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The Reasonableness of the UCTA 1977’s Test of Reasonableness

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About The Author

Subhan Hussain (Guest Contributor)

Subhan Hussain is currently reading Law at SOAS, University of London. He is an avid legal writer; by publishing a research paper on legal pluralism, he became the youngest professionally-published author in the history of SOAS. His published work can be found on his SSRN page: goo.gl/2xwYMC

A judicially administered requirement of reasonableness is open to the objection that it is the source of uncertainty.

Günter Treitel

The classical theory of a contract characterises it as a bargain resulting from agreement between two equal parties. However, this characterisation overlooks the potential for this bargaining process to be distorted: there may be occasions on which a party, typically one with less ‘power’ (whether that be financial or otherwise), may agree to a term in the contract that places them at a disadvantage.

English law has attempted to step in and reduce the likelihood of parties being unfairly prejudiced by such terms. For example, certain terms that might be considered unreasonable are subject to a test of reasonableness pursuant to Section 11(1) of the Unfair Contract Terms Act 1977 (UCTA 1977). But for all the merits that come with providing protection to vulnerable parties, the test of reasonableness contained within Section 11(1) of the UCTA 1977 has been the subject of trenchant criticism. Detractors argue that the discretion afforded to the courts creates uncertainty and violates the fundamental doctrine of freedom of contract.

However, this article reject these criticisms. Considering them unreasonable, it instead argues that the fact that the test allows for judicial flexibility, and for the individual factors in a case to be balanced to achieve a fair outcome is something which should be celebrated.

An Introduction to the UCTA 1977

The provisions of the UCTA 1977 are designed to provide protection to contracting parties by placing limits on the extent to which a party can use contractual provisions to limit or avoid liability for a wide variety of breaches of contract and other duties, such as the duty of care in the tort of negligence. 

The effect of the UCTA 1977 differs depending on the nature of the liability that is subject to the purported exclusion or limitation. In some circumstances – such as where a party has tried to exclude or limit liability for negligence occasioning death or personal injury – the UCTA 1977 renders such an exclusion or limitation completely ineffective. Here, the legislation is drawing a clear red line to emphasise that in such circumstances, the protection of the contracting parties will always outweigh any considerations of freedom of contract or personal assessment of risk.

More commonly, the legislation allows the court to balance these competing considerations by subjecting the limitation or exclusion term in the contract to a requirement of reasonableness. This requirement is given a skeletal definition in Section 11(1) of the UCTA 1977, which holds that a term must be:

[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.

Criticism of the Reasonableness Test

The case law shows that the courts have had regard to a range of factors when determining whether a term fulfils this ‘reasonableness’ criterion. While Schedule 2 to the UCTA 1977 furnishes the court with a non-exhaustive list of factors it can use to shape its application and interpretation of Section 11(1) of the UCTA 1977, in some contexts, judges have also been granted a considerable degree of discretion. This has led to criticisms and concerns about the inherent subjectivity of the reasonableness test being raised by academics that were noted by Lord Bridge in Mitchell v Finney Lock Seeds [1983] QB 284, who said:

There will sometimes be room for a legitimate difference of judicial opinion as to what the answer will be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right.

If a test is subjective, it is inherently uncertain. There is a clear potential for this to cause problems: after all, certainty is important for parties because it enables them to plan, transact and deal with others with confidence as to the extent of their liability, and the liability of the other party, under any contract.

A further, more general criticism of the test of reasonableness in Section 11(1) of the UCTA 1977 is that it limits the fundamental principle of freedom of contract. Because the parties have signed a contract having read and understood its terms, it is argued that these terms should always be enforceable – this is the essence of contracting. Any test, such as that contained in Section 11(1) of the UCTA 1977, which seeks to control the enforceability of contractual terms, threatens this.  

A Plethora of Guidelines

In the Case Law

The argument that the inherent uncertainty in a subjective test renders a test unsatisfactory overlooks the fact that this lack of certainty can actually be reduced if the courts consistently follow certain guidelines or practices. Even when dealing with a case with a novel fact pattern, judges can apply prescribed common practices that have been articulated – whether in a statute or in case law – with the aim of mitigating uncertainty.

Indeed, the discretion vested in judges to judge individual cases on their facts under the reasonableness test in Section 11(1) of the UCTA 1977 – and the extent to which this causes uncertainty – has been heavily curtailed by the judicial development of several general principles that are applied when assessing the reasonableness of clauses.

For example, the case law shows that where a clause is contained in a commercial contract between parties of equal bargaining power, the courts have traditionally found it to be reasonable. This principle was applied in Watford Electronics Ltd v Sanderson CFL Ltd [2001], where the Court of Appeal observed that, because the parties were both commercially aware and had professional advice concerning the contract, the clause reflected and respected the intentions of, and the assessment of risk that had been undertaken by, both parties. Neither was left unfairly and unreasonably vulnerable. As Chadwick LJ explained:

[T]he court should not interfere unless satisfied that one party had in effect taken unfair advantage of the other or that a term was so unreasonable that it could not have been understood or considered.

