Essay: Compare how incorporation of exclusion clauses can benefit buyer and seller

Abstract:
This essay will compare how the incorporation of exclusion clauses within contracts can benefit the buyer and seller. It will comparatively analyse whether the court approach strikes the right balance between both the seller and buyer. Ultimately, evaluating how effective the application is and whether one of the parties has more of an advantage due to this application by the courts of law. In order to do this we must explore existing provisions and case law in order to form a judgment on how balanced the system is currently in its practical application, as well as to what extent the statutory implied terms of fit for purposes s14(2) and satisfactory quality s14(3) of the SGA 1979can be excluded. Thus this paper assesses whether there is a complacent use of the reasonableness test and an overall balance in the courts when assessing breaches of these specific terms in commercial transactions.
Introduction
The inclusion of an exemption or exclusion clause is to potentially limit or dismiss the sellers’ liability. Sellers often imply these clauses in a contract along side a ‘take it or leave it attitude’ when dealing with a more vulnerable buyer. Also, some sellers may rely on this term in a contract in hope that the buyer had not read or understood the small print. Courts are not often in favour of these clauses and are to comply to with precedence and specific legislations; section 55(1) of the Sale of Goods Act states:
‘Where a right, duty or liability would rise under a contract of sale of goods by implication of the law, it may (subject to the Unfair Contract Terms Act 1977) be negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both parties to the contract.’
The Unfair Contract Terms Act 177 is also another key legislation that intends to safeguard a specific party, usually being the buyer from potential exploitation. Although one would assume that both business and consumer contracts would be treated the same in regards to the level of protection both parties are inclined to receive, there are some differentiations. In business transactions, the seller is able to exclude these statutory implied terms, granted to them through common law as well as Unfair Terms and Conditions Act (UCTA) 1977. This essay will discuss whether the statutory terms found in s14 (2) and (3) of The Sales Of Goods Act (SGA) are able to be excluded from a contract and whether the courts overall approach of reasonableness when assessing these cases, establishes an impartial balance. In order to evaluate how balanced and adequate the reasonableness test is applied, we must use case law and break down each requirement of the test in order to form a judgement This project considers these criticisms arbitrary and argues that the test essentially allows judicial powers to intervene in order to inaugurate a more fair balance to the law. We are already aware that exclusion clauses provide protection solely for the seller however; the question I aim to address within this essay is whether the courts have established a conventional and fair balance in the treatment of the buyer and seller in regards to reasonableness.
Requirements of the reasonableness test
Despite the fact that the reasonableness test offers protection and is readily available to sellers, there are requirements in order for the seller to rely on this; the clause must be incorporated into the contract and liability can only be limited or excluded if it has been made within the contract prior to the breach. The clause must also be clear and concise in order to provide a sense of clarity for both parties – this concept is also known as contra proferentem. This is demonstrated in John Lee & Son Ltd v Railway Executive whereby it is seen in its practical application that if the clause was in fact confined by words it construes a clause against the opposing party.
The SGA 1979 implies warranties to ensure that the quality of goods in contractual situations for the sale of goods, must conform to the criteria set out in S14 of the act to protect the buyer; these guidelines state that the goods must conform to their description, must be fit for purpose and must be of satisfactory quality. S6(2) UCTA allows liability for breach of any of these terms to be excluded if the clause integrated within the contract is considered ‘reasonable’.
The courts must therefore, take the following into consideration: the parties bargaining power, other comparable opportunities for the buyer, any inducements and taking in to account any previous courses of dealing. The Case of George Mitchell v Finney Lock Seeds shows that courts intervention was able to supersede any pre agreed terms or clauses and to do this, ‘…the court must en¬ter¬tain a whole range of con¬sid¬er¬a¬tions and bal¬ance them against each other’.
. This is fundamental to the operation of UCTA. A term will be reasonable which requires that the goods be of satisfactory quality and fit for the purpose of the buyer. S11(1) UCTA stipulates that a clause 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’. So,
Exceptions to these implied statutory terms will only be subject to exclusion if they satisfy the reasonableness test .One of these exemptions is when the seller had drawn the buyer’s attention to a defect or if the buyer should’ve discovered the defect upon inspection. Prior to this amendment, case law reflected a more prohibited degree of protection for the buyer and evidently debarred them from a remedy if they had conducted a cursory examination – if a more thorough examination wasn’t undergone, these defects would not be identified and ultimately the buyer would not be eligible to receive a remedy. The case of Macdonald v Pollock however, conveys that the courts have started to adopt a more reasonable approach and take into account that a buyer is not always equipped or able to perform an extensive examination, which would flag up any defects. . This reinstates that the courts have in fact struck a balance as they consider that it is not always possible to be able to inspect the goods adequately.
