Limiting Rights
Cases
R & B Customs Brokers Company Ltd v United Dominions Trust Ltd
[1987] EWCA Civ 3 [1988] WLR 321, [1988] 1 All ER 847, [1987] 1 WLR 321, [1987] WLR 321, [1988] 1 WLR 321
Dillon LJ
The company relies on section 14 of the Sale of Goods Act 1979, which in its form relevant to this contract, having regard to its date, provides so far as material as follows:
“14.-(1) Except as provided by this section … and subject to any other enactment, there is no implied condition or warranty about the quality or fitness for any particular purpose of goods supplied under a contract of sale.
“(2) Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except that there is no such condition –
(a) as regards defects specifically drawn to the buyer’s attention before the contract is made; or
(b) if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal.
“(3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.
“(4) …
“(5) The preceding provisions of this section apply to a sale by a person who in the course of a business is acting as agent for another as they apply to a sale by a principal in the course of a business, except where that other is not selling in the course of a business and either the buyer knows that fact or reasonable steps are taken to bring it to the notice of the buyer before the contract is made.
“(6) …
“(7) In the application of subsection (3) above to an agreement for the sale of goods under which the purchase price or part of it is payable by instalments any reference to the seller includes a reference to the person by whom any antecedent negotiations are conducted”.
So far as subsection (2) is concerned, the relevant date is the date when the contract was made. With the usual tripartite arrangement between a dealer, a finance company and a purchaser, that is likely to be the entirely fortuitous date when the relevant documents are countersigned by the finance company, just as in the present case the contract was made on 3rd November 1984. That is not satisfactory for the working of the Act, because if, as here, the purchaser is allowed interim possession of the car (or other goods) in question he may well by the experience of use become aware of defects, without appreciating their gravity, before the date on which the contract happens to be made. So in the present case the company was, through Mr Bell, aware by experience before 3rd November that the roof of the car leaked, though he had no idea that the leak was incurable.
The question therefore that arises under subsection (2) is whether, even though the car was in fact not of merchantable quality at 3rd November, the company is precluded from relying on the condition in subsection (2) by virtue of the exception (b) because the company knew there was a leak in the roof even though it did not know that the leak was incurable. The judge held that the company was precluded from relying on the condition in subsection (2) because the company had knowledge that there was a leak in the roof; in effect, caveat emptor once the purchaser has notice of a defect, however apparently slight. If that is right, then, in the usual tripartite case involving a finance company, subsection (2) is something of a trap for a purchaser; he may lose his rights under the subsection if he fails to return the car or goods, or renegotiate the proposed contract, on the first appearance of an apparently slight defect.
However, in the circumstances of the present case I find it unnecessary to express a concluded view on whether the company can rely on the condition in subsection (2). On the facts of this case it is sufficient for the company if there is in the contract an implied condition either of merchantable quality under subsection (2) or in the terms of subsection (3) of section 14. I agree with the judge -subject to the questions in relation to the 1977 Act to which I have yet to come – that there is to be implied in the contract between the company and the defendants an implied condition, under subsection (3), that the car was reasonably fit for the purpose for which it was being bought and that that condition was broken.
Subsection (3) refers to “any particular purpose for which the goods are being bought.” Nothing has turned on the words “particular purpose” on this appeal; it has been common ground that the particular purpose made known by implication to the third party (who is to be treated as the seller by virtue of subsection (7)) was the purpose of ordinary use upon the roads in England – in English weather. As Lord Morris of Borth-y-Gest observed in Hardwick Game Farm v. S.A.P.P.A. [1969] 2 AC 31, at 93F-G:
“There is no magic in the word ‘particular.’ A communicated purpose, if stated with reasonably sufficient precision, will be a particular purpose. It will be the given purpose. Sometimes the purpose of a purchase will be so obvious that only one purpose could reasonably be in mutual contemplation. An only purpose or an ordinary purpose may therefore be a particular purpose … Sometimes a particular purpose will be made known expressly: sometimes it will be made known by implication.”
What is said for the third party in relation to subsection (3) is that the condition is not to be implied because of the final words of the subsection – “except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.” It is said that by the date of the contract, 3rd November, Mr Bell knew of the roof-leak and had so far chosen not to tell the third party of it, while the third party did not know of it at all. It is said further for the third party that, though on 5th November Mr Bell undoubtedly relied on the third party when Mr Wyeth promised to have the leak detected and fixed, that came too late and was inadmissible, as the defendants had signed the forms of contract on 3rd November.
I do not accept those submissions of the third party. What happened on 5th November is, in my judgment, admissible as part of the evidence to show what the state of mind of Mr Bell and therefore of the company was on the 3rd. It is accepted on behalf of the third party that, in respect of most matters concerning the car, the company was relying on the skill and judgment of the third party. That would have been particularly so on the 20th and 21st September, but it would have been a continuing reliance; if Mr Bell after taking possession of the car drove it at speed, he would have done so in continuing reliance on the third party not having “sold” him a car with defective brakes. When he realised that the roof of the car leaked, his reliance on the third party did not automatically terminate. The car was at that stage anyhow to go back to the third party on a date to be arranged for the radio to be fitted, as indicated in the letter of the 10th October. I can see nothing in the short delay from when the leak was first apparent and 3rd November to indicate that Mr Bell had ceased to rely on the third party’s skill and judgment. Then what happened on 5th November confirms that he did still rely on it. Accordingly, as indicated above, I agree with the judge on subsection (3) of section 14.
I come therefore to the 1977 Act and the defendants’ printed conditions on their form of contract with the company. It is not in dispute that those conditions were sufficiently drawn to Mr Bell’s attention, although he did not trouble to read them, and therefore, in so far as they were applicable and valid, they are part of the conditional sale agreement of 3rd November between the defendants and the company.
The relevant condition of the defendants, printed on the back of the form of conditional sale agreement, reads as follows:
“IF THE BUYER DEALS AS A CONSUMER WITHIN THE MEANING OF SECTION 12 OF THE UNFAIR CONTRACT TERMS ACT 1977 OR ANY STATUTORY MODIFICATION OR RE-ENACTMENT THEREOF (‘THE STATUTE’) THE BUYER’S STATUTORY RIGHTS ARE NOT AFFECTED BY SUB-CLAUSE (a) OF THE FOLLOWING CLAUSE.
“EXCLUSION OF WARRANTIES AND CONDITIONS – 2.(a) The seller not being the manufacturer of the goods nor at any time prior to the making of this agreement being in actual possession or control of them does not let the goods subject to any warranty or condition whether express or implied as to condition description quality or fitness for any particular purpose or at all.”
The 1977 Act provides by subsections (2) and (3) of section 6 as follows:
“(2) As against a person dealing as consumer, liability for breach of the obligations arising from –
(a) section 13, 14 or 15 of the 1893 Act (seller’s implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose);
(b) section 9, 10 or 11 of the 1973 Act (the corresponding things in relation to hire-purchase), cannot be excluded or restricted by reference to any contract term.
“(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.”
For the purposes of the present case the reference to the 1893 Act is to be taken as a reference to the Sale of Goods Act 1979.
Two questions therefore arise, and success on either of them is sufficient for the company’s purposes, viz:
(1) In entering into the conditional sale agreement with the defendants, was the company “dealing as consumer”? If it was, then, on the wording of the defendants’ printed conditions, the condition 2(a) did not apply, no doubt because under section 6(2) of the 1977 Act the liability could not be excluded.
(2) If the company was dealing otherwise than as a consumer, does the defendants’ condition 2(a) excluding liability under section 14(3) satisfy “the requirement of reasonableness”?
“Dealing as a consumer” is defined in section 12 of the 1977 Act, which provides as follows:
“12.-(1) A party to a contract ‘deals as consumer’ in relation to another party if –
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and
(b) the other party does make the contract in the course of a business; and
(c) in the case of a contract governed by the law of sale of goods or hire-purchase, or by section 7 of this Act, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.
“(2) But on a sale by auction or by competitive tender the buyer is not in any circumstances to be regarded as dealing as consumer.
“(3) Subject to this, it is for those claiming that a party does not deal as consumer to show that he does not.”
It is accepted that the conditions (b) and (c) in section 12(1) are satisfied. This issue turns on condition (a). Did the company neither make the contract with the defendants in the course of a business nor hold itself out as doing so?
In the present case there was no holding out beyond the mere facts that the contract and the finance application were made in the company’s corporate name, and in the finance application the section headed “Business Details” was filled in to the extent of giving the nature of the company’s business as that of shipping brokers, giving the number of years trading and the number of employees, and giving the names and addresses of the directors. What is important is whether the contract was made in the course of a business.
In a certain sense, however, from the very nature of a corporate entity, where a company which carries on a business makes a contract, it makes that contract in the course of its business; otherwise the contract would be ultra vires and illegal. Thus, where a company which runs a grocer’s shop buys a new delivery van, it buys it in the course of its business. Where a merchant bank buys a car as a “company car” as a perquisite for a senior executive, it buys it in the course of its business. Where a farming company buys a landrover for the personal and company use of a farm manager, it again does so in the course of its business. Possible variations are numerous. In each case it would not be legal for the purchasing company to buy the vehicle in question otherwise than in the course of its business. Section 12 does not require that the business in the course of which the one party, referred to in condition (a), makes the contract must be of the same nature as the business in the course of which the other party, referred to in condition (b), makes the contract – e.g., that they should both be motor dealers.
We have been referred to one decision at first instance under the 1977 Act, Peter Symmons & Co. v. Cook [1981] N.L.J. 758, but the note of the judgment is too brief to be of real assistance. More helpfully, we have been referred to decisions under the Trade Descriptions Act 1968, and in particular to the decision of the House of Lords in Davies v. Sumner [1984] 1 W.L.R. 1301.
Under the Trade Descriptions Act any person who in the course of a trade or business applies a false trade description to goods is, subject to the provisions of the Act, guilty of an offence. It is a penal Act, whereas the 1977 Act is not, and it is accordingly submitted that decisions on the construction of the Trade Descriptions Act cannot assist on the construction of section 12 of the 1977 Act.
Also the legislative purposes of the two Acts are not the same. The primary purpose of the Trade Descriptions Act is consumer protection, and the course of business referred to is the course of business of the alleged wrongdoer. But the provisions as to dealing as a consumer in the 1977 Act are concerned with differentiating between two classes of innocent contracting party – those who deal as consumers and those who do not – for whom differing degrees of protection against unfair contract terms are afforded by the 1977 Act. Despite these distinctions, however, it would, in my judgment, be unreal and unsatisfactory to conclude that the fairly ordinary words “in the course of business” bear a significantly different meaning in, on the one hand, the Trade Descriptions Act, and, on the other hand, section 12 of the 1977 Act. In particular I would be very reluctant to conclude that these words bear a significantly wider meaning in section 12 than in the Trade Descriptions Act.
I turn therefore to Davies v. Sumner. That case was not concerned with a company, but with an individual who had used a car for the purposes of his business as a self-employed courier. When he sold the car by trading it in in part exchange for a new one, he had applied a false trade description to it by falsely representing the mileage the car had travelled to have been far less than it actually was. Lord Keith of Kinkel, who delivered the only speech in the House of Lords, commented at page 1304F-G that it was clear that the transaction – s.c. of trading in the car on the purchase of a new one – was reasonably incidental to the carrying on of the business, but he went on to say (at page 1305):
“Any disposal of a chattel held for the purposes of a business may, in a certain sense, be said to have been in the course of that business, irrespective of whether the chattel was acquired with a view to resale or for consumption or as a capital asset. But in my opinion section 1(1) of the Act is not intended to cast such a wide net as this. The expression ‘in the course of a trade or business’ in the context of an Act having consumer protection as its primary purpose conveys the concept of some degree of regularity, and it is to be observed that the long title to the Act refers to ‘misdescriptions of goods, services, accommodation and facilities provided in the course of trade.’ Lord Parker C.J. in the Havering case [1970] 1 W.L.R. 1375 clearly considered that the expression was not used in the broadest sense. The reason why the transaction there in issue was caught was that in his view it was ‘an integral part of the business carried on as a car hire firm.’ That would not cover the sporadic selling off of pieces of equipment which were no longer required for the purposes of a business. The vital feature of the Havering case appears to have been, in Lord Parker’s view, that the defendant’s business as part of its normal practice bought and disposed of cars. The need for some degree of regularity does not, however, involve that a one-off adventure in the nature of trade, carried through with a view to profit, would not fall within section 1(1) because such a transaction would itself constitute a trade.”
Lord Keith then held that the requisite degree of regularity had not been established on the facts of Davies v. Sumner because a normal practice of buying and disposing of cars had not yet been established at the time of the alleged offence. He pointed out for good measure that the disposal of the car was not a disposal of stock in trade of the business, but he clearly was not holding that only a disposal of stock in trade could be a disposal in the course of a trade or business.
Lord Keith emphasised the need for some degree of regularity, and he found pointers to this in the primary purpose and long title of the Trade Descriptions Act. I find pointers to a similar need for regularity under the 1977 Act, where matters merely incidental to the carrying on of a business are concerned, both in the words which I would emphasise, “in the course of” in the phrase “in the course of a business” and in the concept, or legislative purpose, which must underlie the dichotomy under the 1977 Act between those who deal as consumers and those who deal otherwise than as consumers.
This reasoning leads to the conclusion that, in the 1977 Act also, the words “in the course of business” are not used in what Lord Keith called “the broadest sense”. I also find helpful the phrase used by Lord Parker C.J. and quoted by Lord Keith, “an integral part of the business carried on.” The reconciliation between that phrase and the need for some degree of regularity is, as I see it, as follows: there are some transactions which are clearly integral parts of the businesses concerned, and these should be held to have been carried out in the course of those businesses; this would cover, apart from much else, the instance of a one-off adventure in the nature of trade, where the transaction itself would constitute a trade or business. There are other transactions, however, such as the purchase of the car in the present case, which are at highest only incidental to the carrying on of the relevant business; here a degree of regularity is required before it can be said that they are an integral part of the business carried on, and so entered into in the course of that business.
Applying the test thus indicated to the facts of the present case, I have no doubt that the requisite degree of regularity is not made out on the facts. Mr Bell’s evidence that the car was the second or third vehicle acquired on credit terms was in my judgment and in the context of this case not enough. Accordingly, I agree with the judge that, in entering into the conditional sale agreement with the defendants, the company was “dealing as consumer”. The defendants’ condition 2(a) is thus inapplicable and the defendants are not absolved from liability under section 14(3).
There is a different approach which I would wish to leave open for a future case since it was not argued before us. If the company had never incorporated and Mr Bell had bought the car personally for personal (or domestic) and business use, it would, I apprehend, have been difficult to argue that he had not been dealing as a consumer in buying the car. On facts such as those of the present case it would seen anomalous and in some measure disquieting if a different result were reached if the car was bought by a company for the personal and business use of its two directors. It occurs to me that in such circumstances it could well be appropriate to pierce the corporate veil and look at the realities of the situation as in D.H.N. Food Distributors Ltd. v. Tower Hamlets London Borough Council [1976] 1 W.L.R. 852; see especially the comments of Lord Denning M.R. and Goff L.J.
It follows that it is unnecessary to decide whether, if the company had been dealing otherwise than as a consumer, the defendants’ condition 2(a) excluding all liability under (inter alia) section 14(3) satisfied the requirement of reasonableness. It is urged that it does not, because in these tripartite transactions the defendants are working with dealers of their choice, and whom they have approved, such as the third party, and have obvious rights of recourse against the dealer in the event of the defendants being held liable to a purchaser. It was submitted that the defendants had therefore no need for the protection of such a stringent condition as condition 2(a) and it was unreasonable to impose it. This question has, however, to be considered on the hypothesis that the company was dealing otherwise than as consumer, i.e., was making the contract in the course of business. In such a case Parliament has, by the scheme of the statute, envisaged that it may be reasonable for a party to exclude liability under section 14 of the Sale of Goods Act; it cannot be said that as a matter of customer protection any exclusion is per se unreasonable. The requirement of reasonableness is defined in section 11 of the 1977 Act and the onus of establishing that it is satisfied is on the defendants; it requires that the term, s.c. condition 2(a), shall have been a fair and reasonable one to be included in the contract 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, and with particular regard to the matters specified in schedule 2 of the 1977 Act.
The most obviously important facts are: (1) that the company was ex hypothesi dealing in the course of business and Mr Bell was not devoid of commercial experience; and (ii) that, even though they would have recourse against the third party, the defendants had never themselves had possession of or inspected the car. In view of these factors, I would in all the circumstances have agreed with the judge, had it been necessary to decide the point, that the “reasonableness” test was satisfied in relation to condition 2(a).
In the upshot, however, for the reasons which I have given, and which are substantially the same as those of the judge on the points which he decided in favour of the company, I would dismiss this appeal.
LORD JUSTICE NEILL: The conditional sale agreement between R & B Custom Brokers Company Ltd. (the company) and United Dominions Trust (U.D.T.) was made on 3rd November 1984. It has been accepted that the contract between U.D.T. and the third party (the dealers) was made on the same date. There is no evidence to explain why so long a period elapsed between the date when the company first took delivery of the car (21st September) and the date of the agreement. As a result the company had the use of the car for about six weeks without payment; on the other hand, the company was in a position to observe any defects in the car before the agreement was made.
As the agreement between the company and U.D.T. was made in November 1984, it was governed by the provisions as to implied terms about quality or fitness set out in paragraph 5 of schedule 1 to the Sale of Goods Act 1979, unless those provisions were excluded by the express terms of the agreement. I shall have to consider later the question whether the statutory implied terms were successfully excluded.
The relevant terms are to be found in section 14 of the 1979 Act in the form in which that section took effect in relation to contracts made between 18th May 1973 and 19th May 1985. So far as is relevant, the section was in these terms:
“(1) Except as provided by this section and section 15 below …, there is no implied condition or warranty about the quality or fitness for any particular purpose of goods supplied under a contract of sale.
“(2) Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except that there is no such condition –
(a) …..
(b) if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal.
“(3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.
“(4) …
Clause 2(a) is in wide terms and prima facie is apt to exclude any implied conditions or warranties. But, as the agreement itself makes clear, a buyer’s statutory rights are not affected if he deals as a consumer within the meaning of section 12 of the Unfair Contract Terms Act 1977 (the 1977 Act): see section 6(2) of the 1977 Act.
It is necessary therefore to examine section 12 of the 1977 Act. It is in these terms:
“(1) A party to a contract ‘deals as consumer’ in relation to another party if –
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and
(b) the other party does make the contract in the course of a business; and
(c) in the case of a contract governed by the law of sale of goods … the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.
“(2) But on a sale by auction or by competitive tender the buyer is not in any circumstances to be regarded as dealing as consumer.
“(3) Subject to this, it is for those claiming that a party does not deal as consumer to show that he does not.”
By section 14 of the 1977 Act “business” is defined as including “a profession and the activities of any government department or local or public authority”, but there is no definition in the Act of the phrase “in the course of a business”.
It can be strongly argued that, where a person or company, being in “business” within the statutory definition, buys goods for the purposes of that business, the contract is made by him or it “in the course of a business”. Indeed, in the case of a company it can be said that the contract would be ultra vires if it were not made “in the course of a business”.
On this analysis a professional man or a company which buys a carpet for the office makes the contract of purchase “in the course of a business”. Furthermore, this construction of “deals as consumer” (section 12) and of “a person dealing as consumer” (section 6(2)) would appear to be in conformity with the expression “in consumer use” in section 5.
Thus section 5(2)(a) provides that “goods are to be regarded as ‘in consumer use’ when a person is using them, or has them in his possession or use, otherwise than exclusively for the purposes of a business”. It therefore seems clear that, in the example I have taken of the professional man or company buying a carpet for the office, the carpet, if it proved defective, would not be regarded as “in consumer use”.