Consistency of approach is further guaranteed by the principle – laid down by Lord Bridge in Mitchell v Finney Lock Seeds [1983] QB 284 – that, because of the room for legitimate difference in judicial opinion, an appellate court must only interfere when the decision is plainly wrong, rather than merely substitute its own opinion. This acceptance of the need to review cases in a refrained way provides individual cases with more certainty.

In the Statute

The development of guiding principles in the case law combines with the statutory guidelines for the application of the reasonable test that are contained in Schedule 2 of the UCTA 1977. Requiring the courts to have regard to the strength of the parties’ respective bargaining positions, whether the customer received an inducement to agree to the term, whether the customer knew or ought reasonably to have known of the existence and extent of the term, practical considerations and whether the goods were part of a special order, these guidelines further add to the argument that the test for reasonableness is not merely a ‘stab in the dark’ by the courts and that it follows principled questions and considerations.

Indeed, the guidelines themselves are also substantively positive: for example, the requirement to have consideration to any customs of the trade or previous dealings again offers a common-sense scrutiny of contractual terms. The court will therefore not excessively intervene when parties are aware of terms and regularly rely on them within their industry, since such a judgment would ignore the commercial realities of an industry.

The Importance of Discretion

Notwithstanding the welcome availability of guiding factors for the courts in both the statute and in the case law, it is also important not to overlook the importance of granting discretion to judges. This allows the courts to find clauses unreasonable based on an extensive balancing of factors that are individual to any case.

For example, in the case of Messer UK Ltd v Britvic Soft Drinks Ltd [2002], the Court of Appeal was able to conduct a forensic analysis of a number of factors to reach the conclusion that an attempt to exclude liability for any financial or economic loss by drink manufacturers and gas producers was unreasonable. Though Messer UK Ltd v Britvic Soft Drinks Ltd [2002] involved some factors similar to those in Watford Electronics Ltd v Sanderson CFL Ltd [2001], the discretion vested in the court allowed it to also account for the differences including the fact that while the products in Watford Electronics Ltd v Sanderson CFL Ltd [2001] were standard issue, the products in Messer UK Ltd v Britvic Soft Drinks Ltd [2002] had the potential to give rise to problems. Indeed, the court accounted for the fact that at the stage of drafting, the parties had not contemplated the possibility of the drinks being contaminated , and had proceeded to agree to an exemption clause that denied liability for breaches of implied terms as to satisfactory quality or fitness for purpose.

Taken together, Watford Electronics Ltd v Sanderson CFL Ltd [2001] and Messer UK Ltd v Britvic Soft Drinks Ltd [2002] highlight the judiciary’s principled and reasoned approach to the test of reasonableness. The decisions may appear at first glance to be inconsistent, but a closer analysis of the courts’ reasoning indicates that a clearer, more certain approach to the test in Section 11(1) of the UCTA 1977 is being applied, rooted in the desire to prevent vulnerable parties from being exposed to abuse, while also respecting the intentions of parties.  

Judicial Flexibility and Freedom of Contract

This criticism that the test in Section 11(1) of the UCTA 1977 violates the fundamental principle of freedom of contract overlooks the fact that the law does not operate in a vacuum. By placing contracts in the context of an unequal market, the universal enforcement of contracts as written would expose vulnerable parties to some level of abuse. Protection, in one form or another, is therefore required; the test of reasonableness in Section 11(1) of UCTA 1977 is one such example.

Indeed, the step-by-step approach of the courts in tailoring Section 11(1) of the UCTA 1977 to the individual facts of each case prevents an arbitrary application of the test of reasonableness. This leads to a result which is more closely aligned with the parties’ own interests, allowing also, for an objective assessment of risk that is allocated between these parties.

Contract law’s other way of protecting vulnerable parties is derived from a  more recent piece of legislation – the Consumer Rights Act 2015 (CRA 2015) – which, as discussed by Anirudh Mandagere for Keep Calm Talk Law, consolidated existing consumer protection law in the UK, and added further rights and remedies to their arsenal. The provisions of the CRA 2015 take contracts between a business and a consumer outside the remit of the UCTA 1977. As a result, such contracts are no longer subject to the test of reasonableness in Section 11(1) of UCTA 1977. What is applied instead is Section 62(4) of the CRA 2015, which articulates a test of fairness and holds that a term is unfair if:

[C]ontrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer.

This new test of fairness bears some resemblance to the test of reasonableness in Section 11(1) of the UCTA 1977. The application of both tests are overseen by statutory guidelines, and it is fair to assume that subsequent case law will continue to provide secondary guidance on the application of Section 62(4) of the CRA 2015. In fact, it might be said that Parliament’s introduction of the test of fairness can be taken to represent a recognition of the benefits that comes from providing room for judges to take into account the nature of the subject matter of the contract and other aspects of the agreement. 

Conclusion

Ultimately, the test in Section 11(1) of the UCTA 1977 is satisfactory and reasonable because it is applied by the courts in a manner which both increases certainty and achieves fair outcomes. It laudably allows the courts to weigh different considerations in determining the parties’ intentions in order to determine the validity of exemption clauses, and also protects vulnerable parties (both individuals and small businesses) with unequal bargaining power from abuse. This contributes to a more fair and open marketplace.

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Tagged: Consumer Rights, Contract Law

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