Ultimately, the test of reasonableness highlighted in S11(1) UCTA is an adequate tool in assisting the courts to achieve a fair balance. The way in which it is applied by the courts evidently provides a heightened degree of certainty in decision making. The different stipulated sections that the courts use to apply the reasonable test allows the judiciary to assess and scrutinise exemption clauses more closely, in order to ensure that the sellers intentions are within reason. Furthermore, the courts have over the recent years established the concept of caveat venditor meaning ‘let the buyer beware’. This principle implies that the buyer must take care that goods suit his needs before he agrees to purchase them. This principle provides more protection for the buyer and is the first application of the test.
It is evident that this enforcement of these controls, are particularly beneficial to help to buyers as they protect them from potential exploitation due to their unequal bargaining power – particularly when unfair terms and clauses are incorporated within their contract of dealing. Lord Denning in Lloyds Bank v Bundy:
‘When the parties have not met on equal terms- when the one is so strong in bargaining power and the other so weak that, as a matter of common fairness, it is not right that the strong be allowed to push the weak to the wall’.
Conversely, where both parties are of an equal bargaining power the law continues to be fair and reasonable in their judgments. In these particular cases the courts try their best to avoid supervising the parties in exclusion clause matters. Chadwick LJ concluded that ‘ the court should not assume that either is likely to commit his company to an agreement which he thinks is unfair…or incudes unreasonable terms’. Once again, highlighting that the courts primary objective oversee and ensure that there’s an element of balance. Additionally, in Oil & Chemicals the court of appeal thought that parties who are of a similar bargaining should be considered capable enough to make contracts of their choosing whilst expecting to be bound by the terms and clauses contained. This validates that the test is fair, as once again the courts understand that the buyer is not always in a vulnerable position and therefore avoid intervention and having to apply this test as much as possible whils still ha. In turn showing that the courts take into account the bargaining power but do not completely rule out other circumstances. The balance struck, is therefore evident.
Despite there being a clear bias towards the seller with the use of exclusion clauses, the courts use of this test allows them to protect the buyer from being exploited due to the unequal bargaining power between the parties. Titan Steel wheels is an example of how the courts are not completely bias towards the buyer when dealing with cases surrounding exclusion clauses. In this case it was seen that when the buyer is also scrutinised when bringing forth a claim of being at an unfair disadvantage of having an unequal bargaining power. It was said that when the buyer has other opportunities of which could have met their requirements. This in turn establishes a fairer sphere for trade as it recognises that the seller cannot be scrutinised if the buyer was given the freedom of choice of whether to contract with this particular seller.
Freedom of Contract and discretion of the courts:
A contract is often seen as an agreement between two parties who are of equal bargaining power; this concept, as described above, is not always accurate as this bargaining power may alter depending on the financial position or other factors of the party. This could potentially result in one of the parties being at a disadvantage, as they may feel obliged to agree to specific terms or clauses within a contract putting them in a detrimental position. The implementation of test of reasonableness minimise these possibilities as these terms or clauses within contracts are trialled against the reasonableness test. However, many argue that this instrument alone is not sufficient in providing protection for the innocent party in a contract and to some extent breaches the concept of ‘freedom of contract’. The supposed restriction on the doctrine of freedom of contract sparks much debate; many argue that if both parties have contractually agreed to particular terms to be met or excluded from a contract then this should be enforceable per se. The fact that judges are granted the discretion to be able to determine whether these terms can be expelled from a contract, breaches this doctrine and disregards and replaces the common understanding of a contract as a whole. Chadwick LJ supported this by saying,
‘Unless satisfied that one part has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered’ – the court should not interfere.
However, this argument can be overruled and the uncertainty can in fact be minimised if the courts apply the test in the same manor and follow the criteria set out strictly. A variation in judgements can in these types of cases. To avoid or diminish inconsistency in the application of the law, Lord Bridge within the case of They also went on to say v Finney Lock seeds states that the courts must only in exceptional cases even if the term is prima facia unreasonable.
The court of appeal also reiterated this in Watford Electronics Ltd v Sanderson CFL. By minimising the courts involvement as much as possible higher sense of certainty is provided for the concerning individuals. These imposed standards have heightened and businesses are expected to conform to providing their buyer with goods that comply with these implied terms; these protections for the buyer are intended to restore confidence between the parties when contracting. Moreover this primarily aims to preserves the parties’ original intentions, which is a major transformation from the pre-21st century involvement of the courts to maximise overall harmonisation whilst illustrating the advancement of safety for the buyer.