On the other hand, it is necessary to bear in mind that the phrase “in the course of a business” or similar phrases are to be found in other statutes dealing with the protection of consumers generally.
I can take three examples:
(1) “Sells goods in the course of a business”: Sale of Goods Act 1979, section 14(2) and section 14(3). These words were introduced by the Supply of Goods (Implied Terms) Act 1973: see section 3.
(2) “Any person who, in the course of a trade or business, –
(a) applies a false trade description to any goods; or
(b) supplies or offers to supply any goods to which a false trade description is applied;
shall, subject to the provisions of this Act, be guilty of an office”: Trade Descriptions Act 1968, section 1(1).
(3) “In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill”: Supply of Goods and Services Act 1982, section 13. The phrase “in the course of a business” is also to be found in section 4 of this Act.
Guidance as to the proper construction of the words “in the course of a trade or business” in section 1(1) of the Trade Descriptions Act 1968 was given by the House of Lords in Davies v. Sumner [1985] R.T.R. 95. In that case a self-employed courier bought a car in June 1980 which he used almost exclusively for his business of transporting films and other material for a television company. In July 1981 he offered the car to a dealer in part exchange for the purchase of a new one. By then the car had travelled 118,100 miles, but the five-digit odometer recorded only 18,100, and the appearance of the car was consistent with that reading.
The defendant did not disclose the true mileage to the dealer, and on the part exchange he obtained a credit appropriate to the mileage on the odometer. He was convicted by the justices of an offence contrary to section 1(1)(a) of the Trade Descriptions Act 1968.
The Divisional Court allowed his appeal on the ground that the false description had not been applied by him in the course of a trade or business and on an appeal by the prosecutor to the House of Lords the appeal was dismissed.
In the course of his speech, with which the other members of the House agreed, Lord Keith of Kinkel considered the earlier case of Havering L.B.C. v. Stevenson [1971] R.T.R. 58, where the defendant, who carried on a car hire business, had a usual practice of selling the cars employed in it every two years. He sold them at the current trade price and paid the proceeds into the business for the purpose of buying new cars.
In relation to one such sale he falsely represented to the purchaser of the car that the mileage it had travelled was substantially less than was actually the case. A charge against him under section 1(1)(b) of the Trade Descriptions Act 1968 was dismissed by the justices but an appeal by the prosecutor by way of case stated was allowed by the Divisional Court. In referring to this decision Lord Keith said ([1985] R.T.R. 95, 102):
“This decision, the correctness of which was not challenged by [counsel] for the respondent, vouches the proposition that in certain circumstances the sale of certain goods may, within the meaning of the Act, be in the course of a trade or business, notwithstanding that the trade or business of the defendant does not consist in dealing for profit in goods of that, or indeed any other, description.
“Any disposal of a chattel held for the purposes of a business may, in a certain sense, be said to have been in the course of that business, irrespective of whether the chattel was acquired with a view to resale or for consumption or as a capital asset. But in my opinion section 1(1) of the Act is not intended to cast such a wide net as this. The expression ‘in the course of a trade or business’ in the context of an Act having consumer protection as its primary purpose conveys the concept of some degree of regularity, and it is to be observed that the long title to the Act refers to ‘misdescriptions of goods, services, accommodation and facilities provided in the course of trade’.
“Lord Parker C.J. in the Havering case … clearly considered that the expression was not used in the broadest sense. The reason why the transaction there in issue was caught was that in his view it was ‘an integral part of the business carried on as a car hire firm’. That would not cover the sporadic selling off of pieces of equipment which were no longer required for the purposes of a business. The vital feature of the Kavering case appears to have been, in Lord Parker’s view, that the defendant’s business as part of its normal practice bought and disposed of cars. The need for some degree of regularity does not, however, involve that a one-off adventure in the nature of trade, carried through with a view to profit, would not fall within section 1(1) because such a transaction would itself constitute a trade.
“In the present case it was sought to be inferred that the respondent, covering as he did such a large regular mileage, was likely to have occasion to sell his car at regular intervals, so that he too would have a normal practice of buying and disposing of cars. It is sufficient to say that such a normal practice had not yet been established at the time of the alleged offence. The respondent might well revert to hiring a car, as he had done previously. Further the respondent’s car was a piece of equipment he used for providing his courier service. It was not something he exploited as stock in trade, which is what the defendant was in substance doing with his cars in the Havering case … Where a person carries on the business of hiring out some description of goods to the public and has a practice of selling off those that are no longer in good enough condition, clearly the latter goods are offered or supplied in the course of his business within the meaning of section 1(1). But the occasional sale of some worn out piece of shop equipment would not fall within the enactment.”
It is of course true that section 1(1) of the Trade Descriptions Act 1968 creates a criminal offence, whereas the other sections to which I have referred create no more than obligations in the civil law. Nevertheless, it would be unsatisfactory in my view if, when dealing with broadly similar legislation, the courts were not to adopt a consistent construction of the same or similar phrases.
Accordingly, in relation to a seller of goods or a supplier of services, I consider that the court should follow the guidance given by Lord Keith in Davies v. Sumner. Furthermore, as the words “in the course of a business” are used both in section 12(1)(a) and in section 12(1)(b) of the 1977 Act and as the party referred to in section 12(1)(b) will be the seller or supplier of the goods, it seems to me that the same construction of the words “in the course of a business” must be adopted for both paragraphs, and that therefore the Davies v.Sumner test should be used for construing section 12(1)(a).
In the present case Mr Bell gave evidence on behalf of the company that the car was only the second or third vehicle acquired on credit terms. It follows, therefore, that no pattern of regular purchases had been established for this business, nor can it be suggested that this transaction was an adventure in the nature of trade. I am therefore satisfied that in relation to the purchase of this car the company was dealing as consumer within the meaning of section 12 of the 1977 Act.
In these circumstances it is unnecessary to consider whether the exclusion clause in the conditional sale agreement would have satisfied the requirement of reasonableness according to the test contained in section 11 and schedule 2 of the 1977 Act. The evidence in this case as to the date when and the precise circumstances in which the conditional sale agreement was signed is unclear. I do not consider I can express any useful opinion on this aspect of the case.
Nevertheless, for the reasons given by my Lord and for the reasons which I have endeavoured to outline, I too would dismiss this appeal.
Order: Appeal dismissed with costs for the plaintiffs; no order as to costs for the defendants; application for leave to appeal to the House of Lords refused.
Messer UK Ltd. & Anor. v Britvic Soft Drinks Ltd. & Ors
[2002] EWCA Civ 548 [2002] 2 LLR 368, [2002] 2 Lloyd’s Rep 368, [2002] 2 All ER (Comm) 321, [2002] EWCA Civ 548
Mance LJ
11.0 Warranty
11.1 Messer warrants that the purity of the Gas is not less than that laid down in the Standard. All other implied warranties and conditions as to quality or description are excluded except to the extent that such exclusion is prevented by law.
11.2 It is the Customer’s responsibility to satisfy itself that the Gas is suitable for the purpose for which the Customer intends to use it. Recommendations relating to the use of the Gas made by Messer, in writing or otherwise, are given in good faith but no warranty is given as to the suitability of the Gas for any particular purpose.
12.0 Limitation of Liability
12.1. Subject to any other limitation or exclusion of liability expressed elsewhere in this Contract, the liability of Messer, its employees and Agents to the Customer in respect of personal injury or direct physical damage to property (and losses, costs and expenses directly arising ftom such injury or damage), whether through negligence or otherwise, shall be limited to £500,000 in respect of any one incident, except that nothing in this Contract shall restrict Messer’s liability to an injured person or his personal representatives for personal injury or death resulting from negligence.
12.2 Messer, its employees and Agents shall have no liability whatsoever in respect of losses, costs or expenses of a purely financial or economic nature (including, but not limited to, loss of profits, loss of use or other consequential loss), or any other loss or damage not covered in Clause 12. 1, unless such loss, cost, expense or damage be caused by Messer supplying Gas that is not of the purity warranted or by failure to deliver or by late delivery of Gas by Messer and unless such defective or late delivery or failure to deliver is notified within five days of the delivery or failure to deliver is notified within five days of the delivery or intended delivery, in which case Messer’s liability shall be limited to the value of the quantity of Gas concerned (at Messer’s selling price).”
Messer’s industrial grade specification for the gas provided as follows:
“1. PURCHASE SPECIFICATION
1. A solution of the gas in water shall be free of any objectionable taste or odour.
….
4. Hydrocarbons (as CH) 10ppm by volume
2. SALES SPECFICATION
The product complies with BS 4105: 1990 and BS 6535
The product meets the requirements of the Miscellaneous Food Additives Regulations SI 3187 wherein it is referred to as “E290”.”
A summary of the specific requirements of BS 4105 followed.
BS 4105 (as it was formulated at the relevant time) consisted of a foreword, a general section 1, followed in sections 2 and 3 by descriptions and specifications of particular constituent elements for carbon dioxide types 1 and 2, then by appendices dealing with sampling and methods for determination of the amount of such particular elements, and finally by figures showing such methods or the equipment used. Section 1 provides as follows:
“Section 1. General
1. Scope
This British Standard specifies two types of carbon dioxide for industrial use. Type 1 is suitable for industrial non-food applications, e.g. purging, inerting, life raft inflation. Type 2 is a higher quality grade which is also suitable for industrial food applications, e.g. beverages, gas packaging, food freezing and chilling.
Note 1. Type 2 carbon dioxide is covered by the specific and general criteria of purity laid down in The Miscellaneous Additives in Food Regulations 1980 (SI 1980 No. 1834) in which carbon dioxide is referred to as E290.
This standard does not apply to carbon dioxide for:
(a) medical use, for which a specification is included in the British Pharmacopoeia.,
(b) fire fighting, for which BS 6535: Part 1 applies;
(c) welding.
Note 2. Throughout this standard, concentrations expressed by mass or volume are at a temperature of 20’C and 101.3 kPa1 pressure.
Note 3. The titles of the publications referred to in this standard are listed on the inside back cover.
2. Definition
For the purposes of this British Standard the following definition applies.
carbon dioxide
A high pressure liquefiable gas expressed by the chemical formula C02.”
It is common ground that the carbon dioxide agreed to be supplied by Messer to Brothers and THP was of type 2. Section 3 of BS 4105 provides in relation to type 2:
“Section 3. Carbon dioxide, type 2
8 Description
The product shall consist essentially of carbon dioxide, C02, in liquid form.
A carbonated solution of the product in tasteless water, with a headspace vapour pressure of 300 kPa at 200C, shall be free from any objectionable taste or odour.
9 Sampling
The product shall be sampled from the liquid phase by the method specified in the appropriate method of test and as described in appendix A. Care shall be taken to purge the valve and connecting line before taking a sample.
Note. Attention is drawn to the provisions of BS 341: Part l.
10 Residual gases content …….
11 Water content ……
12 Oil content ……
13 Content of sulphur compounds ……
14 Content of nitric oxide (NO) and nitrogen dioxide (N02) ……
15 Packaging and identification ……”
The first point – the scope of BS 4105
The judge concluded that “the gas supplied simply did not conform with the words of description in BS 4105, in other words …. that the gas supplied was not suitable for industrial food applications”. He went on to say that ‘It is implicit in this conclusion that they [the claimants] are equally entitled to succeed on the broader basis of breach of the statutory implied terms” – referring to the undertakings in respect of satisfactory quality and fitness for purpose arising prima facie under s. 14 of the Sale of Goods Act 1979.
…….
Nor do I think that the respondents obtain any assistance on this point from the wording of Messer’s conditions, incorporated into the contracts with THP and Brothers. Leaving on one side the issue of the validity of some of those conditions, it seems to me, if anything, that they would tend to underline the relatively limited role of BS 4105 – cf e.g. the warranty in clause 11.1 ‘that the purity of the Gas is not less than that laid down in the Standard” – a reference to Messer’s printed standard which in turn identifies and summarises BS 4105; and the attempts in clause 11.2 to impose responsibility for assessing suitability on THP and Brothers.
1 therefore accept the submissions of Mr Prynne and conclude that the judge was wrong to treat BS 4105 as containing any express term relevant to benzene for breach of which the claimants could obtain damages from Messer. It follows that the respondents, Bass, as assignees of THP and Brothers, can only claim against Messer if they can rely on undertakings as to satisfactory quality and fitness for purpose implied by virtue of s. 14 of the Sale of Goods Act 1979.
The second point – the reasonableness of clause 11.1 and 11.2
That leads to the second point argued before us. Messer relied in its defence upon the terms of clauses 11. 1 and 11. 2 “to limit its liability”, by excluding any liability for breach of any implied undertaking of satisfactory quality or fitness for purpose under s. 14 of the 1979 Act. Bass replied that clauses 11. 1 and 11.2 did not satisfy the requirement of reasonableness in the Unfair Contract Terms Act 1977. That statute provides as follows:
“2 Negligence liability
(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.
(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.
3 Liability arising in contract
(1) This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term–
(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
(b) claim to be entitled–
(i) to render a contractual performance substantially different from that which was reasonably expected of him, or
(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.
6 Sale and hire-purchase
(2) As against a person dealing as consumer, liability for breach of the obligations arising from–
(a) [section 13, 14 or 15 of the 1979 Act] [FN2] (seller’s implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose);
(b) section 9, 10 or 11 of the 1973 Act (the corresponding things in relation to hire-purchase), cannot be excluded or restricted by reference to any contract term.
(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.
(4) The liabilities referred to in this section are not only the business liabilities defined by section 1(3), but include those arising under any contract of sale of goods or hire-purchase agreement.
11 The “reasonableness” test
(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act, section 3 of the Misrepresentation Act 1967 and section 3 of the Misrepresentation Act (Northern Ireland) 1967 is that the term shall have been 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.
(2) In determining for the purposes of section 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract.
(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.
(4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to–
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
(5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.
….
SCHEDULE 2
GUIDELINES” FOR APPLICATION OF REASONABLENESS TEST
Sections 11(2), 24(2)
The matters to which regard is to be had in particular for the purposes of sections 6(3), 7(3) and (4), 20 and 21 are any of the following which appear to be relevant–
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would by practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.
It was accepted both before the judge and before us that clauses 11.1 and 11.2 of Messer’s conditions purport to exclude Messer’s liability for breach of the implied terms arising from s. 14 of the Sale of Goods Act 1977, within the meaning of s.6(2) and (3) of the l977 Act, and so that it is for Messer to show that such clauses satisfy the requirement of reasonableness, having regard in particular to the matters specified in Schedule 2 to the Act.
The judge, after considering what he identified as the relevant circumstances, found that the clauses did not satisfy that requirement. In these circumstances, the correct approach in this court is that prescribed in Mitchell (George)_(Chesterfield) v. Finney Lock Seeds Ltd. [1983] 2 AC 803, 815-6 per Lord Bridge:
“It may, therefore, be appropriate to consider how an original decision as to what is “fair and reasonable” made in the application of any of these provisions should be approached by an appellate court. It would not be accurate to describe such a decision as an exercise of discretion. But a decision under any of the provisions referred to will have this in common with the exercise of a discretion, that, in having regard to the various matters to which the modified section 55 (5) of the Act of 1979, or section 11 of the Act of 1977 direct attention, the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.”
I start with the scope of clauses 11.1 and 11.2. Clause 11.1 warrants a purity not less than that laid down in Messer’s standard, which in turn incorporates BS 4105. This cannot be read as an absolute warranty of “purity” in the abstract, or of anything other than compliance with Messer’s standard. The clause qualifies its exclusion of other warranties “to the extent that such exclusion is prevented by law”. But this qualification simply refers to, and requires consideration of, the potential effect of the 1977 Act. Mr Prynne suggested in opening the appeal that clauses 11.1 and 11.2 might leave room for an implied undertaking that the carbon dioxide supplied would not be injurious to health, contrary to the Food Safety Act 1990, which could cater for possibilities such as the presence of strychnine. But, except in cases where the purity of the carbon dioxide laid down in Messer’s standard was affected, clauses 11.1 and 11.2 would in terms exclude any such implied undertaking, and there is nothing in ss.7 and 8 of the Food Safety Act 1990 to override such exclusion.
The judge accepted that the parties were to be regarded as having been of equal bargaining power – see paragraph (a) in Schedule 2 to the Act. There were other suppliers (Hydrogas and BOC) to which THP and Brothers could have gone. The judge also treated it as axiomatic for the purposes of paragraph (c) that “on the footing that the terms are applicable at all” the buyers “must be regarded as cognisant of their existence and effect”. I am not satisfied that paragraph (c) can be quite so easily disposed of. Contractual incorporation may in some circumstances occur without a party either knowing, or being realistically in a position where he or it can be blamed for not knowing, of the extent of certain terms. Take someone contracting for the carriage of a parcel by rail or air on the carriers’ standard conditions. No-one really expects him to obtain or read the terms. Nor do I think that paragraph (c) is to be necessarily even to be read as equating the positions of someone who actually knows and someone who “ought reasonably to have known” of the existence and extent of a term. It seems to me legitimate to consider and take into account the actual extent and quality of the knowledge of a party, however much he or it may, under ordinary contractual principles, have become contractually bound by the particular term(s).
Thus, in the case of Watford Electronics Ltd. v. Sanderson CFL Ltd. [2001] EWCA Civ 317; [2001] 1 AER 696, cited to the judge and to us, the judge found as a relevant factor under paragraph (c) that the buyer of the relevant software was “aware of the existence of the term, only first learned of its existence towards the end of the pre-contract discussions, attempted unsuccessfully to have it substantially amended, only succeeded in achieving a make-weight amendment and learnt from Sanderson [the supplier] that a term excluding liability was standard software industry practice.”
The Court of Appeal in Watford, in upholding the validity of an exclusion of liability for any “claims for indirect or consequential losses whether arising from negligence or otherwise”, regarded that as a most material factor, as appears from the judgment given by Chadwick LJ (with which Buckley J agreed) at paragraphs 54(vii) and 56 and that of Peter Gibson LJ at paragraph 62(4). In the present case, the commercial and contractual background were significantly different. The manufacture of carbon dioxide so as to exclude benzene does not compare with the provision of software (an exercise notoriously liable to give rise to problems). No-one would have contemplated that the manufacturing process would allow benzene in, or (despite clause 11. 2) that the buyers (THP and Brothers) would test for benzene, or indeed for compliance with BS 4105, which Messer anyway warranted. The parties did not discuss or negotiate with regard to the specific provisions of the contract, clauses 11.1 and 11.2 in particular. Clauses 11.1 and 11.2 were simply incorporated as part of Messer’s standard provisions. Although this is not a consideration specifically identified in Schedule 2, it seems to me that it can be relevant under paragraph (c) and anyway as a general consideration under s. 11(2) (cf also by analogy s. 3(1)).
Messer’s basic contention, as the judge recognised, was and is that it was reasonable for it as a supplier (but not a manufacturer) to limit its liability to compliance of the carbon dioxide supplied with BS 4105, on the basis that this represented the contemporary understanding of the required purity. The judge in rejecting this said:
“I suspect that if the parties had been asked when they were contracting on whom should lie the risk of a breakdown in the manufacturing process permitting the unexpected introduction into the CO2 of a redundant carcinogen in quantities which, whilst not injurious to health would render products made using that CO2 unsaleable, they would have unhesitatingly replied that of course that risk should be borne by the supplier…… In my judgment it is wholly unreasonable for the supplier of a bulk commodity such as CO2 for a food application to seek to exclude liability for the commodity not being of satisfactory quality or being unfit for its purpose where that has come about as a result of a breakdown in the manufacturing process allowing the inadvertent introduction of a redundant carcinogen.”
