Exclusion Clauses in Contracts

An exclusion clause is a type of clause that appears in a contract when one party tries to limit or exclude itself from liability. If the law did not prevent it, then large companies would use and abuse these clauses to protect themselves. Consumers have already “agreed” to hundreds of terms and conditions when they buy goods and services, so the laws protecting them from unfair exclusion clauses are important. In this article we will review what statutory controls are in place to protect consumers and consider recent changes to the law.

The two key statutes that control the use of exclusion clauses are

  • the Unfair Contract Terms Act 1977, and
  • the Unfair Terms in Consumer Contracts Regulations 1999.

The Unfair Contract Terms Act 1977 (UCTA)

This Act was a piece of “home grown” legislation created on the recommendation of the Law Commission. The Law Commission, for those of you who may have forgotten, is a public body responsible for reviewing the law and making recommendations to the government where improvements can be made. Broadly what the Act did was to make certain types of exemption clauses automatically void and ineffective.

The types of clauses which were in effect “banned” dealt with excluding liability for

  • death or personal injury caused by negligence;
  • selling goods which you did not properly own; and
  • selling goods which were not of a suitable quality or as described.

The Act also created a reasonableness test to deal with a range of other types of exclusion clauses. This test allowed the courts to consider a number of factors when deciding whether an exclusion clause would be effective. An example of one factor the courts could consider is the bargaining strength of the parties.

An example of an “unfair” negotiation

You are buying a mobile phone from a company. The company selling the phone is unlikely to allow you to negotiate or change any of the terms in the contract. If you want the phone, then you have to sign their contract no matter how unfair the terms are.

This type of negotiation is normal, and the type of contract you sign even has its own name — a “standard form agreement”. As a consumer you are not expected or even allowed to make any changes. If we did not have the UCTA, then you might be in trouble, but the Act should protect you from any unreasonable terms. 

Consider this example of an exclusion clause from a current mobile phone contract: “We will not be liable if for any reason our site is unavailable at any time or for any period.”

Is this type of exclusion reasonable? The answer in this case would be no, but many mobile phone contracts still include this type of exclusion clause because many people would not realise that if they challenged the company in court, they would win.

So the UCTA already protects consumers, but that is not the same as saying it hasn’t any problems. For a start, it is complex and hard for a non-lawyer to understand. The Act also applies only to exclusion clauses rather than to all types of clauses in a contract.

The Unfair Terms in Consumer Contracts Regulations 1999

The Regulations, another law that protects against unfair contracts, were created by an EU directive and, perhaps because of this, were described as “an ill-fitting wig” on the 1977 Act. The Regulations extended the law on consumer protection in some areas, such as allowing the courts to consider any kind of clause in a contract to decide whether it was “unfair”. However, the Regulations also placed limits so that when a clause is individually negotiated, it might be allowed to stand even if it appears to be unfair. The Office of Fair Trading published an 88-page guide to help explain the Regulations, so obviously the law was not very straightforward!

The current law and future developments

The Law Commission first started working on ways to make the law on unfair contract terms clearer and more accessible in 2005 and last reported to government in 2013. There is now a new Consumer Rights Act as of March 2015. Given all the time and effort spent considering how the law should be improved, has it been “fixed”?

Judging by the 144-page guidance provided by the Competition and Markets Authority, how straightforward the law is now is debatable. The new 2015 Act applies to all consumer contracts from 1 October 2015; however, it does not replace the two laws we have discussed above. What this means is that there will be two separate legal regimes to deal with the use of exclusion clauses.

If you want to learn more about the Consumer Rights Act 2015, consider the April 2015 Journal article which outlined the key new provisions. We will revisit this topic in the future to assess how well the Act is protecting the interests of consumers.