expo would be under no obligation to accept the return of the goods.

In the trial of these matters in the High Court, the judge had held that the cloth was of unsatisfactory quality. He further held that the terms of the contract were fair and reasonable when the contract was made. Naughty had had time to check the goods, it being considered by the court that the 20-day period was sufficient.

Furthermore, the stipulation that the complaint should be made before the cloth was cut was also considered reasonable.

Naughty was unhappy with this decision and took the matter to the Court of Appeal, where it argued that the time limit was not reasonable because it did not allow time for discovery of latent defects, which could not be discovered until the cloth was cut, for example defects that became apparent on washing or wearing the final garment.

Lord Justice Waller in the Court of Appeal quickly rejected that argument. There was simply no evidence before the previous trial judge that related to latent defects in this way. The 20 days gave a purchaser a perfectly reasonable opportunity to discover any defects in the cloth and, accordingly, the time limit condition of the contract was a reasonable condition.

Most importantly, the court was satisfied with the evidence presented to the court that such a clause was very common in contracts for the sale of textiles.

In conclusion, the appeal was dismissed. Naughty had lost its rights to complain about the defects in the fabric, and to refuse payment, because it had not given effective notice within the stipulated 20 days from the delivery of the goods.