Messer submits that the judge was in this first sentence posing the wrong question. He was taking advantage of hindsight, and his knowledge of what had actually happened and its consequences, instead of asking whether the term was 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.
In my judgment, however, the judge was entirely justified in rejecting Messer’s submission that it was reasonable for it as a supplier (and not a manufacturer) to limit its liability to compliance of the carbon dioxide supplied with BS 4105, on the basis that this represented “the contemporary understanding” of the required purity. The authors of BS 4105 were concerned to regulate the quantities of and methods of testing for elements which carbon dioxide might be expected to contain. They did not identify or regulate other elements, not because the contemporary understanding was that carbon dioxide might contain them, but because the presence of an extraneous or deleterious substance such as benzene or strychnine was wholly unexpected, and could only occur due to some manufacturing or other mishap. If one asks whether it was reasonable to limit Messer’sliability to compliance with BS 4105, the answer seems to me, therefore, to be that it ought to have been appreciated that compliance with BS 4105 would not, by itself, necessarily mean that the carbon dioxide supplied was suitable for use. BS 4105 assumed that the process of manufacture and supply would exclude the introduction of other extraneous elements, and so did not actually address such elements. Clauses 11.1 and 11.2 are thus unreasonable, because they contradict a fundamental assumption that all parties would have made in this respect. Since it is accepted that there was no basis on which the buyers, THP and Brothers, could have been expected to test for extraneous components which they had no reason to consider could be present, and since their presence could only arise from some mishap in manufacture or supply, responsibility should rest on the supplier, Messer, who would be expected to be able to pass it on, where appropriate to the manufacturer, Terra (as it can in fact in the present proceedings).
Conclusions
Accordingly, I consider that the judge reached the right conclusion on the second ground pursued before us. Although the appellants are right on the first ground, in that BS 4105 contains no express warranty or undertaking of suitability, clauses 11.1 and 11.2 are not shown to satisfy the requirement of reasonableness and cannot therefore be relied upon by the respondents to exclude their liability for breach of the implied undertakings as to suitability and fitness for purpose, which, as is accepted, arose by virtue of s.14 of the Sale of Goods Act 1979 unless they were validly excluded by clauses 11.1 and 11.2. It follows that this appeal against the judge’s full and helpful judgment fails.
Messer UK Ltd. & Anor v Thomas Hardy Packaging Ltd & Anor
[2002] EWCA Civ 549 [2002] 2 All ER (Comm) 335, [2002] 2 LLR 379, [2002] 2 Lloyd’s Rep 379, [2002] EWCA Civ 549
Mance LJ
The Contractual Claim
The first step in the contractual claim is determined by the judgment which we have given in the Britvic proceedings. In that judgment we held that Messer and Terra had failed to show that clauses 11.1 and 11.2 of Messer’s standard conditions were reasonable within the meaning of the Unfair Contract Terms Act 1977. It follows that Messer’s supplies of the carbon dioxide to THP were subject to implied undertakings of satisfactory quality and fitness for purpose of the carbon dioxide, which, in those circumstances, it is also common ground were broken. The next step requires examination of clauses 12.1 and 12.2 of Messer’s standard terms which were incorporated in its contract for supply to THP and which read as follows:
“12.0 Limitation of Liability
12.1. Subject to any other limitation or exclusion of liability expressed elsewhere in this Contract, the liability of Messer, its employees and Agents to the Customer in respect of personal injury or direct physical damage to property (and losses, costs and expenses directly arising ftom such injury or damage), whether through negligence or otherwise, shall be limited to £500,000 in respect of any one incident, except that nothing in this Contract shall restrict Messer’s liability to an injured person or his personal representatives for personal injury or death resulting from negligence.
12.2 Messer, its employees and Agents shall have no liability whatsoever in respect of losses, costs or expenses of a purely financial or economic nature (including, but not limited to, loss of profits, loss of use or other consequential loss), or any other loss or damage not covered in Clause 12. 1, unless such loss, cost, expense or damage be caused by Messer supplying Gas that is not of the purity warranted or by failure to deliver or by late delivery of Gas by Messer and unless such defective or late delivery or failure to deliver is notified within five days of the delivery or failure to deliver is notified within five days of the delivery or intended delivery, in which case Messer’s liability shall be limited to the value of the quantity of Gas concerned (at Messer’s selling price).”
The critical question is whether THP’s claim against Messer is “in respect of ….. direct physical damage to property” within clause 12.1. If it is, then all losses, costs and expenses directly arising from such damage are also recoverable. Normally, since the terms of clause 12.1 offer a more expanded prospect of recovery than those of clause 12.2, one could expect Bacardi and THP to argue that clause 12.1 is wide enough to cover the present situation, and Messer and Terra to be arguing the contrary. In this case, however, Messer and Terra fear, and the judge held, that clause 12.2 cannot be shown to satisfy the requirement of reasonableness under s.6(3) and 11(2) of the Unfair Contract Terms Act 1977. It is therefore in Messer and Terra’s interests to seek to bring the claim within clause 12.1, which is a provision that the judge considered to be reasonable (a conclusion against which Bacardi and THP do not appeal). In this connection, the judge held, and again there is no appeal on this point, that there was only one “incident” (the “Benzene incident” viewed as a whole) and so that there would be an overall limit of £500,000 to any contractual recovery by THP against Messer. Bacardi and THP nonetheless profess themselves to be relatively neutral on the application of clause 12.1, although suggesting that Messer’s and Terra’s analysis is wrong. Their relative neutrality arises, because, if the claim falls within clause 12.1 (as being “in respect of … direct physical damage”), then Bacardi and THP maintain that Terra is liable to Bacardi in tort and that Bacardi’s tort claim and THP’s contribution claim should succeed on that basis. Messer and Terra deny that this follows, and submit that Bacardi cannot in any event recover in tort damages indemnifying them against contractual liability for loss borne by Westbay.
THP’s pleaded contribution claim is that there was direct physical damage to the mixed drinks, e.g. the Breezer, whereas Bacardi pleads that there was damage to the mixed drinks, the product, and/or to the ingredients. The judge considered both possibilities. He rejected the former, on the ground that direct physical damage involves harm to some existing property. Here, all that happened was that THP created a defective end product, containing benzene, principally (on the evidence) as a result of mixing the defective carbon dioxide into a pre-existing mix of water and concentrate. As to the alternative possibility, it seemed to him artificial to think in terms of damage to the other pre-existing ingredients, consisting of the mix resulting from the admixture of THP’s water to Bacardi’s concentrate. Anyway, he pointed out, even if the ingredients could properly be said to have been damaged by the admixture, it was not because of damage to the ingredients that the loss was suffered. The loss arose from uselessness of the finished drinks, and the need for their recall.
This last observation is related to the make-up of the loss totalling £2,175,000 set out in the judge’s judgment:
“Bulk liquid and packaging: £1,339,093
Production bottling fee: £192,440
Haulage: £12,617
Storage costs: £36,473
Bacardi staff time: £40,251
Destruction costs: £79,050
Consultants fees: £32,353
Central Risks Group Fee: £7,353
Laboratory Fees: £9,856
Faxes, stationery and sundry: £7,291
Hotel, travel and temporary labour: £3,712
Customer withdrawal expenses: £326,955
Retrieval haulage: £37,557
Loss of profits: NIL”
These items self-evidently relate to the whole of the finished drinks, rather than to any individual components which could be said to have been damaged by any admixture of carbon dioxide. Further, although, as the judge said, it might be possible to speak of the mix of Bacardi’s concentrate and THP’s own water as having been “damaged” by being admixed with benzene contaminated carbon dioxide, the more natural view is that the mix of concentrate and water itself ceased (as always intended) to exist and the finished product came into existence at the moment of such admixture. What resulted was not damaged concentrate and water, but a defective new product. As to other components of the finished product embraced within the above list, if (as one might presume) the item for bulk liquid included the value of the carbon dioxide, that could certainly not be said to have damaged itself. It would certainly stretch language to speak of the bottles, caps, trays or packaging as having been damaged. What happened was that they were rendered valueless or less valuable by being used to wrap defective product, which had to be recalled and scrapped. Had any loss of profit been incurred (which the judge found as a fact that it had not been), it would not have related to any individual element, but to the finished product. It would in these circumstances seem to me artificial and wrong to try to separate out any particular loss as arising from damage to Bacardi’s concentrate or mix of concentrate and water.
The judge carefully examined the structure of clauses 12.1 and 12.2 for clues as to the proper approach to the present unusual situation. As he observed, clause 12.1 deals with personal injury and direct physical damage to property (and losses, costs, and expenses directly arising therefrom), while clause 12.2 specifically covers “other loss or damage not covered in Clause 12.1” including any such other “loss … or damage … caused by Messer supplying Gas that is not of the purity warranted”. The judge noted that the only express reference to the typical situation that might result from supply of defective carbon dioxide was to be found in clause 12.2. He also regarded a claim for the costs associated with the recall and destruction of a defective product as essentially a claim for economic loss, rather than for direct physical damage to property. I would agree. This conclusion does not seem to me to be altered by the consideration that during the process of creation of the defective product, concentrate belonging to Bacardi might be described as having been “damaged” and rendered valueless upon its mixture with the contaminated carbon dioxide. As I have said, the concentrate or mix of concentrate and water was never intended to retain its identity, and the more natural description of events is simply that a defective product resulted, leading, as the judge said, to an overall economic loss suffered through the recall.
There was disagreement between the parties as to the extent to which any assistance might be obtained in the construction of clause 12.1 from authorities considering the circumstances in which damage may be said to have occurred sufficient to found a claim in tort. Mr Prynne referred the judge to a decision of my own in Losinjska Plovidba v.Transco Overseas Ltd. (The “Orjula”) [1995] 2 Ll.R. 395, but before us he submitted that tort authorities were really of no assistance. In my view there are obvious undertones of tort thinking behind the identification and description of the types of harm falling within both clauses 12.1 (“personal injury” and “direct physical damage”) and 12.2 (“losses …. of a purely financial or economic nature”). That is not to say that clause 12.1 contemplates that a customer like THP could bring, or that either the customer or Messer as supplier could be liable for, a claim in tort. The clause simply distributes between Messer and its customer the risk in respect of certain types of harm. Its reference to “liability … to the Customer in respect of personal injury or direct physical damage” is wide enough to embrace personal injury or direct physical damage whether the customer suffers this himself or itself or incurs liability for it to a third party. The exception at the end of clause 12.1, relating to “Messer’s liability to an injured person or his personal representatives for personal injury or death resulting from negligence”, would in contrast only appear apt if the customer were himself an individual and was injured; and the reason for such an exception is no doubt to be found in s.2(1) of the 1977 Act. Clause 12.1 also refers twice to potential liability for negligence. Physical injury is the typical occasion for a tortious claim based on negligence; and a duty of care has been said to be more likely to arise in tort in respect of “direct physical damage” or loss than in relation to indirect physical damage: Marc Rich & Co. AG v. Bishop Rock Marine Co. Ltd. [1996] 1 AC 211, 237D-G, per Lord Steyn.
In The “Orjula” I held a vessel to have been damaged by contamination by hydrochloric acid, which required her to be cleaned by specialist contractors before she could again be used. In Hunter v. Canary Wharf Ltd. [1997] AC 655 the Court of Appeal considered that dust could in certain circumstances cause damage to property, for example when trampled into a carpet so as to lessen the value of the fabric. In Blue Circle Industries plc v. Ministry of Defence [1999] Ch 289 land was held to be physically damaged by the admixture with the topsoil of radioactive material, which required the expenditure of money to remove. I agree that none of these authorities is of real assistance in the present case. In each case pre-existing property was damaged and was useless or depreciated, at least unless money was spent to restore it to its former state. The difficulties which arise in the present case were not present.
In Murphy v. Brentwood D.C. [1991] 1 AC 398 the House of Lords held that the purchaser of a defectively constructed house had no tortious claim against a local authority whose negligence had allowed the defective construction to occur, in circumstances where the defect was discovered before any injury to person or health or damage to property other than the defective house had been done. The loss suffered was regarded as pure economic loss, which was in the circumstances recoverable, if at all, only in contract. Lord Keith at page 465F approved the proposition that:
“…. there is no liability in tort upon a manufacturer towards the purchaser from a retailer of an article which turns out to be useless or valueless through defects due to careless manufacture. The loss is economic. It is difficult to draw a distinction in principle between an article which is useless or valueless and one which suffers from a defect which would render it dangerous in use but which is discovered by the purchaser in time to avert any possibility of injury. The purchaser may incur expense in putting right the defect, or, more probably, discard the article.”
It also appears to me of some interest to note the discussion in Murphy regarding the “complex structure theory” which Lords Bridge and Oliver had mooted in earlier speeches in D. & F. Estates v. Church Commissioners [1989] AC 177. Relevant passages appear in the speeches of Lord Keith at page 470C-G, Lord Bridge at pages 476B-479C, Lord Oliver at page 484D-F and Lord Jauncey at page 497A-E. Lords Mackay, Brandon and Ackner agreed with Lord Keith. Lords Mackay and Ackner also agreed with Lord Bridge and Lord Ackner further agreed with Lords Oliver and Jauncey. Lord Bridge referred to an American case, Quackenbush v. Ford Motor Co. 153 NYS 131, in which the plaintiff recovered tort damages from the manufacturer for damage to her motor car caused by an accident attributable to faulty manufacture of the brakes. Lord Bridge at page 476E thought it “highly doubtful” if the reasoning in this case could now be supported consistently with the unanimous opinion of the US Supreme Court in East River Steamship Corporation v. Transamerica Delaval Inc. (1986) 106 S.Ct. 2295, that a manufacturer incurs no liability in tort for damage occasioned by a defect in a product which injures itself. He went on at page 476H-477A and page 477D-E to indicate that Quackenbush was in any event no authority for the proposition that, once a defect in a complex chattel is discovered, there is a remedy in tort against the manufacturer on the ground that the cost of repairing the defect was necessarily incurred in order to prevent further damage to other parts of the chattel, and that the position was no different where repair was necessary to prevent harm to some other person or chattel, since “…once a chattel is known to be dangerous it is simply unusable”.
At pages 466F-467A, Lord Bridge addressed the argument that a tort claim might lie in respect of damage caused by subsidence caused by inadequate foundations. He rejected the theory that it could as “quite unrealistic”:
“The reality is that the structural elements in any building form a single indivisible unit of which the different parts are essentially interdependent. To the extent that there is any defect in one part of the structure it must to a greater or lesser degree necessarily affect all other parts of the structure. Therefore any defect in the structure is a defect in the quality of the whole and it is quite artificial, in order to impose a legal liability which the law would not otherwise impose, to treat a defect in an integral structure, so far as it weakens the structure, as a dangerous defect liable to cause damage to ‘other property’.”
At page 478E-G, he then said:
“A critical distinction must be drawn here between some part of a complex structure which is said to be a ‘danger’ only because it does not perform its proper function in sustaining the other parts and some distinct item incorporated in the structure which positively malfunctions so as to inflict positive damage on the structure in which it is incorporated. Thus, if a defective central heating boiler explodes and damages a house or defective electrical installation malfunctions and sets the house on fire, I see no reason to doubt that the owner of the house, if he can prove that the damage was due to the negligence of the boiler manufacturer in the one case or the electrical contractor in the other, can recover damages in tort on Donoghue v Stevenson principles. But the position in law is entirely different where, by reason of the inadequacy of the foundations of the building to support the weight of the superstructure, differential settlement and consequent cracking occurs. Here, once the first cracks appear, the structure as a whole is seen to be defective and the nature of the defect is known. Even if, contrary to my view, the initial damage could be regarded as damage to other property caused by a latent defect, once the defect is known the situation of the building owner is analogous to that of the car owner who discovers that the car has faulty brakes. He may have a house which, until repairs are effected, is unfit for habitation, but, subject to the reservation I have expressed with respect to ruinous buildings at or near the boundary of the owner’s property, the building no longer represents a source of danger and as it deteriorates will only damage itself.”
A similar distinction was also adopted, without reference to Murphy, in my judgment in Skanska Construction Ltd. v. Eggar (Barony) Ltd. [2002] EWCA Civ 310, paragraphs 30-33.
Lord Keith at page 470C-G and Lord Jauncey at page 497A-D thought that it would be quite unrealistic to treat a building, the whole of which had been erected and equipped by the same contractor, as divisible into parts, so that damage caused to one part by a hidden defect in another might be regarded as damage to “other property” for the purpose of grounding a claim in tort. Lord Keith at page 467A-468C cited with approval a passage from Deane J. in the Australian case of Council of Sutherland v. Heyman 157 CLR 424: “The building itself could not be said to have been subjected to “material, physical damage” by reason merely of the inadequacy of its foundations since the building never existed otherwise than with its foundations in that state.” Both Lords Keith and Jauncey recognised that a tortious claim might be possible if a defective part (e.g. wiring) had been installed by a separate subcontractor, and had, for example, caused damage by fire to other parts.
Clearly there may be borderline cases of this nature. The interesting discussion and difference of opinion between Lloyd LJ and Nicholls LJ (as they were) in M/S Aswan Engineering Est. Co. v. Lupdine Ltd. [1987] 1 WLR 1 does not help to resolve these, particularly when it preceded Murphy and occurred when the star of Junior Books Ltd. v. Veitchi Co. Ltd. [1983] 1 AC 520 was still high in the sky. The present case may also be regarded as close to the border, as Mr Jonathan Marks QC for THP acknowledged. But I consider that the answer is reasonably clear. To recapitulate, carbon dioxide of separate manufacture was acquired by THP, which had in its possession concentrate and other items owned by Bacardi. THP mixed the concentrate with water of THP’s supply (so as to create a mix which Bacardi owned), and at this stage (substantially) further mixed in carbon dioxide so as to create liquid Bacardi Breezer mix, owned by Bacardi. This was the product that THP then bottled and packaged, before delivering the whole finished product to Bacardi. Although there were ingredients owned by Bacardi which were separate from the defective carbon dioxide and water supplied by THP, THP’s activity involved creating a new product by mixing all these elements. The new product was not damaged, but merely defective from the moment of its creation. The alternative and more persuasive way of justifying any tort claim on Bacardi’s behalf seems to me to be to argue that damages can be claimed for the spoiling of the (without doubt valuable) concentrate that Bacardi supplied. But this concentrate did not survive, and was never intended to survive, as such. It was always going to be merged in the finished Breezer. The real complaint relates to the finished product. The loss which is claimed is also not by reference to the value of the concentrate (or with reference to losses consequential upon its spoiling), but by reference to the value of the finished product and losses consequential upon the need to recall it. Accordingly, the tort cases (which are in my view of some assistance) tend to confirm the conclusion that I would anyway favour without them.
Mr Prynne observed that, on the construction that Messer and Terra advance, clause 12 overall operates (in terms) less restrictively. He submits therefore, rightly in my view,that clause 12.1 falls in case of real doubt to be construed in the way which he submits. That principle is no less applicable, if clause 12.2 is held unreasonable and so ineffective under the Unfair Contract Terms Act 1977. The effect of the Act must be ignored in deciding what the language of clause 12 purports to achieve. Moreover, much of the argument that clause 12.2 is unreasonable turns on its extreme width of application. If clause 12.1 has the meaning that Mr Prynne submits, then the scope of clause 12.2 is considerably diminished, and a different conclusion might be reached on its reasonableness. For that reason too, it is necessary to consider the scope of both parts of clause 12 before addressing any question whether either is unreasonable. In my opinion, however, the principle that any exemption clause should in case of real doubt be construed in the less restrictive sense is not determinative of this case. We are concerned with a relatively confined situation, in relation to which it is in my view possible to reach a sufficiently clear conclusion regarding the intentions behind and proper sphere of application of each part of clause 12. There is therefore no scope for the application of the principle.
