Legal briefing | 18 Jan 2024 |

Liability: has the Court of Appeal breathed new life into UCTA?

It is relatively rare for contractual limitations of liability to fall foul of the Unfair Contract Terms Act 1977 (UCTA) – so you could be forgiven for thinking that businesses don't need to be too concerned about UCTA. But a recent ruling by the Court of Appeal challenges some commonly held assumptions about the legislation and may mean that it becomes more of an issue in future – particularly for suppliers using standard terms.

UTCA: a brief reminder

Among other things, UCTA allows certain clauses limiting or excluding liability to be challenged on the basis that they do not meet the test of reasonableness; if the court agrees, the clause will be unenforceable. Depending how the rest of the liability provisions have been drafted, such an outcome will often leave the supplier exposed to significantly higher claims for damages.

In practice, however, it is relatively rare for clauses to fall foul of UCTA. One reason for this is that for many years the courts – including the Court of Appeal – have tended to emphasise that where there is equality of bargaining power between the parties, they should be reluctant to infer that a clause does not meet the test of reasonableness. It is this area where the Court of Appeal's latest ruling may signal something of a shift.

What has the Court of Appeal said about UCTA?

In Last Bus v Dawson (2023), the Court of Appeal overturned a ruling of the High Court that a finance company's standard terms for hire purchase were reasonable under UCTA. Those terms purported to exclude all liability for the quality, fitness for purpose, description or specifications of the vehicles which the buyer – a coach hire firm – was using the finance to acquire. The dispute arose because in 2018, four of the coaches caught fire – prompting the coach hire firm to bring a claim against the finance company.

The High Court concluded that the exclusion was reasonable under UCTA because there was equality of bargaining power between the parties. The Court of Appeal disagreed, making the following points:

One of the aims of UCTA is to control the use of liability clauses in standard terms of business. The legislation effectively presumes that where a customer contracts with a business on the latter's standard terms of supply (including those of a finance company), there is no equality of bargaining power as regards the contents of those terms - because in many cases the supplier will refuse to contract on different terms (and other suppliers in the market typically use similar terms and take the same approach).
It is perfectly possible to show that equality of bargaining power exists – for example, where the customer has managed to secure material changes to the terms (and where this is the case, it is more likely that the clause will meet the test of reasonableness). But the Court of Appeal drew a distinction between negotiations about the content of the standard terms and negotiations on other issues such as price; it said that just because a customer had managed to secure a price reduction, that did not necessarily mean that there was equality of bargaining power as regards the terms of the transaction.
In this case, there was no negotiation of the terms; on the contrary, the High Court had found that the finance company would not have been prepared to enter into the contract without the exclusion clause and no materially different terms were available in the market. As a result, the Court of Appeal ruled that the High Court's dismissal of the UCTA arguments advanced by the coach hire firm was wrong and they should be considered fully at trial.

What does this mean?

Businesses supplying on standard terms may find that this case improves the chances of customers arguing successfully that wide-ranging exclusions of liability are unreasonable under UCTA. In particular, the Court of Appeal noted that the exclusion clause in this case potentially left the coach hire firm with no remedy for a very serious alleged defect in respect of vehicles for which it had paid £7.5 million – and that there was no evidence as to the insurance position of the parties (the existence of insurance is another factor that is often considered in relation to the test of reasonableness under UCTA). It also pointed out that several previous cases had held that similarly broad exclusion clauses in finance company standard terms were unreasonable under UCTA – and that it is for the party relying on the clause to justify it under UCTA.

That said, the Court of Appeal did not rule that the clause in this case was unenforceable under UCTA – it said that this was for the lower court to decide after a full trial. It is also far from clear that the Court of Appeal was taking issue with earlier judgments which have emphasised the importance of equality of bargaining power in relation to UCTA. On the contrary, it acknowledged that equality of bargaining power was a key factor – but pointed out that in relation to standard terms, courts should normally proceed on the assumption that there is no equality of bargaining power unless there is evidence that the customer could realistically have obtained better terms.

What about contracts which aren't on standard terms?

A common misconception about UCTA is that it only applies to contracts on standard terms. In fact, section 2(2) of UCTA is capable of applying even to contracts which have been negotiated. Section 2(2) applies to clauses which exclude or restrict liability for negligence (other than for personal injury or death – where attempts to exclude negligence liability are not enforceable in any circumstances).

In our view, the impact of this case on challenges based on section 2(2) where the contract is not on standard terms is likely to be more limited; as the contract will have been negotiated, the courts will be more likely to conclude that there was equality of bargaining power (and that as a result, they should be more circumspect about intervening under UCTA). That said, the Court of Appeal in Last Bus emphasised that Parliament must have intended UCTA to have some effect – so any approach which largely empties it of relevance is unlikely to be correct. This point probably applies as much to section 2(2) as it does to section 3 (which relates to contracts on standard terms) – so the mere fact that the contract was not on standard terms should not rule out the possibility of challenge under UCTA. In particular, if the clause is particularly destructive of the customer's rights – for example, by leaving it with no meaningful remedy for a serious breach – it may still be vulnerable to challenge under section 2(2).

How can suppliers minimise their UCTA risk?

Suppliers seeking to minimise their risk under UCTA should note that in many cases, the courts have found clauses to be reasonable under UCTA even where they limited the claimant's loss to a fraction of what it would have been able to seek in the absence of any contractual restriction. The key point is to avoid exclusions which are so sweeping that they remove any possibility of a meaningful remedy for serious breaches. Alongside that, suppliers should look to ensure that they always include a free-standing cap on liability – with a view to ensuring that even if certain blanket exclusions are found to be unenforceable under UCTA, the cap should survive (because without the cap, suppliers may face unlimited liability).

Read Jonathan Rush Profile