Discretion in the courts
It is evident through the outcomes of case law that courts are able to form a decision based on the exhaustive list of criteria set out in S2 and S11(1) of UCTA. Despite these criterions, judiciaries are awarded a significant level of discretion, which can in turn raise questions to the partiality of the reasonableness test. The subjectivity of the test attests that it is in fact uncertain. This undoubtedly leaves scope for problems concerning the level of confidence that either party may have in one another in a contractual relationship. (INSERT CASE OR STATEMENT WHICH SUGGESTS NON0CONSISTENCY) However, this degree of uncertainty can in fact be overcome if they follow precedent and maintain consistency. Although the discretion granted to judges can be construed as something, which creates uncertainty, case law as well as the statutory instruments in place provide a sense of direction for the judges. The uncertainty that is said to reside in the test of reasonableness is discussed in the judgment made in the case, RÖHLIG (UK) Ltd v Rock Unique Ltd. Moore-Bick LJ in the case that had been heard in the Court of Ap¬peal said that, “…the ques¬tion must be con¬sid-ered sep¬a¬rately in each case be¬cause the cir¬cum¬stances sur¬round¬ing the con-tract may dif¬fer from case to case, but where a stan¬dard con¬di¬tion of this kind is in¬volved…the court should be as¬tute to draw fine dis¬tinc¬tions be¬tween cases that in broad terms are very sim¬i¬lar”. Discretion is also a tool, which allows judges to conduct further analysis or investigate certain factors more thoroughly as opposed to coming to a generic conclusion. This is important, as without investigating the matter further the courts wouldn’t be able to come to a conclusion that the exclusion of liability was unreasonable. Messer UK Ltd v Britvic Soft Drinks Ltd is a great example of how without having conducted further analysis they would not have been able to deem the exclusion of the implied terms of satisfactory quality and fitness for purpose unreasonable. By applying the test step-by-step, this assesses individual cases more pedantically ultimately averting from the capricious application of the test. Though the courts decisions may initially appear to be inconsistent, this case emphasises that the judiciary essentially approach the test of reasonableness rationally and discretion is fundamental in order to apply the reasonableness test more fittingly.
Breaches of implied terms s14(2) and (3)
The inclusion of unfair contract terms however aren’t always considered to be solely beneficial to the seller; instead it can also be perceived as a detrimental factor when trying to enter a contract with a more established business. Although sellers are foisted with the implied term of satisfactory quality and fitness for purpose, the buyer cannot expect top quality goods under s14(2). In Jewson Ltd v Boyham , it was discussed that goods can still be meet these criteria of being fit for purpose of regardless of whether the product met the buyers unusual use or not. Moreover, in regards to this requirement it was seen in Balmoral Group Ltd v Borealis that where the purpose of the goods meets the proposed purpose, then the quality could be deemed reasonable. This is a key case as it portrays that the courts try to encourage freedom of contract as much as possible and do not just favour the buyer when assessing a case based on the any of these statutory terms not being met– showing that the reasonableness test isn’t biased towards the buyer and is in fact fair in its application.
Another case where it was seen that the Cooke J Brusquely rejected the claim for breach of the term satisfactory quality by the seller in Transworld Ltd v Bombadier Inc. The nature of the contract itself was ruled to be clear unambiguous as only one meaning could be derived from the contractually agreed clause. Parties should obide by their bargain, as discussed and promoted in the mercini case.
Another requirement in order to exclude liability for an implied statutory term is that the buyer must be aware of the clauses as well as the degree to which it extends. This was reinstated in AEG (UK) Ltd v Logic Resources Ltd, where the seller had incorporated a clause in the contract, which aimed to exclude him from liability for breach of the implied terms found in the SGA. The court of appeal declared that the seller must take reasonable steps to ensure that these clauses are brought to the attention of the buyer. It was found that this requirement was not met and therefore led to the term not being enforceable. However, a buyer would find it particularly difficult to argue this in circumstances where it has been professed in a contract that they had signed and therefore agreed to. Usually, it would not work in his favour to claim that he was unaware of its presence. This was also seen in L’Estrange v Graucob. In these particular circumstances, the courts assess the actuality of the ‘contract’ and decrees that if a reasonable person in the probable buyers position would anticipate the document to include terms which would affect his rights and responsibilities. Hence, by signing this document, it is presumed that the buyer did have knowledge of this clause. Contrastly,Kendall v Lillico is another case, which discusses that the buyer must have an understanding of all terms included within the contract. It was seen that In cases where there had been previous trade or the parties have had engaged in previous courses of dealings then it is reputed that the buyer is in fact aware and accepting of the term. This proves that the courts once again take all considerations into account and do at times per miss the exclusion clause.
Conclusion
In conclusion, the reasonable test is applied by the courts adequately and therefore has established a fair and reasonable balance. Not only does the application of this test increase certainty, but it also helps to achieve an overall sense of harmonisation and fairness. It meritoriously allows the courts to consider various factors in interpreting the intentions of either party. Although the test found in UCTA 1977 is crucial in determining whether an exemption clause can be enforceable, it is not solely bias.