The application of the Unfair Contract Terms Act to clause 12.2
The judge considered that Messer had failed to satisfy the onus upon it, under ss. 6 and 11 of the 1977 Act, to show that the terms of clause 12.2 were reasonable. I remind myself of the proper approach to review of a judge’s decision upon such a point, as laid down by the House of Lords in Mitchell (George) (Chesterfield) Ltd. v. Finney Lock Seeds Ltd. [1983] 2 Ac 803, 815-6 per Lord Bridge:
“It may, therefore, be appropriate to consider how an original decision as to what is “fair and reasonable” made in the application of any of these provisions should be approached by an appellate court. It would not be accurate to describe such a decision as an exercise of discretion. But a decision under any of the provisions referred to will have this in common with the exercise of a discretion, that, in having regard to the various matters to which the modified section 55 (5) of the Act of 1979, or section 11 of the Act of 1977 direct attention, the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.”
Mr Prynne submitted before us that the judge’s (now unchallenged) conclusion that clause 12.1 was not unreasonable could not be squared with his further conclusion that clause 12.2 was not shown to be reasonable. The judge, Mr Prynne submits, failed in the latter context to identify or place any or sufficient weight on the effective equality of bargaining power and on the availability (although THP chose not to take this out until late 1999) of product recall insurance, both of which factors influenced him in the former context. The judge was, however, considering the reasonableness of clause 12.1 on a hypothesis which he (and now I) reject, namely that it offered at least the prospect of recovery of up to £500,000 in respect of any one incident of “damage” arising from the contamination of any end product into which defective carbon dioxide was added.
Clause 12.2 by contrast operates as a blanket exemption, both in respect of losses of a “purely financial or economic nature” and in respect of “any other loss or damage not covered in Clause 12.1”. Mr Prynne seeks to justify this as no more than an exemption in respect of losses falling within the second head in Hadley v. Baxendale (1854) 9 Ex 341, in other words losses which would be outside the scope of ordinary contemplation, unless special circumstances were made known. He points to the preservation of liability in respect of supplies of gas “not of the purity warranted”, referring to failure to meet the requirements of BS 4105 which he submits represents the only type of deficiency that the parties could have foreseen. He points to clause 8.7.1 which provides for the customer to determine suitability, so that any claim could be put forward within the five day period specified in the exception to clause 12.2. The limitation of liability under the concluding part of that exception to the value of the quantity of gas concerned on this submission also corresponds with the amount of loss that the parties could foresee, if the contract operated as provided.
One difficulty about these submissions, as the judge pointed out, is that they do not correspond with the reality of the parties’ expected behaviour. The carbon dioxide supplied by Messer to THP was supplied into equipment (storage vessels with associated vaporising and/or other equipment) which Messer provided to THP under a separate agreement. Those tanks were never allowed to be less than 40% full. Accordingly, any defective carbon dioxide supplied would necessarily contaminate a considerably greater quantity of carbon dioxide, quite apart from any effect as and when gas from the relevant tank was later admixed with Bacardi concentrate. Further, no-one in reality ever expected THP to test the quality of carbon dioxide supplied into such tanks, whether for compliance with BS 4105, which Messer warranted, or for absence of other contaminating substances, which Terra’s manufacturing and Messer’s delivery process should have avoided. The judge actually found, in the light of the process of delivery and admixture, that “compliance with the five day notice period would be impractical and to all intents and purposes impossible”; but, even if one simply describes such compliance as “unrealistic” and “not to be expected”, the implications for the reasonableness of clause 12.2 seem to me the same.
I turn to Mr Prynne’s argument that no-one would have foreseen that carbon dioxide matching the requirements of BS 4105 would be contaminated by some other substance, not mentioned in that standard; and so that it was reasonable to include clause 12.2. Before the judge, he carried this argument to the length of a submission that, because the drafters cannot have had such contamination in mind, therefore clause 12.2 or at least its five day notice requirement could not apply in such a case at all. The difficulty about this argument is that clause 12.2 is in absolute terms. The exception only applies to loss, etc. caused by supplying “Gas that is not of the purity warranted”, which must in turn refer back to Messer’s standard and so to BS 4105. Once one concludes, as we have concluded on the appeal in the Britvic proceedings, that neither Messer’s standard conditions nor BS 4105 contain any express undertaking regarding freedom from contamination by other substances not specified by BS 4105, it follows that clause 12.2 purports to exclude all liability for any such other contamination.
Mr Prynne’s submissions at this point mirror some of those mounted in respect of clause 11 in the Britvic appeal. He argues that, since no-one foresaw other contamination, a clause which does not foresee it or therefore allow any claim in respect of it should be regarded as reasonable. He submits that clause 12.2 does attempt to deal (fairly, he submits) with matters which could be foreseen, such as failure to comply with BS 4105, failure to deliver or late delivery. These submissions must be rejected in my judgment for reasons paralleling those which we expressed in the course of our judgment on the Britvic appeal. The fact that no-one would have conceived of other contamination by some entirely extraneous elements (whether benzene or a poison) is because all concerned would have assumed that Terra’s manufacturing process (and, so far as material, Messer’s delivery service) would have been operated efficiently in such a way as to make it impossible. Far from justifying an exclusion of responsibility if extraneous contamination occurred, this to my mind demonstrates the unreasonableness of any clause purporting to exempt Messer from liability in respect of such contamination.
In these circumstances, the judge’s conclusion that clause 12.2 was unreasonable is in my judgment unassailable. It is unassailable in relation to the very situation which has arisen. But, as the judge pointed out, even if the unreasonableness had only related to potential circumstances, rather than those actually before the court, present authority in this court suggests that the clause would have to be regarded as unreasonable for all purposes: see Stewart Gill Ltd. v. Horatio Myer and Co. Ltd. [1992] QB 600, 608-9 per Stuart-Smith LJ. I have some reservations about this proposition, which I expressed in Skipskreditforeningen v. Emperor Navigation [1998] 1 Ll.R. 66, 75, but they do not arise for consideration on this appeal. Mr Prynne sought, however, to derive assistance from accepting the proposition and relying on the warning which I attached in Skipskreditforeningen that, if the clause as a whole was to be judged either valid or invalid, then courts “should not be too ready to focus on remote possibilities or to accept that a clause fails the test by reference to relatively uncommon or unlikely situations”. I was speaking there in the context of an exclusion of set-off which would in terms cover any cross-claim for alleged fraud. I stand by the warning, but I do not consider that the exemption provided by the terms of clause 12.2, viewed as a whole, can in any way be regarded as referring only to relatively uncommon or unlikely situations. The delivery of gas complying with BS 4105 and of suitable quality is one of the main subjects that it covers. An exemption that would, in practice (since no-one expected THP to test even for compliance with BS 4105), operate as a blanket exemption in respect of matters which the parties would have regarded as fundamental to each supply is a quite different exemption to that which I was addressing in Skipskreditforeningen.
I therefore agree both with the judge’s reasoning and with his conclusion that clause 12.2 was not shown to be reasonable, and that, under s.6 of the Unfair Contract Terms Act 1977, it cannot therefore be relied on to exclude Messer’s contractual liability for breach of the implied undertakings as to satisfactory quality and fitness for purpose, which, it is now accepted, were broken by Messer’s supplying of benzene-contaminated carbon dioxide to THP. The result is that the present appeals fail.
…..
Overall Conclusion
The appeals against Tomlinson J’s judgment in the present proceedings therefore fail for reasons which, although I have set them out at some length, mirror, almost in their entirety, those which Tomlinson J himself expressed in his meticulous judgment.
Mr Justice Neuberger:
For the reasons given by Mance LJ, I also would dismiss this appeal.
36. I would dismiss the appeal.
Overseas Medical Supplies Ltd v Orient Transport Services Ltd
[1999] EWCA Civ 1449 [1999] 2 Lloyd’s Rep 273 Potter LJ
REASONABLENESS
First, so far as this court is concerned, while the hearing of this appeal is in the form of a re-hearing and the court is entitled to reach its own view on the evidence, its approach is constrained by a natural reluctance to disturb a first instance decision as to what is reasonable in all the circumstances of a particular case, bearing in mind that views on reasonableness may properly differ and that, in any matter where the decision depends not merely on argument but also on the effect of oral evidence, the first instance judge has the advantage of hearing such evidence at first hand. In relation to the task of an appellate court in such cases, the position is as stated by Lord Bridge in George Mitchell Chesterhall Limited –v- Finney Lock Seeds Limited [1983] 2 AC 803 at 815G:
“(It may, therefore be appropriate to consider how an original decision as to what is “fair and reasonable” made in the application of any of these provisions should be approached by an appellate court. It would not be accurate to describe such a decision as an exercise of discretion. But a decision under any of the provisions referred to will have this in common with the exercise of a discretion, that, in having regard to the various matters to which the modified section 55(5) of the Act of 1979, or section 11 of the Act of 1977 direct attention, the court must entertain a whole range of considerations, put them on the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.”
The treatment of various factors going to the question of reasonableness has been considered in a number of authorities from which the following observations of relevance emerge.
(1) The way in which the relevant conditions came into being and are used generally is relevant: Singer Co. (UK) Ltd. –v- Tees and Hartlepool Port Authority [!988] 2 Lloyd’s Rep. 164 at 169, applied by the Court of Appeal in Schenkers Limited –v-Overland Shoes Limited [1998] 1 Lloyd’s Rep 498 (a case concerning an entirely different aspect of the BIFA terms).
(2) Although not specifically applicable to cases falling within Section 3 of the 1977 Act, the five guidelines as to reasonableness set out in Schedule 2 are nonetheless relevant to the question of reasonableness, while bearing in mind that the court is dealing with a commercial and not a consumer transaction. They ought therefore to be taken into account: Stewart Gill Limited –v- Horatio Myer and Co. Ltd. [1992] QB 600 at 608. Those which are relevant in this case are
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term or, in accepting it, had an opportunity of entering into a similar contract with other persons, but without having to accept similar terms;
(c) whether the customer knew or ought to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties).
(3) In relation to the question of equality of bargaining position, the court will have regard not only to the question of whether the customer was obliged to use the services of the supplier but also to the question of how far it would have been practicable and convenient to go elsewhere: Singer –v- Tees at 169 and St Albans’ City and District Council –v- International Computers Limited (1995) XXI FSR 686 at 708.
(4) The question of reasonableness must be assessed having regard to the relevant clause viewed as a whole: it is not right to take any particular part of the clause in isolation, although it must also be viewed against a breach of contract which is the subject matter of the present case: AEG (UK) Limited –v- Logic Resource Limited (Unreported save by New law on Line, Court of Appeal, 20.10.95) per Hobhouse LJ.
(5) The reality of the consent of the customer to the supplier’s clause will be a significant consideration (ibid; see also the St Alban’s City case at 709-711.
(6) In cases of limitation rather than exclusion of liability, the size of the limit compared with other limits in widely used standard terms may also be relevant; Sonicare International Limited –v- East Anglia Freight Terminal Limited [1997] 2 Lloyd’s Rep 48 at 55 per Judge Hallgarten QC.
(7) While the availability of insurance to the supplier is relevant, it is by no means a decisive factor: see Singer –v- Tees at 170 and The Flamar Pride [1990] 1 Lloyd’s Rep 434 at 439.
(8) The presence of a term allowing for an option to contract without the limitation clause but with a price increase in lieu is important: see Singer –v- Tees at 170. However, as suggested in Yates: Contracts for the Carriage of Goods para. 7.2.25.13, if the condition works in such a way as to leave little time to put such option into effect, this may effectively eliminate the option as a factor indicating reasonableness c.f. Phillips Products Limited –v- Hyland [1987] 1 WLR 6159.
British Fermentation Products Ltd v. Compair Reavell Ltd
[1999] EWHC Technology 227
Bowsher QC
Reasonableness under the Unfair Contract Terms Act, 1977
30. The claimants contend that the terms of contract relied on are governed by sections 3, and 6, of the Unfair Contract Terms, Act, 1977:
“Section 3. Liability arising in contract
(1) This section applies as between contracting parties where one of them deals as a consumer or on the other’s written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term:
(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
(b) claim to be entitled:
(i) to render a contractual promise substantially different from that which is reasonably expected of him, or
(ii) in respect of the whole or any part of his performance to render no performance at all,
except in so far as (in any of the cases mentioned above in this sub-section) the contract term satisfies the requirement of reasonableness.
Section 6. Sale and Hire Purchase
(2) As against a person dealing as a consumer, liability for breach of the obligations arising from:
(a) section 13, 14 or 1 5 of the 1979 Act (seller’s implied undertakings as to conformity of the goods with description or sample, or as to their quality or fitness for a particular purpose;
……
cannot be excluded or restricted by reference to any contract term.
(3) As against a person dealing otherwise than as a consumer, the liability specified in sub-section (2) above can be excluded or restricted by reference to a contract term but only in so far as the term satisfies the requirement of reasonableness.
Application of the Act
31. The defendants submit that the Act does not apply at all to this contract.
32. Section 6 does not apply because we are not concerned here with the seller’s undertakings implied by sections 13, 14, or 15 of the Sale of Goods Act, 1979.
33. The defendants submit that section 3 does not apply because this is not a case where one of the contracting parties “deals as a consumer or on the other’s written standard terms of business”.
34. A consumer is defined by section 12 of the Act:
“(1) A party to a contract ‘deals as consumer’ in relation to another party if-
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and
(b) the other party does make the contract in the course of a business; and
(c) in the case of a contract governed by the law of sale of goods or hire-purchase, or by section 7 of this Act, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.
(2) But on a sale by auction or by competitive tender the buyer is not in any circumstances to be regarded as dealing as consumer.
(3) Subject to this, it is for those claiming that a party does not deal as consumer to show that he does not.”
2. The claimants made this contract in the course of a business and plainly did not deal as a consumer.
35. The Act gives no guidance on the meaning of “the other’s written standard terms of business”. The Institution of Mechanical Engineers Model Form of General Conditions of Contract are plainly “written standard terms of business” but the defendants contend that they are not the defendants’ standard terms of business and therefore not covered by the Act. Mr. Blackburn submitted that if it were otherwise, it would follow that where a building employer contracts on the terms of a JCT Form of Contract, or an architect is appointed under the terms of the RIBA Form of Agreement for the Appointment of an Architect, terms in the contract limiting or excluding liability would be subjected to the test of reasonableness. Mr. Blackburn plainly regarded that possibility as totally unacceptable, but I can see no reason why Parliament should not require the test of reasonableness to be applied to terms excluding or limiting liability in such contracts. The question is, has Parliament done so?
36. Mr. Stuart Isaacs, counsel for the claimants, had not expected this point to be taken and I did not receive a full argument or any citation of authority upon it. Mr. Isaacs did, however point to the fact that the 1978 Amendment to condition 11(ii) of the Model Form was made solely to deal with the impact of the Unfair Contract Terms Act. Mr. Isaacs asked, “Why introduce the 1978 amendment if the Unfair Contract Terms Act did not apply?”. Though the question was asked rhetorically, I hazard the answer that those responsible for the Model Form, having taken legal advice and received no definite guidance, anticipated that the Act might apply on some though not necessarily on all occasions when the Model Form would be used and inserted words to comply with the Act in case it was necessary.
37. The editors of Chitty on Contracts 27th edition at page 675 express the view that the expression “on the other’s written standard terms of business” probably would embrace the standard terms of a third party:
“The expression ‘on the other’s written standard terms of business’ is not defined or explained by the Act but it would seem probable that it would embrace the standard terms of a third party, e.g. a trade association, incorporated into the contract by reference or by course of dealing. Since, in any event, no two contracts are likely to be completely identical, but will at least differ as to subject-matter and price, the question arises whether variations or omissions from or additions to standard terms thereby render them “non-standard” and, if they do not, whether all the terms then become standard terms. If it is alleged that an ostensibly “one-off” contract is in fact the other’s written standard terms of business, extensive discovery may be involved to determine the terms on which contracts have been concluded with others.”
38. In making the recommendations leading to the enactment of the Unfair Contract Terms Act, 1977, the Law Commission and the Scottish Law Commission considered the question what were written standard terms of business (Law Com No. 69; Scot Law Com No. 39 paragraphs 151 – 157).
39. At paragraph 152 the Law Commissioners considered the type of terms referred to by Mr. Blackburn:
“152. Broadly speaking, standard form contracts are of two different types. One type is exemplified by forms which may be adopted in commercial transactions of a particular type or for dealings in a particular commodity, such as the different forms of sale contracts used by the Grain and Feed Trade Association or the forms for building and engineering contracts sponsored by the Royal Institute of British Architects, the Institution of Civil Engineers and the Federation of Associations of Specialists and Sub-contractors. Such forms may be drawn up by representative bodies with the intention of taking into account the conflicting interests of the different parties and producing a document acceptable to all. The other type is the form produced by, or on behalf of, one of the parties to an intended transaction for incorporation into a number of contracts of that type without negotiation. Examples include a multitude of printed documents setting out conditions of various kinds, terms found in catalogues and price lists, and terms set out or referred to in quotations, notices and tickets. Although it is the second type of standard form contract that has attracted most criticism, both types have in common the fact that they were not drafted with any particular transaction between particular parties in mind and are often entered into without much, if any, thought being given to the wisdom of the standard terms in the individual circumstances.”
40. The Law Commissioners then said that although lawyers are familiar with the idea conveyed by the terms “standard form contract” it is not easy to formulate a precise definition. One possible distinguishing mark, the lack of negotiation was considered and rejected as a defining feature:
“156. The essential element that has led us to the decision that there must he some measure of control over terms in standard form contracts between persons in business is the lack of negotiation that exists in most situations where they are used. Nevertheless it does not seem to us that the lack of negotiation, or of any opportunity for negotiation, can itself be regarded as the distinguishing feature of standard form contracts. In many contracts there may be negotiation as to some terms, such as the quantity or price, with no opportunity to negotiate the exempting terms with which we are concerned. Moreover, an expressed willingness to discuss terms may not in practice mean that the terms are any the less proffered on a “take it or leave it” basis. Accordingly our conclusion is that the lack of opportunity to vary or negotiate terms should not be made a feature of a statutory description of standard terms.”
41. Finally, the problem was left to the courts:
“157. We think that the courts are well able to recognise standard terms used by persons in the course of their business, and that any attempt to lay down a precise definition of “standard form contract” would leave open the possibility that terms that were clearly contained in a standard form might fall outside the definition. In our view this would be unfortunate. We have not, therefore, attempted to formulate a statutory description of a standard form contract.”
42. In McCrone v. Boots Farm Sales Limited [1981] SLT 103 at 105, a decision on a point of pleading, Lord Dunpark considered the meaning of the words “standard form contract” in the part of Unfair Contract Terms Act, 1977 applicable to Scotland:
“The Act does not define “standard form contract”, but its meaning is not difficult to comprehend. In some cases there may be difficulty deciding whether the phrase properly applies to particular contract. I have no difficulty deciding that, upon the assumption that the defenders prove that their general conditions of sale were set out in all their invoices and they were incorporated by implication in their contract with the pursuer, the contract was a standard form contract within the meaning of the said section 17.
Since Parliament saw fit to leave the phrase to speak for itself, far be it from me to attempt to formulate a comprehensive definition of it. However, the terms of s. 17 in the context of this Act make it plain to me that the section is designed to prevent one party to a contract from having his contractual rights, against a party who is in breach of contract, excluded or restricted by a term or condition, which is one of a number of fixed terms or conditions invariably incorporated in contracts of the kind in question by the party in breach, and which have been incorporated in the particular contract in circumstances in which it would be unfair and unreasonable for the other party to have his rights so excluded or restricted. If the section is to achieve its purpose, the phrase “standard form contract” cannot be confined to written contracts in which both parties use standard forms. It is, in my opinion, wide enough to include any contract, whether wholly written or partly oral, which includes a set of fixed terms or conditions which the proponer applies, without material variation, to contracts of the kind in question. It would, therefore, include this contract if the defenders’ general conditions of sale are proved to have been incorporated in it. In that event, it would be for the defenders to prove that it was fair and reasonable for their condition 6 to be incorporated in this contract.”
3. That opinion is of limited assistance in the present case because Lord Dunpark did not have in mind the conditions of an outside body used by one of the parties and he was construing different words. However, it is interesting that Lord Dunpark expressed a requirement that the terms should be generally applied by a party if he is to be subjected to the provisions of the Act.
43. In Walker v. Boyle [1982] 1 WLR 495, Dillon J, on a finding alternative to his main decision, applied the reasonableness test of the Unfair Contract Terms Act 1977 to the National Conditions of Sale. That decision does not, however, help in the present case because the reasonableness test only became applicable there because of the provisions of section 3 of the Misrepresentation Act, 1967 as amended by the Unfair Contract Terms Act 1977. Section 3 of the Misrepresentation Act is not limited in its effect to consumer sales or standard terms of business: it applies to any contract containing a term which would exclude or restrict liability or remedies arising on a misrepresentation by one of the parties.
44. Section 3(1) of the Unfair Contract Terms Act, 1977 was also considered by Potter J. in The Flamar Pride [1990] 1 Lloyds Rep 434 (in which Mr. Stuart Isaacs appeared for the plaintiff). That decision again was on a pleading point. The decision does not help in the present case because Potter J. at page 438 expressly left aside the question whether the standard form of management agreement which the defendants possessed at that time would amount to “standard terms of business” in the sense contemplated by the Unfair Contract Terms Act.
45. On the issue of reasonableness, a number of authorities were mentioned as cases in which terms were held to be in some cases reasonable and in other cases unreasonable, but it was not suggested that in any of those cases is there to be found any guidance on the question of the applicability of the Act which I am now considering.
46. I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of Model Forms drafted by an outside body. However, if the Act ever does apply to such Model Forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the Model Form is invariably or at least usually used by the party in question. It must be shown that either by practice or by express statement a contracting party has adopted a Model Form as his standard terms of business. For example, an architect might say, “My standard terms of business are on the terms of the RIBA Form of Engagement”. Without such proof, it could not be said that the Form is, in the words of the Act, “the other’s” standard terms of business. I leave open the question what would be the position where there is such proof, and whether such proof either alone or with other features would make section 3 of the Act applicable.
47. In the present case, the issue of the Unfair Contract Terms Act was raised in the Reply in the following terms:
“4. Further, or in the alternative, clause 11 of the General Conditions is unreasonable under section 3 of the Unfair Contract Terms Act, 1977.”
4. There is before me a draft amendment to that Reply (for which no permission has yet been granted) which makes no further allegation about the applicability of the Act.
48. It has not been alleged or proved that the defendants either invariably or usually used the Model Form. The only evidence as to defendants’ use of the Model Form is to be found in the documents before me. The defendants’, typed quotation CC/2155 of July 1990 contains the paragraph:
“Conditions of Contract
Our offer is based on the Model Form of General Conditions of Contract Form for Home Contracts, as recommended by the Institution of Mechanical Engineers as applicable.”
5. That quotation was accepted by an order of September, 1990 in which the Claimants included the words “Terms and Conditions as per quote”. There then followed some correspondence in which there was a dispute as to whether the Model Form superseded the terms and conditions printed on the back of the claimants’ Order form. In the course of that correspondence, the defendants wrote on 9 October, 1990,
“Both our Clients [presumably meaning the Gist Brocade Group] and ourselves make extensive use of the Institution of Mechanical Engineers Model Forms. These are written jointly by the Institution of Mechanical Engineers and I.E.E., as independent bodies, by members who represent both Clients and Contractors. They are so constructed to be reasonable and fair to both parties and are written in an unambiguous form. We make use of these Model Forms because of their fairness to both parties.
Further to the above, we request that Terms and Conditions to Model Form C apply to your order. We look forward to your confirmation of this.”
6. It was not said in that letter that the terms of the Model Form were the only or even the usual terms on which the defendants contracted, only that the defendants made extensive use of them. The defendants did not say that they would only have been willing to contract on the basis of the Model Form. The position taken by the defendants was that the contract had in fact been made in terms which included the Model Form. On the evidence before me, it is quite possible that if the matter had been raised in negotiations, the defendants would have entertained negotiations as to whether the Model Form or some other terms would form part of the agreement.
49. A question of the burden of proof arises. Section 12(3) of the Act provides that it is for those claiming that a party does not deal as a consumer to show that he does not. There is no similar provision as to the words “the other’s written standard terms of business” in section 3. I therefore hold that it for the party alleging that a statute applies to demonstrate its application.
50. I therefore hold that the Model Form has not been shown to be the defendants’ standard terms of business and the Unfair Contract Terms Act does not apply to the contract between these parties.
51. In case I am found to be wrong in that decision, I shall consider the question of reasonableness as if the Act did apply.
Reasonableness
52. It is only condition 11 which is said by the claimants to be unreasonable.
53. The Act puts the burden of proof of reasonableness on the defendants. Section 11(5) provides:
“It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.”
54. In considering whether a condition is reasonable, the relevant date to be taken is the date of making the contract. Section 11(1) of the Unfair Contract Terms Act, 1977 states the test of reasonableness:
“(1) In relation to a contract term, the requirement of reasonableness for the purpose of this part of the Act …. is that the term shall have been 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.”
55. It was submitted in argument that in considering reasonableness the Guidelines set out in Schedule 2 to the Act should be applied. Those Guidelines are prescribed by section 11(2) of the Act to sections 6 and 7. Those sections do not apply to this case and the Guidelines have no direct application, but they are usually regarded as of general application to the question of reasonableness: Stewart Gill Limited v. Horatio Meyer & Co. Limited [1992] 1 QB 600 at 608 per Stuart-Smith L.J. The Guidelines are in the following terms:
“The matters to which regard is to be had in particular for the purposes of sections 6(3), 7(3) and (4), 20 and 21 are any of the following which appear to be relevant-
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.”
56. As to Guideline (a), both parties to this action are substantial companies carrying on considerable businesses. It appears from a statement of Tristao Valente e Branco attached to the written submissions of counsel for the claimants that when the claimants bought the compressor from the defendants, the claimants already had two Demag compressors. Moreover, when it was evident that the defendants’ compressor was not up to specification, the claimants considered buying a replacement and obtained quotations from other suppliers, including Atlas Copco. I find that there was no disparity between the relative bargaining positions of the parties, and there were alternative means by which the customer’s requirements could have been met.
57. As to Guideline (b), there is no evidence that the claimants received an inducement to accept the term. I have no evidence of the terms on which other suppliers would have supplied a compressor.
58. As to Guideline (c), The Model Form was expressly referred to in the Quotation and the claimants’ Order also included the words, “Terms and Conditions as per quote”. There is no evidence that the claimants had actual knowledge of the content of the Model Form but copies of the Form are readily available.
59. Guideline (d) is not in its literal terms applicable but its spirit is relevant to what I shall later say about the relationship of condition 5 to condition 11.
60. As to Guideline (e), the goods were manufactured to the special order of the claimants.
61. The claimants submit that condition 11 is unreasonable for the following reasons:
(a) It is unreasonable for the Defendant to expressly guarantee that the compressor would reach specified performance levels yet not be liable for damages in the event that the compressor cannot meet those performance levels and the Plaintiff suffers loss.
(b) It is unreasonable for the Plaintiff to have no remedy for the Defendant’s breach of contract if the Defendant is unwilling or unable to make good the defect by repair or replacement as it is obliged to do under condition 11(i).
(c) The exclusion of the terms implied by law as to quality and fitness for purpose is only reasonable if the Plaintiff can rely on express terms as to guaranteed performance levels in seeking damages.
62. I am told that there are no reported decisions considering the clause currently under consideration. Counsel for the defendants referred to a number of cases where clauses had been held to be reasonable. Counsel for the claimants referred to a number of cases where clauses were held to be unreasonable. I do not derive much assistance from those cases. They all concerned conditions in different terms. Even a decision on this particular term would have to be approached with some care because in each case as it arises the reasonableness of a condition has to be considered in the light of the particular circumstances of the parties in question at the time the contract was made.
63. I have already expressed the view that the terms contained in conditions 5 and 11 made good business sense. If the compressor failed to come up to specification, the claimants were not left with no remedy at all. The claimants had two opportunities to reject the compressor. If the claimants had rejected the compressor, the price would have been returned to them and the defendants would have paid the reasonable costs of the claimants obtaining from another supplier a compressor which did fulfil the contract requirements. If compressors had not been obtainable from other suppliers that remedy would not have been available to the claimants, and here the spirit of Guideline (d) is relevant. But a replacement compressor could have been obtained, and the claimants did obtain quotations for them. The claimants did not obtain a replacement compressor because, in the words of Sr. Valente e Branco,
“We took the view that the cost of replacement with related loss of production would make the proposal uneconomical”.
7. The cost of replacement would have been borne by the defendants, so it was only the loss of production that was a relevant issue. The claimants made a choice between loss of production for a limited time in obtaining and installing a replacement at the cost of the defendants and less efficient working for the life of the defendants’ compressor if it was not replaced. That choice was foreseeable at the time of the making of the contract.
64. Condition 4 does not use the word “damages”, but its effect would be that in the event of breach, the defendants would be liable to pay damages of a defined nature, but not the extensive damages sought by the claimants. If the defendants were to quote on terms not including the restriction of liability contained in condition 11 they would no doubt have wished to reconsider the price quoted, having regard to the totally different level of risk undertaken by them. When considering reasonableness one has to consider reasonableness for the vendor as well as reasonableness for the purchaser.
65. In this connection, I should mention one of the cases cited to me, Edmund Murray Limited v. BSP International Foundations Limited [1992] 33 Con LR 1. In that case, the Court of Appeal held that a condition excluding liability for the failure of machinery to come up to specification was unreasonable. By the terms of that contract, the vendors undertook under certain stated conditions “to repair or replace without charge the goods or any part or parts thereof manufactured by them which shall be proved to the satisfaction of the sellers to be defective by reason solely of faulty materials or workmanship supplied or performed by the sellers”. That undertaking, limited as it was to faulty materials or workmanship, did nothing to redress the balance of the wide exclusion clause the effect of which was to exclude liability for failure to come up to specification and left the purchaser without any remedy at all when the machinery failed to do what was required of it. That is not the result achieved by the contract which I am considering.
Finding on Issue 2
66. I find that in the circumstances of the contract between these parties condition 11 of the Institution of Mechanical Engineers Model Form of General Conditions of Contract Form C 1975 edition as amended in September, 1978 is reasonable under the Unfair Contract Terms Act, 1977 and is enforceable.
Axa Sun Life Services Plc v Campbell Martin Ltd & Ors
[2011] EWCA Civ 133 [2011] 2 Lloyd’s Rep 1, [2011] EWCA Civ 133, 138 Con LR 104, [2012] Bus LR 203, [2011] 1 CLC 312 Burnton LJ
Issue 1: Clause 24: the entire agreement clause
The Respondents accepted that in view of the decision of this Court in Springwell Navigation Corp v J P Morgan Chase Bank [2010] EWCA Civ 1221, by which we are bound, an entire agreement clause such as clause 24 in a signed written agreement is effective in accordance with its terms. However, the Respondents reserved their right to seek to argue in the Supreme Court that Springwell was wrongly decided. All parties accepted that as a matter of the construction of clause 24 it was effective to exclude collateral warranties. The Appellant submitted that it was also effective as a matter of its true construction to exclude misrepresentations or liability for them. The Respondents submitted that it was insufficiently clear and unequivocal to exclude misrepresentations or liability for them. For the Appellant, Mr Picken QC submitted that clause 24 excluded any implied terms. Mr Spink QC, for the Defendants in the Ideal, Bennett and Mortgage UK proceedings, submitted that it did not, and his submissions were adopted by Mr McMeel on behalf of the Defendants in the Kymin proceedings.
The effect of clause 24 on misrepresentations is less clear than its effect on what might in its absence be collateral warranties. Since this is a question of construction, it depends on the precise words of the clause and indeed of the Agreement as a whole, and it is not necessarily helpful to rely on judgments on differently worded provisions. There is nonetheless a comparison to be made with the provisions considered by the Court of Appeal in Deepak v ICI [1999] 1 Lloyd’s L Rep 387, which was held to exclude collateral warranties but not misrepresentations, and to the clause considered by Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC). Furthermore, there are, as Mr Picken accepted, well known contractual provisions that clearly and unequivocally refer to misrepresentations.
I have no doubt that clause 24 does not exclude or supersede misrepresentations as to matters that are not the subject of the terms of the Agreement. Notwithstanding the words “This Agreement … constitute the entire agreement and understanding between us in relation to the subject matter thereof” and “this Agreement shall supersede any prior … representations … between you and us relating to the subject matter of this Agreement” I do not think that the clause is sufficiently clear for this purpose. Indeed, I have difficulty in seeing how a written agreement can “supersede” a representation that does not relate to the terms of the agreement. Thus I think that a representation by AXA such as “We are the largest insurance company in the country”, if false and relied upon, is not superseded by the clause.
In an effort to give some effect to the inclusion of the word “representations”, I initially considered that a representation that relates to the terms of the Agreement could be excluded or superseded. However, having read and been convinced by Lord Justice Rix’s compelling judgment, I have resiled from this position. In summary, in addition to the difficulty of reading “representations” as including “misrepresentations”, as Lord Justice Rix points out, such representations do not relate to “the subject matter” of the Agreement, but to the terms of the Agreement. The context too points away from the interpretation contended for by AXA.
It follows that clause 24 has no effect on misrepresentations of fact. I would add, however, that it seems to me that most of the statements alleged to be misrepresentations may well be, on analysis, either advice or what in the absence of clause 24 would be at best collateral warranties.
In the case of Campbell Martin, the implied terms referred to in the order for the trial of the preliminary issues are:
8.1 AXA would process all business submitted to it by (Campbell Martin) with reasonable care and without any unreasonable delay.
8.2 AXA would ensure that its computer processes operated efficiently so as to facilitate the completion of business submitted without unreasonable delay.
8.3 AXA would not unreasonably delay or unreasonably refuse or fail to approve the appointment of suitable company representatives recruited by (Campbell Martin).
The same assumed implied terms are set out in the orders in the Harry Bennett and Ideal Financial proceedings. No implied terms are mentioned in the Kymin order.
None of the orders specifies the basis for the implication of the terms alleged by the Defendants. It is apparent, however, that the Defendants allege that they are to be implied in order to give business efficacy to the Agreements. In other words, the implied terms are said to be intrinsic to the Agreements, and true implications. In my judgment, such terms, if otherwise to be implied, are not excluded by clause 24. As intrinsic provisions of the Agreement, they are within the expression “This Agreement and the Schedules and documents referred to herein” in the first sentence, and they are not “prior” to the Agreement, and therefore are unaffected by the second sentence. The Agreement might have included, but does not include, an express specific exclusion of such implied terms.
On the other hand, terms that might be implied as a result of matters extrinsic to the written Agreements would, in my view, be excluded by clause 24.
It follows, in my judgment, that Issue 1 cannot be answered by a simple “Yes” or “No”, because most of the alleged representations are not representations of fact. However, the exclusion of alleged collateral warranties should be given a simple affirmative answer, and the exclusion of the alleged implied terms should be given a simple negative answer.
Issue 2: Clause 15.2: no set off
Apart from UCTA, I see no basis in the assumed facts set out in the orders for the trial of the preliminary issues for clause 15.2 not to take effect in accordance with its terms: see Coca Cola Financial Corp v Finsat Ltd [1998] QB 43. Mr Spink and Mr McMeel sensibly did not contend that it does not do so.
There was a suggestion that a defendant could seek a stay of any judgment obtained by AXA pending determination of its counterclaim. I do not think that this is right. It would be inconsistent with clause 15.2 for the court, in the exercise of its discretion, to order such a stay: see Coca Cola Financial Corp v Finsat Ltd at 858H to 859A, Continental Illinois National Bank vPapanicolaou [1986] 2 Lloyd’s Rep 441.
Issue 3: clause 1.6 of Schedule 4: conclusive evidence
Although the order for the trial of preliminary issues referred to clause 1.6, and not to clause 5.5, they have similar functions and effect. I shall refer to clause 1.6, but the issues it raises apply equally to clause 5.5.
Again, there was no dispute before us as to the contractual effect of clause 1.6. Such clauses have long been used: see Society of Lloyd’s v Fraser and ors (unreported, Court of Appeal 31 July 1998); see too IIG Capital v Van der Merwe [2008] EWCA Civ 542. Clause 1.6 takes effect in accordance with its terms. The answer to Issue 3 is Yes.
Issue 4: UCTA and section 3 of the Misrepresentation Act 1967
(a) Scope
(i) Clause 24
It is common ground that the Agreements were on AXA’s standard terms of business, so that section 3 of UCTA applies to them. The Respondents contend that both that section and section 3 of the Misrepresentation Act 1967 apply to them. The Appellants submitted that neither provision does, since the effect of clause 24 is to exclude any effective misrepresentation or collateral warranty.
An entire agreement such as clause 24 is not an exemption clause of the kind with which UCTA was and is principally concerned. Since it prevents any collateral contract or warranty from coming into existence, it is not the subject of section 3(2)(a), since there is no collateral contract of which AXA could be in breach. Nor does section 13 materially assist the Respondents, for the same reason.
However, different considerations apply to section 3(2)(b)(i). Quite how that ‘paragraph’ should operate is not entirely clear, as is demonstrated by the somewhat tentative discussion in Chitty on Contracts, 30th edition, at paragraph 14-073. I have no doubt that it is principally aimed at the small print that entitles a party to a contract to provide something other than that defined by the principal terms of the contract, as where a holiday company reserves the right to substitute a hotel or resort for that specified in the main part of the contract. In most cases, as Chitty suggests, the performance reasonably expected of a party is that which is defined by the written contract between the parties. But this ‘paragraph’ of section 3 refers not to the performance specified in the contract but to the performance “which was reasonably expected” of that party. It seems to me that in appropriate circumstances a pre-contractual representation or promise may affect the performance that is reasonably expected of a party. It follows that clause 24 may be subject to the reasonableness test in UCTA in relation to both collateral warranties and representations. However, section 3(2)(b)(i) will only come into play in the present cases if it is possible to identify both the performance by AXA that was reasonably expected and that defined by the contract. The effect of clause 24, if any, on a representation such as “We are the largest insurance company in England” will not be within the scope of section 3(2)(b)(i).
Mr Picken submitted that, since the effect of clause 24 is that the parties agree that there have been no misrepresentations, section 3 of the Misrepresentation Act cannot apply to it. While I see the logic of his submission, to my mind his approach to section 3 is too formalistic. Looked at sensibly and practically, if, contrary to my view, clause 24 has the effect for which he contends, it excludes AXA’s liability for misrepresentations it made, and would be subject to the statutory requirement of reasonableness in this respect too.
(ii) Clause 15.2
In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 the Court of Appeal held that a provision materially identical to clause 15.2 was within the scope of section 3 of UCTA as extended by section 13. That decision is binding on us, even if I disagreed with it, which I do not. The clause is valid only to the extent that it is reasonable.
(iii) Clause 1.6 of Schedule 4: conclusive evidence
It is common ground that clause 1.6 of Schedule 4 is subject to the requirement of reasonableness in UCTA. In my judgment, this is correct. Clause 1.6 does have the effect of excluding the Defendants’ right of set off, which, if it is an equitable set off, goes to reduce the sum due from them to AXA.
Have AXA satisfied the requirement of reasonableness?
The position of the parties in relation to this issue changed during the course of the hearing. Initially, all counsel asked the Court to decide this issue notwithstanding the lack of any decision by the judge and the lack of relevant findings of fact. However, during the course of the hearing, concerns were expressed, not least by myself, that the Court was being asked a hypothetical question, on incomplete or non-existent factual findings. This led Mr Spink QC to reconsider his position, and ultimately to submit that the Court should not address this issue. In the end, the Court decided to hear full submissions, with a view to then deciding whether or not it should address and answer this issue.
I fully understand and sympathise with the desire of the parties to obtain even a qualified or provisional answer on this issue. The sums involved in this litigation are not great, and anything that will assist the parties to resolve their differences without incurring the costs of a full trial is to be supported.
Whether the requirement of reasonableness is satisfied depends not only on the terms of the contract and the contractual provision in question, but also on “the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. Section 11 of UCTA expressly requires the Court to have regard to such circumstances, as Mr McMeel pointed out. The Act requires the Court to have regard in particular to the matters set out in Schedule 2. They are:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); …
Paragraphs (d) and (e) are inapplicable to the present claims.
……
The purpose of entire agreement clauses such as clause 24 is obvious. It was accurately described by Lightman J in Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s L Rep 611:
7. The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract 28th ed. Vol 1 para 12-102: it is to denude what would otherwise constitute a collateral warranty of legal effect.
A clause such as clause 24 gives both sides certainty as to the terms of their contract. In circumstances in which the sums involved in any dispute are likely to be relatively modest, if unchallenged it has the effect of limiting the costs involved in litigation; indeed, it may result in litigation being avoided. It is nonetheless more beneficial to AXA than to the Defendants, since it is AXAwho decided on the terms of the Agreement.
The effect of clause 24 is limited to collateral warranties. I consider that sensible parties, faced with a written agreement of the length and detail of the Agreements, would not expect it to be attended by oral collateral agreements, and would expect their contract to be contained in the document they sign. Furthermore, if the Appointed Representative is dissatisfied, it may at any time terminate the Agreement under clause 13.3 on 2 months’ notice. This is a relatively short notice period. Thus the Appointed Representative is not tied in to the Agreement for an extensive period.
Weighing up all these considerations, I have concluded that clause 24 was a reasonable provision to have been included in the Agreements.
In relation to clause 15.2, in my judgment in considering whether it is a reasonable provision it is necessary to consider what were the claims that when entering into the Agreements the parties would have envisaged as falling within “All monies payable by you to us under this Agreement” and what “credit, set-off or counterclaim” they would or should have envisaged as being available to the Defendants. The former would be clawbacks of commission, due from the Defendants as a result of cancellation or termination of insurance policies by their clients, and moneys repayable under Schedule 4.
Schedule 4 concerned the financial and other assistance provided by AXA to the Defendants under the Agreements. In the case of Campbell Martin, for example, AXA provided a “Business Benefits Allowance” of £43,032 and an “Initial Development Allowance” of £77,000, plus a number of computers and printers. Paragraph 1.1.3 of Schedule 4 required the Development Allowance to be used for the purpose of developing the business carried on by the Defendants pursuant to their Agreement: an unspecific obligation. Paragraph 1.1.4 was even less specific in relation to the Business Benefits Allowance, providing only that it was provided by AXA “on the terms from time to time applicable to the Business Benefit in question a copy of which will be supplied on request”. Those terms are not in evidence. The total of the Development Allowance and the Business Benefits Allowance was referred to as “the Aggregate Benefits”.
Schedule 4 also specified Annual Commission Targets and a “Five Year Commission Target”. The total of the Annual Commission Targets was the Five Year Commission Target of £1,763,720. Each of these figures seems to be a calculated figure: for example, the Year 3 Commission Target is £367,224. There is no evidence or information before the Court as to how or on what basis these Commission Targets were arrived at and agreed. They are not the same in the Agreements in issue in these appeals, but were specific to and different in each Agreement. If I have to make any assumption, given that the Agreements must be construed as a whole and the orders for the trial of the preliminary issues do not include any assumption that the figures were arrived at on any basis inconsistent with the other provisions of the Agreements, I would assume that the parties agreed that on a single-tie basis these Commission Targets were reasonably achievable.
Schedule 4 provides for a calculated proportion of the Aggregate Benefits to become repayable in the event that the Appointed Representative’s Cumulative Commission Earnings for any year are less than the specified Cumulative Commission Target for that year.
Clause 13.1 of each Agreement provides for a contractual duration of 5 years, but that is a maximum duration, since under clauses 13.2 and 13.3 either party may terminate the Agreement at any time on giving 2 months’ notice. If either party does terminate the Agreement during the 5 year period, a calculated proportion of the Aggregate Benefits will be repayable by the Appointed Representative if its Cumulative Commission Earnings are less than the Five Year Commission Target. In effect, as I understand the Agreement, in such circumstances the Aggregate Benefits are treated as if they would have been amortised over the 5 year period, so that premature termination results in the unamortised Benefits being repayable.
We had no submissions on the meaning or effect of clauses 5.5 of the Agreement and clause 1.6 of Schedule 4. However, the expression “manifest error” in the present context is not as unambiguous as might at first seem. “Manifest” may mean “apparent on the face of the document”, as where the document is a certificate under clause 1.6 of Schedule 4. If so, it may be difficult to see how any error could be manifest in that sense. I think, therefore, that “manifest” in this context has the wider meaning of “obvious”.
I would expect the Appointed Representative to be able to keep track of the commission payable on policies and other financial products it sold pursuant to the Agreement, and on commission clawbacks resulting from its clients cancelling or terminating policies. If so, it would have no difficulty in itself calculating its Commission Earnings, and from that in making the calculations set out in Schedule 4. It should therefore be able to demonstrate that any statement or certificate signed by AXA for the purposes of clause 1.6 of that Schedule, if incorrect, is subject to a manifest error. In my view, therefore, clause 1.6 is a reasonable provision for the purposes of UCTA.
For similar reasons I consider clause 5.5 to be reasonable. A failure of AXA to pay commission on a policy taken out by a client of an Appointed Representative which it has brought about will be an obvious, and therefore manifest, error on the part of AXA.Any incorrect calculation of commission will similarly be challengeable as subject to such error: any such calculation will be obviously wrong.
Very different considerations apply to clause 15.2. It is signposted in the list of contents, under the heading “Set Off”, so that it should be obvious to the Appointed Representative that there is a contractual provision affecting rights of set off. Clause 15.1 expressly authorises AXA to set off any liability of the Appointed Representative against sums payable to it. Clause 15.2, on the other hand, would prevent the Appointed Representative who is owed commission from being able to set off what it is owed against its liability under Schedule 4, and also prevent the Appointed Representative from being able to set off his claim for damages for factual misrepresentation. We have no explanation of AXA’s requirement for this clause. In the absence of such an explanation, I would hold that it has not shown that the clause is reasonable for the purposes of UCTA.
Rix LJ
Issue 1: Clause 24: the entire agreement clause
The Respondents accepted that in view of the decision of this Court in Springwell Navigation Corp v J P Morgan Chase Bank [2010] EWCA Civ 1221, by which we are bound, an entire agreement clause such as clause 24 in a signed written agreement is effective in accordance with its terms. However, the Respondents reserved their right to seek to argue in the Supreme Court that Springwell was wrongly decided. All parties accepted that as a matter of the construction of clause 24 it was effective to exclude collateral warranties. The Appellant submitted that it was also effective as a matter of its true construction to exclude misrepresentations or liability for them. The Respondents submitted that it was insufficiently clear and unequivocal to exclude misrepresentations or liability for them. For the Appellant, Mr Picken QC submitted that clause 24 excluded any implied terms. Mr Spink QC, for the Defendants in the Ideal, Bennett and Mortgage UK proceedings, submitted that it did not, and his submissions were adopted by Mr McMeel on behalf of the Defendants in the Kymin proceedings.
The effect of clause 24 on misrepresentations is less clear than its effect on what might in its absence be collateral warranties. Since this is a question of construction, it depends on the precise words of the clause and indeed of the Agreement as a whole, and it is not necessarily helpful to rely on judgments on differently worded provisions. There is nonetheless a comparison to be made with the provisions considered by the Court of Appeal in Deepak v ICI [1999] 1 Lloyd’s L Rep 387, which was held to exclude collateral warranties but not misrepresentations, and to the clause considered by Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC). Furthermore, there are, as Mr Picken accepted, well known contractual provisions that clearly and unequivocally refer to misrepresentations.
I have no doubt that clause 24 does not exclude or supersede misrepresentations as to matters that are not the subject of the terms of the Agreement. Notwithstanding the words “This Agreement … constitute the entire agreement and understanding between us in relation to the subject matter thereof” and “this Agreement shall supersede any prior … representations … between you and us relating to the subject matter of this Agreement” I do not think that the clause is sufficiently clear for this purpose. Indeed, I have difficulty in seeing how a written agreement can “supersede” a representation that does not relate to the terms of the agreement. Thus I think that a representation by AXA such as “We are the largest insurance company in the country”, if false and relied upon, is not superseded by the clause.
In an effort to give some effect to the inclusion of the word “representations”, I initially considered that a representation that relates to the terms of the Agreement could be excluded or superseded. However, having read and been convinced by Lord Justice Rix’s compelling judgment, I have resiled from this position. In summary, in addition to the difficulty of reading “representations” as including “misrepresentations”, as Lord Justice Rix points out, such representations do not relate to “the subject matter” of the Agreement, but to the terms of the Agreement. The context too points away from the interpretation contended for by AXA.
It follows that clause 24 has no effect on misrepresentations of fact. I would add, however, that it seems to me that most of the statements alleged to be misrepresentations may well be, on analysis, either advice or what in the absence of clause 24 would be at best collateral warranties.
In the case of Campbell Martin, the implied terms referred to in the order for the trial of the preliminary issues are:
8.1 AXA would process all business submitted to it by (Campbell Martin) with reasonable care and without any unreasonable delay.
8.2 AXA would ensure that its computer processes operated efficiently so as to facilitate the completion of business submitted without unreasonable delay.
8.3 AXA would not unreasonably delay or unreasonably refuse or fail to approve the appointment of suitable company representatives recruited by (Campbell Martin).
The same assumed implied terms are set out in the orders in the Harry Bennett and Ideal Financial proceedings. No implied terms are mentioned in the Kymin order.
None of the orders specifies the basis for the implication of the terms alleged by the Defendants. It is apparent, however, that the Defendants allege that they are to be implied in order to give business efficacy to the Agreements. In other words, the implied terms are said to be intrinsic to the Agreements, and true implications. In my judgment, such terms, if otherwise to be implied, are not excluded by clause 24. As intrinsic provisions of the Agreement, they are within the expression “This Agreement and the Schedules and documents referred to herein” in the first sentence, and they are not “prior” to the Agreement, and therefore are unaffected by the second sentence. The Agreement might have included, but does not include, an express specific exclusion of such implied terms.
On the other hand, terms that might be implied as a result of matters extrinsic to the written Agreements would, in my view, be excluded by clause 24.
It follows, in my judgment, that Issue 1 cannot be answered by a simple “Yes” or “No”, because most of the alleged representations are not representations of fact. However, the exclusion of alleged collateral warranties should be given a simple affirmative answer, and the exclusion of the alleged implied terms should be given a simple negative answer.
Issue 2: Clause 15.2: no set off
Apart from UCTA, I see no basis in the assumed facts set out in the orders for the trial of the preliminary issues for clause 15.2 not to take effect in accordance with its terms: see Coca Cola Financial Corp v Finsat Ltd [1998] QB 43. Mr Spink and Mr McMeel sensibly did not contend that it does not do so.
There was a suggestion that a defendant could seek a stay of any judgment obtained by AXA pending determination of its counterclaim. I do not think that this is right. It would be inconsistent with clause 15.2 for the court, in the exercise of its discretion, to order such a stay: see Coca Cola Financial Corp v Finsat Ltd at 858H to 859A, Continental Illinois National Bank vPapanicolaou [1986] 2 Lloyd’s Rep 441.
Issue 3: clause 1.6 of Schedule 4: conclusive evidence
Although the order for the trial of preliminary issues referred to clause 1.6, and not to clause 5.5, they have similar functions and effect. I shall refer to clause 1.6, but the issues it raises apply equally to clause 5.5.
Again, there was no dispute before us as to the contractual effect of clause 1.6. Such clauses have long been used: see Society of Lloyd’s v Fraser and ors (unreported, Court of Appeal 31 July 1998); see too IIG Capital v Van der Merwe [2008] EWCA Civ 542. Clause 1.6 takes effect in accordance with its terms. The answer to Issue 3 is Yes.
Issue 4: UCTA and section 3 of the Misrepresentation Act 1967
(a) Scope
(i) Clause 24
It is common ground that the Agreements were on AXA’s standard terms of business, so that section 3 of UCTA applies to them. The Respondents contend that both that section and section 3 of the Misrepresentation Act 1967 apply to them. The Appellants submitted that neither provision does, since the effect of clause 24 is to exclude any effective misrepresentation or collateral warranty.
An entire agreement such as clause 24 is not an exemption clause of the kind with which UCTA was and is principally concerned. Since it prevents any collateral contract or warranty from coming into existence, it is not the subject of section 3(2)(a), since there is no collateral contract of which AXA could be in breach. Nor does section 13 materially assist the Respondents, for the same reason.
However, different considerations apply to section 3(2)(b)(i). Quite how that ‘paragraph’ should operate is not entirely clear, as is demonstrated by the somewhat tentative discussion in Chitty on Contracts, 30th edition, at paragraph 14-073. I have no doubt that it is principally aimed at the small print that entitles a party to a contract to provide something other than that defined by the principal terms of the contract, as where a holiday company reserves the right to substitute a hotel or resort for that specified in the main part of the contract. In most cases, as Chitty suggests, the performance reasonably expected of a party is that which is defined by the written contract between the parties. But this ‘paragraph’ of section 3 refers not to the performance specified in the contract but to the performance “which was reasonably expected” of that party. It seems to me that in appropriate circumstances a pre-contractual representation or promise may affect the performance that is reasonably expected of a party. It follows that clause 24 may be subject to the reasonableness test in UCTA in relation to both collateral warranties and representations. However, section 3(2)(b)(i) will only come into play in the present cases if it is possible to identify both the performance by AXA that was reasonably expected and that defined by the contract. The effect of clause 24, if any, on a representation such as “We are the largest insurance company in England” will not be within the scope of section 3(2)(b)(i).
Mr Picken submitted that, since the effect of clause 24 is that the parties agree that there have been no misrepresentations, section 3 of the Misrepresentation Act cannot apply to it. While I see the logic of his submission, to my mind his approach to section 3 is too formalistic. Looked at sensibly and practically, if, contrary to my view, clause 24 has the effect for which he contends, it excludes AXA’s liability for misrepresentations it made, and would be subject to the statutory requirement of reasonableness in this respect too.
(ii) Clause 15.2
In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 the Court of Appeal held that a provision materially identical to clause 15.2 was within the scope of section 3 of UCTA as extended by section 13. That decision is binding on us, even if I disagreed with it, which I do not. The clause is valid only to the extent that it is reasonable.
(iii) Clause 1.6 of Schedule 4: conclusive evidence
It is common ground that clause 1.6 of Schedule 4 is subject to the requirement of reasonableness in UCTA. In my judgment, this is correct. Clause 1.6 does have the effect of excluding the Defendants’ right of set off, which, if it is an equitable set off, goes to reduce the sum due from them to AXA.
Have AXA satisfied the requirement of reasonableness?
The position of the parties in relation to this issue changed during the course of the hearing. Initially, all counsel asked the Court to decide this issue notwithstanding the lack of any decision by the judge and the lack of relevant findings of fact. However, during the course of the hearing, concerns were expressed, not least by myself, that the Court was being asked a hypothetical question, on incomplete or non-existent factual findings. This led Mr Spink QC to reconsider his position, and ultimately to submit that the Court should not address this issue. In the end, the Court decided to hear full submissions, with a view to then deciding whether or not it should address and answer this issue.
I fully understand and sympathise with the desire of the parties to obtain even a qualified or provisional answer on this issue. The sums involved in this litigation are not great, and anything that will assist the parties to resolve their differences without incurring the costs of a full trial is to be supported.
Whether the requirement of reasonableness is satisfied depends not only on the terms of the contract and the contractual provision in question, but also on “the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. Section 11 of UCTA expressly requires the Court to have regard to such circumstances, as Mr McMeel pointed out. The Act requires the Court to have regard in particular to the matters set out in Schedule 2. They are:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); …
Paragraphs (d) and (e) are inapplicable to the present claims.
The Defendants pointed out that AXA had failed to plead the facts and matters it relied upon for its case that the terms in issue were reasonable. Indubitably, AXA should have done so, but it seems that no objection was made to the evidence being adduced by AXA below, and it is now too late for the Defendants to take this pleading point. Nonetheless, the lack of proper pleading, by either AXA or by the Defendants, has I think resulted in a lack of appropriate analysis.
The only evidence before the judge, apart from the matters set out in the agreed orders for the trial of the preliminary issues, was given by Sean McKillop, an employee of AXA. Relatively little of his cross-examination addressed the issues that require to be addressed under UCTA.
In my judgment, the starting point in the consideration of the question of reasonableness is that the Agreements were made between commercial organisations and in a commercial context. Admittedly, AXA was an immeasurably larger organisation than the companies with which it contracted, and the guarantors of the companies’ liabilities were, I assume, persons of modest means. However, as financial advisors, they were accustomed to deal with written agreements, such as insurance and pension policies, and I think it fair to assume that they would generally, if not always, advise their clients to ensure that they were content with the written terms of their policies. I would therefore have expected the Defendants to have read the Agreements, and in the case of the individual Defendants the guarantees that they signed. The Agreements state both on the front page and in the veryfirst clause 1.1 that they set out the terms of the company Defendants’ appointment as AXA’s Appointed Representative. The contents page lists in capital letters clause 15 entitled “Set Off”, and clause 24, entitled “Entire Agreement”. Clause 1, which I would expect a Defendant to read first, makes it clear in clauses 1.8 and 1.9 that there are restrictions on the right to sell products other than AXA’s, as does clause 2.1.
None of the Defendants gave evidence that they had not read or had not had an adequate opportunity to read the Agreement into which he entered, or which he signed on behalf of a company. Nor was it suggested to Mr McKillop that they had had no such opportunity (though it may well be that he would have been unable to give any evidence on the point). The contractual provisions in issue are not unusual in the insurance industry: the evidence before the judge was that they are standard terms. Two of the company Defendants, Ideal Financial Planning and Harry Bennett, had entered into previous agreements with AXA on materially identical terms.
In these circumstances, I consider that the Defendants “knew or ought reasonably to have known of the existence and extent” of the terms in question.
If it be right that other insurance companies required their representatives to enter into similar contracts, it cannot be said that the Defendants had “an opportunity of entering into a similar contract with other persons, but without having to accept a similar term”. However, they could have carried on business, or continued to carry on business, as independent financial advisers. If they had done so, they would have had to be authorised as IFAs by the FSA, whereas as a result of entering into the Agreements their authorisation and their regulation became the responsibility, and a cost, of AXA. To have been directly authorised by the FSA would have involved work and expense, as Mr McKillop said in evidence, but the approximate sums involved, or indeed the procedures involved, were not in evidence. I can assume that the cost and work involved in being a wholly independent financial adviser are not so great as to make it an impracticable alternative to regulation through an insurance company, since if they were there would be no independent financial advisers. Clearly avoiding the costs involved in direct authorisation is an incentive to regulation as an appointed representative of, and through, an insurance company, and to this extent the Defendants could have avoided terms such as those now in issue.
The purpose of entire agreement clauses such as clause 24 is obvious. It was accurately described by Lightman J in Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s L Rep 611:
7. The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract 28th ed. Vol 1 para 12-102: it is to denude what would otherwise constitute a collateral warranty of legal effect.
A clause such as clause 24 gives both sides certainty as to the terms of their contract. In circumstances in which the sums involved in any dispute are likely to be relatively modest, if unchallenged it has the effect of limiting the costs involved in litigation; indeed, it may result in litigation being avoided. It is nonetheless more beneficial to AXA than to the Defendants, since it is AXAwho decided on the terms of the Agreement.
The effect of clause 24 is limited to collateral warranties. I consider that sensible parties, faced with a written agreement of the length and detail of the Agreements, would not expect it to be attended by oral collateral agreements, and would expect their contract to be contained in the document they sign. Furthermore, if the Appointed Representative is dissatisfied, it may at any time terminate the Agreement under clause 13.3 on 2 months’ notice. This is a relatively short notice period. Thus the Appointed Representative is not tied in to the Agreement for an extensive period.
Weighing up all these considerations, I have concluded that clause 24 was a reasonable provision to have been included in the Agreements.
In relation to clause 15.2, in my judgment in considering whether it is a reasonable provision it is necessary to consider what were the claims that when entering into the Agreements the parties would have envisaged as falling within “All monies payable by you to us under this Agreement” and what “credit, set-off or counterclaim” they would or should have envisaged as being available to the Defendants. The former would be clawbacks of commission, due from the Defendants as a result of cancellation or termination of insurance policies by their clients, and moneys repayable under Schedule 4.
Schedule 4 concerned the financial and other assistance provided by AXA to the Defendants under the Agreements. In the case of Campbell Martin, for example, AXA provided a “Business Benefits Allowance” of £43,032 and an “Initial Development Allowance” of £77,000, plus a number of computers and printers. Paragraph 1.1.3 of Schedule 4 required the Development Allowance to be used for the purpose of developing the business carried on by the Defendants pursuant to their Agreement: an unspecific obligation. Paragraph 1.1.4 was even less specific in relation to the Business Benefits Allowance, providing only that it was provided by AXA “on the terms from time to time applicable to the Business Benefit in question a copy of which will be supplied on request”. Those terms are not in evidence. The total of the Development Allowance and the Business Benefits Allowance was referred to as “the Aggregate Benefits”.
Schedule 4 also specified Annual Commission Targets and a “Five Year Commission Target”. The total of the Annual Commission Targets was the Five Year Commission Target of £1,763,720. Each of these figures seems to be a calculated figure: for example, the Year 3 Commission Target is £367,224. There is no evidence or information before the Court as to how or on what basis these Commission Targets were arrived at and agreed. They are not the same in the Agreements in issue in these appeals, but were specific to and different in each Agreement. If I have to make any assumption, given that the Agreements must be construed as a whole and the orders for the trial of the preliminary issues do not include any assumption that the figures were arrived at on any basis inconsistent with the other provisions of the Agreements, I would assume that the parties agreed that on a single-tie basis these Commission Targets were reasonably achievable.
Schedule 4 provides for a calculated proportion of the Aggregate Benefits to become repayable in the event that the Appointed Representative’s Cumulative Commission Earnings for any year are less than the specified Cumulative Commission Target for that year.
Clause 13.1 of each Agreement provides for a contractual duration of 5 years, but that is a maximum duration, since under clauses 13.2 and 13.3 either party may terminate the Agreement at any time on giving 2 months’ notice. If either party does terminate the Agreement during the 5 year period, a calculated proportion of the Aggregate Benefits will be repayable by the Appointed Representative if its Cumulative Commission Earnings are less than the Five Year Commission Target. In effect, as I understand the Agreement, in such circumstances the Aggregate Benefits are treated as if they would have been amortised over the 5 year period, so that premature termination results in the unamortised Benefits being repayable.
We had no submissions on the meaning or effect of clauses 5.5 of the Agreement and clause 1.6 of Schedule 4. However, the expression “manifest error” in the present context is not as unambiguous as might at first seem. “Manifest” may mean “apparent on the face of the document”, as where the document is a certificate under clause 1.6 of Schedule 4. If so, it may be difficult to see how any error could be manifest in that sense. I think, therefore, that “manifest” in this context has the wider meaning of “obvious”.
I would expect the Appointed Representative to be able to keep track of the commission payable on policies and other financial products it sold pursuant to the Agreement, and on commission clawbacks resulting from its clients cancelling or terminating policies. If so, it would have no difficulty in itself calculating its Commission Earnings, and from that in making the calculations set out in Schedule 4. It should therefore be able to demonstrate that any statement or certificate signed by AXA for the purposes of clause 1.6 of that Schedule, if incorrect, is subject to a manifest error. In my view, therefore, clause 1.6 is a reasonable provision for the purposes of UCTA.
For similar reasons I consider clause 5.5 to be reasonable. A failure of AXA to pay commission on a policy taken out by a client of an Appointed Representative which it has brought about will be an obvious, and therefore manifest, error on the part of AXA.Any incorrect calculation of commission will similarly be challengeable as subject to such error: any such calculation will be obviously wrong.
Very different considerations apply to clause 15.2. It is signposted in the list of contents, under the heading “Set Off”, so that it should be obvious to the Appointed Representative that there is a contractual provision affecting rights of set off. Clause 15.1 expressly authorises AXA to set off any liability of the Appointed Representative against sums payable to it. Clause 15.2, on the other hand, would prevent the Appointed Representative who is owed commission from being able to set off what it is owed against its liability under Schedule 4, and also prevent the Appointed Representative from being able to set off his claim for damages for factual misrepresentation. We have no explanation of AXA’s requirement for this clause. In the absence of such an explanation, I would hold that it has not shown that the clause is reasonable for the purposes of UCTA.
Farrans Construction v. RMC Ready Mixed Concrete [2004] ScotCS 51
Lord Drummond Young
[47] Section 14(3) of the Sale of Goods Act 1979 is in the following terms:
“Where the seller sells goods in the course of business and the buyer, expressly or by implication, makes known —
(a) to the seller…
any particular purpose for which the goods are being bought, there is a implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which the goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill and judgment of the seller…”.
The finding that Mr Gillanders did not rely on the skill and judgment of Mr Hendry in relation to the selection of C7 concrete as a mix suitable for any particular purpose brings the present case quite clearly within the first part of the exception found at the end of section 14(3). I am further of opinion that the present case falls within the second part of the exception. The pursuers had employed Avoidatrench as a specialist drilling subcontractor; moreover, the pursuers themselves were clearly very experienced civil engineering contractors. Mr Gillanders stated that the decision to use C7 foamed concrete had been made by the pursuers and Avoidatrench. In addition, Mr Gillanders did not tell Mr Hendry how the pumping operation was to be carried out by the pumping contractor, nor inform him of the pursuers’ proposed method of working on site, nor tell him the depth of the shaft into which the concrete was to be poured. In these circumstances I do not consider it reasonable for the pursuers to rely on the skill and judgment of the defenders in the selection of C7 concrete as suitable for being placed by pump. I accordingly reject the pursuers’ alternative argument based on section 14(3) of the 1979 Act.
Unfair Contract Terms Act 1977
[48] The defenders make use of standard conditions of sale, and it was a matter of agreement between the parties that those conditions had been incorporated into their contract. Clause 9 of those conditions, so far as material, is in the following terms:
“… [L]iability in respect of any… breach shall be limited to the direct costs which would necessarily be incurred by the Customer in the breaking out and in the removal of any concrete in question and to any replacement by RMC of the concrete in question and to any other direct costs which would necessarily be incurred by the Customer in carrying out repair or reinstatement. RMC shall not be liable for indirect or consequential damage or loss in relation to any breach…”.
The defenders rely on clause 9 to exclude any liability on their part for indirect or consequential damage sustained by the pursuers. The pursuers respond that section 17 of the Unfair Contract Terms Act 1977 applies to clause 9, and that in terms of that section it was not fair and reasonable to incorporate the clause into the contract. (I should add that both sections 17 and 20 of the 1977 Act are relied on in the pursuers’ pleadings, but in his submissions made at the close of the proof the pursuers’ counsel relied only on section 17).
[49] Section 17 is in the following terms:
“(1) Any term of a contract which is a… standard form contract shall have no effect for the purpose of enabling a party to the contract —
(a) who is in breach of a contractual obligation, to exclude or restrict any liability of his to the… customer in respect of the breach;
…
if it was not fair and reasonable to incorporate the term in the contract.
(2) In this section, ‘customer’ means a party to a standard form contract who deals on the basis of written standard terms of business of the other party who himself deals in the course of a business”.
Section 24 of the 1977 Act, so far as material, provides as follows:
“(1) In determining for the purposes of this Part of the Act whether it was fair and reasonable to incorporate a term in the contract, regard shall be had only to the circumstances which were or ought reasonably to have been in the contemplation of the parties to the contract at the time the contract was made.
…
(4) The onus of proving that it was fair and reasonable to incorporate a term in a contract… shall lie on the party so contending”.
……
Conclusion
[59] In conclusion, therefore, I answer the parties’ first question by holding that the terms of their contract were as described in paragraph [13] above. The pursuers ordered C7 foamed concrete from the defenders, and that is properly to be understood as indicating two things. First, the concrete will be of relatively low strength and low density; the mean strength will be approximately 14 N/mm2, and the distribution curve of typical strengths will be approximately as described in paragraph [9] above. Secondly, the strength of the concrete will be such that it can be broken easily, and thus put to the uses that are characteristic of C7 foamed concrete. I answer the parties’ second question by holding, as indicated in paragraph [42] above, that the defenders were not in breach of the express term of the parties’ contract that the concrete supplied should be C7 foamed concrete; nor were they in breach of the implied terms contained in sections 13(1) and 14(3) of the Sale of Goods Act 1979. I answer the parties’ third question by holding that it was fair and reasonable to incorporate clause 9 of the defenders’ standard terms and conditions into the contract. The answers to the first and, in particular, the second of these questions are obviously conclusive as to the liability of the defenders to the pursuers. In these circumstances I consider it appropriate to sustain the third and fourth pleas-in-law for the defenders and to assoilzie the defenders from the conclusions of the summons.
Zockoll Group Ltd v Mercury Communications Ltd
[1997] EWCA Civ 2317 [1998] FSR 354, [1998] 1 FSR 354, [1997] EWCA Civ 2317
Philips LJ
Zockoll’s attempt to rely upon this decision in the court below was unsuccessful. The Vice-Chancellor held that there was the following significant distinction between that case and this (page 13 of the judgment):
“… the agreement between Timeload and BT involved only one number. The withdrawal of the number necessarily involved termination of the contract. In the present case, there are 53 numbers allocated under the contract in question. The power that has been exercised by Mercury is not the termination power conferred by para.2 but the power to withdraw any number allocated under the agreement, a power conferred by para.8.1. There are other factual differences between the Timeload case and the present case.”
As to reliance on the 1977 Act, he said (at page 16):
“I can see no reasonably arguable basis for alleging that in this case there has been a breach of contract by Mercury in withdrawing the 0500 354448 number. Accordingly, issues regarding the adequacy of damages and balance of convenience do not, in my judgment, arise. Those are matters which it seems to me, on the arguments I have heard, are fairly balanced between the two sides. If, however, all that there is between the parties is a question of the length of notice that ought to have been given to qualify with the reasonable notice requirement, then in my view the balance of convenience would fall firmly against the grant of an interlocutory injunction. I can see that something more than a 14 days notice might reasonably be argued for. Whether the argument would succeed would depend upon a number of issues and the examination of all the facts of the case. I cannot contemplate, however, that the requisite notice would be more than, at most, six months. The difference between a 14-day notice and a six-month notice would be something that could be dealt with by damages. I do not myself think the amount could be very great, since the ability of Zockoll to achieve a worthwhile commercial exploitation of these alpha-numeric numbers seems still to be some distance away.”
Miss Heilbron argued that the significant features in Timeload are equally to be found in the present case and that the Vice-Chancellor fell into error in drawing a distinction between the two. In particular:
1) In each case the customer required a specific telephone number or numbers for a specific purpose of which the supplier was made aware when the contract was concluded.
2) In each case, the contract made provision for termination for specified causes.
3) In each case the supplier claimed to be entitled to withdraw numbers under an additional clause which purported to permit this with or without good reason.
4) In each case the withdrawal would defeat the very object for which the customer had entered into the contract.
For Mercury, Mr Michael Douglas Q.C. argued that the Vice-Chancellor had been correct to distinguish the present case from Timeload. He relied particularly upon two grounds of distinction:
1) The right to withdraw a number under Clause 8(1) was subject to a requirement to give reasonable notice. That rendered it impossible to contend that the clause was unreasonable. The length of notice would necessarily be tailored to the extent needed to render operation of the right of withdrawal reasonable. In an extreme case this might require as much as ten years’ notice to be given.
2) Mercury had withdrawn only one number out of 53 covered by the contract. It was impossible to contend that this rendered contractual performance “substantially different” from what was reasonably expected or that it “rendered no performance at all” in respect of part of Mercury’s contractual obligation.
I appreciate the force of both these arguments, but they do not persuade me that they necessarily lead to the conclusion that
Feldarol Foundry Plc v Hermes Leasing (London) Ltd & Anor
[2004] EWCA Civ 747 Tuckey LJ
Section 6 (2) of the Unfair Contract Terms Act 1977 states that:
“(2) As against a person dealing as consumer, liability for breach of the obligations arising from –
(a) …..
(b) section ….. 10 ….. of the 1973 Act …..
cannot be excluded or restricted by reference to any contract term.”
It goes on to say:
“(3) As against a person dealing otherwise than as consumer, the liabilities specified in sub-section (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.”
The first question is whether in this transaction the respondent was a person dealing as consumer. If he was, the term implied by Section 10 of the 1973 Act could not be excluded. Section 12 of the 1977 Act states that –
(1) A party to a contract ‘deals as consumer’ in relation to another party if –
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and
(b) the other party does make a contract in the course of a business; and
(c) in the case of a contract governed by the law of ….. hire purchase ….. the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.”
In this case it is common ground that conditions (b) and (c) are met: the appellant made the contract in the course of its business and the goods were of a type ordinarily supplied for private use.
In dealing with this question the judge said:
“On first considering this question, it seemed to me that [the respondent] must have been acting in the course of its business. It is a company, which was purchasing a motor car for the purpose of providing the motor car to its managing director as a part of the rewards of his employment. It also seemed to me that [the respondent] had held itself out as acting in the course of its business by the terms of the agreement which provide a statement of the nature of the business and the number of years it has been established, which was signed by Mr Beresford in his capacity as director, and which includes a declaration under which Mr Beresford signed ‘I confirm that I/we have selected the goods and that they will be used for the purposes of my/our business.”
However, he went on to hold that he was bound to conclude that the respondent had dealt as consumer by the decision of this court in R & B Customs Brokers Co Ltd v United Dominion Trust Ltd [1988] 1 WLR 321. The facts in that case could not be realistically distinguished from those of the present case.
In R & B a company had bought a car for use by one of its directors from a finance company under a credit sale agreement. The company was a freight forwarder and shipping agency. The car was defective and the company claimed damages against the finance company for breach of the fitness for purpose term implied by Section 14 (3) of the Sale of Goods Act 1979. The finance company sought to rely on exclusion clauses in its agreement, to which Section 6 of the 1977 Act applied, if the company bought the car as consumer. In reserved judgments Dillon and Neil LJJ held that it could not do so because the company had dealt as consumer within the meaning of Section 12 of the 1977 Act. At page 328 H Dillon LJ said:
“In the present case there was no holding out beyond the mere facts that the contract and the finance application were made in the company’s corporate name, and in the finance application the section headed ‘Business Details’ was filled in to the extent of giving the nature of the company’s business as that of shipping brokers, giving the number of years trading and the number of employees, and giving the names and addresses of the directors. What is important is whether the contract was made in the course of a business.
In a certain sense, however, from the very nature of a corporate entity, where a company which carries on business makes a contract, it makes that contract in the course of its business; otherwise the contract would be ultra vires and illegal. Thus, where a company which runs a grocer’s shop buys a new delivery van, it buys it in the course of its business. Where a merchant bank buys a car as a ‘company car’ as a perquisite for a senior executive, it buys it in the course of its business. Where a farming company buys a landrover for the personal and company use of a farm manager, it again does so in the course of its business. Possible variations are numerous. In each case it would not be legal for the purchasing company to buy the vehicle in question otherwise than in the course of its business.”
Dillon LJ went on to refer to the decision of the House of Lords in Davies v Sumner [1984] 1 WLR 1031, a case which was decided under the provisions of the Trade Descriptions Act 1968, where the House of Lords held that a self-employed courier who sold his car and falsely represented its mileage had not supplied a false trade description “in the course of a trade or business”, so it had not been guilty of an offence under the Act. Lord Keith had delivered the only speech in that case. He relied on the fact that the car had not been sold as an integral part of the defendant’s business and that a degree of regularity was required before it could be shown that something had been done in the course of a trade or business. Dillon LJ continued at page 330 G:
“I find pointers to a similar need for regularity under the Act of 1977, where matters merely incidental to the carrying on of a business are concerned, both in the words which I would emphasise ‘in the course of’ in the phrase ‘in the course of a business’ and in the concept, or legislative purpose, which must underlie the dichotomy under the Act of 1977 between those who deal as consumers and those who deal otherwise than as consumers.
This reasoning leads to the conclusion that, in the Act of 1977 also, the words ‘in the course of business’ are not used in what Lord Keith called ‘the broadest sense’. I also find helpful the phrase used by Lord Parker CJ and quoted by Lord Keith, ‘an integral part of the business carried on’. The reconciliation between that phrase and the need for some degree of regularity is, as I see it, as follows: there are some transactions which are clearly integral parts of the businesses concerned, and these should be held to have been carried out in the course of those businesses; this would cover, apart from much else, the instance of a one-off adventure in the nature of trade, where the transaction itself would constitute a trade or business. There are other transactions, however, such as the purchase of the car in the present case, which are at highest only incidental to the carrying on of the relevant business; here a degree of regularity is required before it can be said that they are an integral part of the business carried on, and so entered into in the course of that business.
Applying the test thus indicated to the facts of the present case, I have no doubt that the requisite degree of regularity is not made out on the facts.”
Neill LJ agreed. In his judgment, at page 336D, he said:
“It is of course true that section 1 of the Trade Descriptions Act 1968 creates a criminal offence whereas the other sections to which I have referred create no more than obligations in the civil law. Nevertheless, it would be unsatisfactory in my view if, when dealing with broadly similar legislation, the courts were not to adopt consistent construction of the same or similar phrases.”
Mr Richard Maurey QC, for the appellant, makes a number of submissions on this part of the case. In ascending order of ambition they are:
(1) that the judge should have distinguished R & B on the facts;
(2) R & B was the decision of a two-man court which conflicts with the more recent decision of this court in Stevenson v Rogers [1999] QB 1029, and so should not be followed;
(3) that R & B was wrongly decided; and
(4) this court should hold that a company can never deal as consumer for the purposes of this legislation.
I think Stevenson v Rogers provides the answer to a number of these submissions. In that case a fisherman had sold one of his fishing boats to the plaintiffs who claimed damages for breach of the implied term as to merchantable quality in Section 14 (2) of the Sale of Goods Act 1979 in its unamended form. The question was whether the sale had been made by the defendant “in the course of a business”. In allowing the appeal, this court held that it had. The judge had relied on R & B. After an exhaustive analysis of the legislative history of Section 14 (2), including a Pepper v Hart excursion, Potter LJ concluded that free of the restraints of precedent the words were intended to have their wide face value meaning. At page 1040 E he said:
“The question thus becomes, in my view, whether the decision in R & B ….. albeit relating to a separate section of the Act of 1979, is effectively binding upon us on the basis that the term ‘in the course of a business’ must be interpreted so as to bear the same meaning as between the different sections of the codifying Act in which it appears. While I recognise the force of that argument, I do not think it should prevail.
The Act of 1979 forms a single code: however that is upon the basis simply that it consolidates and enacts within one statute and without material amendment a number of disparate statutes previously governing the field of sale of goods. While, in the first instance, a consolidating Act is to be construed in the same way as any other, if real doubt as to its legal meaning arises, its words are to be construed as if they remained in the earlier Act. Thus, in terms of the proper construction of its provisions, the Act of 1979 is not to be regarded as more than the sum of its parts.
That being so, I would observe as follows in respect of the R & B ….. case. First, the ratio of the decision is limited to its context, namely the application of section 12 of the Act of 1977. Second, save for passing reference in the obiter dicta of Neill LJ to which I have referred, the meaning of the phrase ‘in the course of business’ in that section was not treated as coupled with, or dependent upon, the meaning of the phrase in section 14 (2). Thus the court gave no consideration to whether or not the legislative history of section 14 (2) might require it to be distinguished from section 12 of the Act of 1977 or, alternatively, if a common interpretation was called for, whether the construction of Section 12 should not be subordinated to that of section 14 (2). Third, the obiter dicta of Neill LJ which might suggest that the observations of Lord Keith should be applied generally in the case of a seller of goods lacked the benefit of contrary argument in relation to section 14 (2) and, not least (at a date well preceding Pepper v Hart ….. ) any reference to Hansard or the First Report of the Law Commission, of which this court has had the advantage.
It is of course desirable that, when identical phrases occur in associated sections of a statute, they should be construed to similar effect. I have little doubt that such was the original intention of the Law Commission and of Parliament in relation both to the modification of section 14 (2) made by section 3 of the Act of 1973 and the amendment to section 55 of the Act of 1893 made by section 4 of the Act of 1973, which referred to a ‘seller in course of a business’ when defining a ‘consumer sale.’ However, the latter provision did not survive for long. It was repealed and replaced by section 12 of the Act of 1977, which put in place a different formula in respect of exemption clauses, based upon either party ‘dealing as consumer,’ rather than upon a ‘consumer sale’ defined principally by reference to the seller. In my view, had the court in R & B ….. been concerned not with the Act of 1977, but with the definition of a consumer sale under the Act of 1973, it might well have concluded that the phrase ‘in the course of a business’ in section 55 of the Act of 1893, as amended, required to be construed in harmony with, and subject to, the proper construction of section 14 (2).
As to the proper construction of section 14 (2), given the clear view which I have formed, I do not consider it right to displace that construction simply to achieve harmony with a decision upon the meaning of section 12 of the Act of 1977. Section 14 (2) as amended by the Act of 1973 was itself a piece of consumer protection intended to afford wider protection to a buyer than that provided in the Act of 1893. Indeed, there is a sense in which the decision in the R & B case can be said to be in harmony with that intention. It dealt with the position of consumer buyers and the effect of adopting the construction propounded in Davies v Sumner ….. in relation to section 12 (1) (a) of the Act of 1977 was to further such buyers’ protection. In the context of its statutory history, section 14 (2), as amended by the Act of 1973 and re-enacted in the Act of 1979, is the primary provision in the overall scheme of increased protection for buyers which the Act of 1973 initiated. To apply the reasoning in the R & B case ….. in the interests only of consistency, thereby undermining the wide protection for buyers which section 14 (2) was intended to introduce, would in my view be an unacceptable example of the tail wagging the dog. Accordingly, I would hold that there was an implied term ….. in the contract [in that case].”
Butler Sloss LJ and Sir Patrick Russell agreed with Potter LJ.
It is clear from this decision that the court felt bound by R & B. The fact that it was a decision of a two-man court is not to the point. It was and is a decision which is binding on this court. Secondly, the decision is not inconsistent with R & B. Lord Justice Potter explains in the passage I have cited at length how the two decisions can be reconciled. An interpretation of the words “deals as consumer” in the 1997 Act, which gave increased protection for consumer buyers, was consistent with the wide meaning which the court gave the words “seller in the course of a business” in the 1979 Act.
This disposes of Mr Maurey’s second, third and fourth submissions. In argument this morning he subjected R & B to sustained criticism: no reason is given as to why the meaning of words in the Trade Descriptions Act should be the same as in the 1977 Act; “integral part of the business” and “regularity” do not appear in the statute: application of such tests will produce anomalous results. Far better, he said, to go for a root and branch solution which was simply to say that a company can never be a consumer for the purpose of this legislation. This was consistent with other consumer protection legislation and regulations where consumers are defined as natural rather than legal persons.
But none of this answers the point that R & B is binding on us. It is a reported decision that has stood unchallenged for more than 15 years, during which time the relevant provisions in the 1977 Act have stood unamended. If harmonisation of the various provisions dealing with consumer protection is required, that is Parliament’s job. If R & B is to be challenged, that cannot be done in this court.
It is only therefore Mr Maurey’s first submission which survives in this part of the case. Here he relies on a number of points which he says distinguish this case from the facts in R & B. R & B was a one-man private company. The respondent is a public company. The car must have been put through the company’s books and treated as part of its assets. But I do not think that these factors enable us to distinguish this case from R & B which was not decided on a one-off basis or related specifically to the size of the company. The car in that case must also have been put through the company’s books.
Mr Maurey however does have a further point of distinction. He says that by its declaration in the agreement signed by Mr Beresford that “I/we confirm that I/we have selected the goods and they will be used for the purposes of my/our business” and the acknowledgment by the hirer in the terms themselves that “the goods will be used for his own business purposes”, the respondent had held itself out as making the contract in the course of a business within the meaning of Section 12 (1) (a) of the 1977 Act.
I do not accept this submsision. Neither the declaration or the acknowledgment are directed to the capacity in which the respondent is dealing. They deal with the use to which the car is intended to be put. They say nothing about whether the buying of cars is an integral part of the company’s business or the regularity of such transactions.
It follows from what I have said that I think the appellant’s first and main ground of appeal fails. This makes it unnecessary to consider whether the judge was right to conclude that clause 4 of the terms and conditions failed to satisfy the requirement of reasonableness. Suffice it to say that I think there is much in the appellant’s argument that it was reasonable for much the same reasons as Dillon LJ gave for reaching the same conclusion in R & B.
This therefore brings me to the arguments about breach, rejection and affirmation. The appellant first says that the judge should not have held that there was a breach of Section 10 (2) of the 1973 Act. In reaching his conclusion that the defects in the car were sufficiently serious as to amount to a breach, the judge attached too much weight to Mr Beresford’s view of the car when it was the respondent company which was the hirer. Applying the objective standard demanded by Section 10 (2) (2A) and (2B), there was no breach as demonstrated by the relatively small cost of repairing the defects.
I disagree. There was ample evidence to justify the judge’s conclusion. Whether the car is a company car or individually owned, if it is potentially unsafe to drive because of defects in its steering and brakes it cannot be described as being of satisfactory quality. As the implied term was a condition of the contract – Section 10 (7) of the 1973 Act – its breach entitled the respondent to reject the car.
The appellant however says that the respondent did not reject the car or attempt to do so, at least until after he had affirmed the contract by accepting it. This he did by his arrangement to substitute the car, by his correspondence with TCA and the appellant and by paying the first instalment under the agreement after he knew of the defects.
The judge found that the respondent rejected the car on the ground that it was not of satisfactory quality when the appellant received the respondent’s solicitor’s letter of 23 August, to which I have referred. The appellant says this was too late. In reaching his conclusion that there had been rejection, the judge should have ignored the respondent’s dealings with the dealer since the agreement made it clear that the dealer was not the appellant’s agent.
Whether a buyer or a hirer has rejected or accepted goods under contracts of sale or supply of this kind is a broad issue of fact which does not depend upon technicalities or legal niceties. What the court must determine objectively from what the buyer or hirer has said or done is whether he has accepted or rejected the goods tendered in performance of the seller’s or owner’s contractual obligation to deliver goods of the contract quality.
Judged in this way, I think there was only one answer in this case. As the appellant was told within a very short time of delivery, the respondent had expressed his dissatisfaction with the Lamborghini and within days had returned it to the dealer. In his letter to the appellant of 12 August Mr Beresford made it clear that he had rejected the car and payment had been made under the agreement to keep it alive so that it could be rolled over for use with the substitute car which he was still expecting to be provided. In these circumstances, I fail to see how the appellant or anyone else could possibly have thought that the respondent had accepted the Lamborghini or, to put it another way, affirmed the agreement under which that car was to be hire-purchased by the respondent. The Lamborghini had self-evidently been rejected. The fact that the reasons for doing so emerged later is not to the point.
For these reasons I reject Mr Maurey’s arguments about rejection and affirmation.
It follows that I think this appeal should be dismissed. The judge’s judgment, to which I should pay tribute, should be upheld.
LORD JUSTICE KAY: I agree.
LORD JUSTICE KENNEDY: I also agree.
Order: Appeal dismissed with the costs assessed as claimed without VAT
E A Grimstead & Son Ltd v McGarrigan
[1999] EWCA Civ
Chadwick LJ
The second issue
The view which I have expressed in relation to the first issue makes it unnecessary for me to consider the second issue – was the judge correct to hold that that there was nothing in either clauses 2.5 or 8.1 of the agreement which made it clear that the purchaser was to have no remedy for pre-contractual representations? Nevertheless, in the circumstances that the point has been fully argued and is of some general importance, it seems to me appropriate that I should do so.
Clauses 2.5 and 8.1 of the agreement overlap to a substantial degree:
2.5 The Purchaser confirms that it has not relied on any warranty representation or undertaking of or on behalf of the Vendors (or any of them) or of any other person in respect of the subject matter of this Agreement save for any representation or warranty or undertaking expressly set out in the body of this agreement and for the avoidance of doubt no representation or warranty is given or made in respect of any of the matters contained in schedule 2 save in respect of the facts and to the extent as expressly therein stated.
8.1 This Agreement sets out the entire agreement and understanding between each of the parties hereto in connection with the Company and the sale and purchase of the shares and no party hereto has entered into this Agreement in reliance upon any representation, warranty or undertaking of any other party which is not set out or referred to in this Agreement.
As I have already indicated, in determining the effect of those clauses the judge relied on the observations of Mr Justice Jacob in Thomas Witter Ltd vTBP Industries Ltd [1996] 2 All ER 573. The clause which Mr Justice Jacob had to consider in the Thomas Witter case was in terms which are, in substance, indistinguishable:
17.2 This agreement sets forth the entire agreement and understanding between the parties or any of them in connection with the Business and the sale and purchase described herein. In particular, but without prejudice to the generality of the foregoing,
the Purchaser acknowledges that it has not been induced to enter into this Agreement by any representation or warranty other than the statements contained or referred to in Schedule 6.
But, in the Thomas Witter case, schedule 6 of the agreement included a paragraph in these terms – see [1996] 2 All ER 573 at 596c-d:
All statements of fact made in the Disclosure Letter (but not including the Disclosed Documents as defined therein) are true and accurate in all material respects and are not misleading in any material respect (including by reason of any omissions therefrom).
The disclosure letter contained reference to a change in accounting policy relating to the write-off of expenditure incurred in respect of pattern books which, as Mr Justice Jacob held, was misleading – see [1996] 2 All ER 573 at 581j, 591g, 594c-d. So, in the Thomas Witter case, the plaintiff was able to identify a pre-contractual representation which was within schedule 6 of the agreement and so outside the acknowledgement of non-reliance contained in the second sentence of clause 17.2. Accordingly, the only question which Mr Justice Jacob needed to consider was whether the first sentence of clause 17.2 excluded remedies for pre-contractual misrepresentations. If, as a matter of construction, the first sentence of the clause did not have that effect, the vendor could gain no assistance (on the facts in that case) from the acknowledgement of non-reliance contained in the second sentence of that clause.
In the present case Mr McGarrigan does not, as I understand the submissions made on his behalf, seek to rely on the first limb of clause 8.1 – which corresponds to the first sentence of clause 17.2 in the Thomas Witter case. He can rely on the second limb of that clause and on the first limb of clause 2.5 (both italicised in the extracts set out above) which contain acknowledgements of non-reliance in terms corresponding to those in the second sentence of clause 17.2 in the Thomas Witter case. So the observations in the Thomas Witter case on which the judge relied – which relate to the first sentence of clause 17.2 – are not in point in the present case. But, in a passage to which the judge did not refer in express terms, but which he may have had in mind, Mr Justice Jacob had said this, [1996] 2 All ER 573, at page 597e-f:
Of academic importance here would be a misrepresentation of fact not contained or referred to in schedule 6. Would the second sentence preclude the purchaser from saying that he had relied upon this? I rather doubt it. Again, the point of exclusion from liability is not made explicit. It is perfectly possible to read the clause as doing no more than attempting to set out such representations as the purchaser thinks he is relying on at the time. He may have difficulty later in proof of any further representation, but if he can prove one, then his acknowledgement that there was no other may amount to no more than an acknowledgement of what he thought was the position at the time.
I find difficulty in following that reasoning. I can understand an argument that a purchaser who acknowledges that certain specified representations are the only representations which have been made to him may be able to say that that was what he thought at the time; and so not be prevented from attempting to prove that other representations were, in fact, made. But that does not seem to me to be the effect of the acknowledgement in the second sentence of clause 17.2 in the Thomas Witter case; and it is, plainly, not the effect of the acknowledgements in clauses 2.5 and 8.1 in the present case. The acknowledgements in the present case are not acknowledgements as to what representations were made to the purchaser; they are acknowledgements as to what acknowledgements the purchaser relied upon. I can see no difficulty in an acknowledgement by a purchaser that a representation which was made was not relied upon; but I cannot see how a purchaser who has acknowledged that a representation
was not relied upon can afterwards say that that was nothing more than what he thought was the position at the time. Put another way, I reject the contention that it is open to a purchaser to assert both that he did not rely on a representation which was made to him and that he did rely upon that representation. He must be taken to know, at the time when he enters in to the agreement, what representations he is relying upon.
In my view an acknowledgement of non-reliance, in the form which appears in clauses 2.5 and 8.1 in the present agreement, is capable of operating as an evidential estoppel. It is apt to prevent the party who has given the acknowledgement from asserting in subsequent litigation against the party to whom it has been given that it is not true. That seems to me to be a proper use of an acknowledgement of this nature, which, as Mr Justice Jacob pointed out in the Thomas Witter case, has become a common feature of professionally drawn commercial contracts. He identified, as the genesis of such clauses, remarks of Mr Justice Browne-
Wilkinson in Alman and another v Associated Newspapers Group Limited (unreported, 20 June 1980) that:
If it [the entire agreement clause which he was considering] were designed to exclude liability for misrepresentation it would, I think, have to be couched in different terms, for example, a clause acknowledging that the parties had not relied on any representations in entering into the contract.
It is of interest to note that Mr Justice Browne-Wilkinson found as a fact on the evidence that entire agreement clauses in the form which he had to consider – that is to say in a form which extended only to the first sentence of clause 17.2 in the Thomas Witter case – were commonly included by skilful and reputable solicitors in share purchase agreements.
It is, of course, not sufficient that the acknowledgement – in the form in which it appears at clauses 2.5 and 8.1 of the agreement in the present case – should be capable of operating as an evidential estoppel. In order to establish an estoppel it was for Mr McGarrigan to plead and prove that the three requirements identified by this Court in Lowe v Lombank Ltd [1960] 1 WLR 196 were satisfied – that is to say, (i) that the statements in those clauses were clear and unequivocal, (ii) that the purchaser had intended that Mr McGarrigan should act upon those statements and (iii) that Mr McGarriganhad believed the statements to be true and had acted upon them. The difficulty in Mr McGarrigan’s way in the present appeal, in relation to the second issue, is that he did not rely on estoppel in his defence (as originally drawn or as amended or re-amended). The relevant pleading appears in paragraph 7 of the re-amended defence:
7. In the premises and upon a true construction of the Agreement (in particular, Clauses 2.5 and 8.1 thereof):
(a) The Plaintiff did not rely and/or was not influenced by any representation made by or on behalf of the Defendant or Kevin John McGarrigan or either of them in deciding to enter into the Agreement, other than any representation expressly set out in the Agreement itself;
I would have no difficulty in holding that the acknowledgements of non-reliance contained in clauses 2.5 and 8.1 were clear and unequivocal. For my part, had the matter been investigated at trial, I have little doubt that the judge would have found as a fact that the purchaser intended that Mr McGarriganshould act on the terms of the agreement, including the terms in
clauses 2.5 and 8.1. That was, after all, the purpose of including those clauses in the agreement. I do not think that it would have been any answer, in the present case, for Mr Grimstead to assert that he had not himself read the clauses. There were solicitors and accountants advising the purchaser in the transaction who must have known that the clauses were in the agreement and why. But, in the absence of evidence on the point from Mr McGarrigan, I do not think it safe to assume, in a case in which the point was not pleaded, that the judge would have reached the conclusion that Mr McGarriganentered into the agreement on the basis that the purchaser was not relying on whatever representations he had made at the meeting on 12 September 1989. Mr McGarrigan’s case was that he had made no representations at that meeting. The judge held that he had made the representation alleged. If Mr McGarrigan did make that representation, in the circumstances alleged, it is difficult to avoid the conclusion that he did so in order to persuade Mr Grimstead to agree to the purchase. In that case it would have been open to the judge to hold that Mr McGarrigan knew that the acknowledgements of non-reliance in clauses 2.5 and 8.1 did not reflect the true position. If he knew that, he could not rely on any estoppel which might otherwise have been created by those acknowledgements.
For these reasons – which differ from those given by the judge – I would not have been prepared to hold, in the circumstances of this case, that Mr McGarrigan could rely on the acknowledgements of non-reliance contained in clauses 2.5 and 8.1 of the agreement.
The test of reasonableness
The conclusions which I have reached on both the first and the second issues make it unnecessary for me to decide the question whether, if Mr McGarrigan had been able otherwise to rely – and had needed to rely – on the acknowledgements of non-reliance contained in clauses 2.5 and 8.1 by way of an estoppel, he would have been precluded from doing so by the provisions of section 3 of the Misrepresentation Act 1967 as amended by the Unfair Contract Terms Act 1977. But, as the point is of some importance generally and I have formed a clear view upon it, I think it right to express that view.I can do so shortly.
Assuming (but without deciding) that the acknowledgements of non-reliance fall within section 3 of the 1967 Act – as terms which exclude any remedy available to a party to a contract by reason of a pre-contractual misrepresentation – the question is whether those terms satisfy the requirement of reasonableness as stated in section 11 (1) of the Unfair Contract Terms Act 1977. The requirement is that the term shall have been 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.
In the present case the evidence showed that the draft accounts as at 30 June 1989 were available; and that the purchaser had had the opportunity to investigate the company’s books and records, if it had chosen to do so. The parties entered into the agreement on 13 September 1989 with the benefit of advice from accountants and solicitors on each side. Subject to the question which I have considered under issue 2 – whether Mr McGarrigan thought Mr Grimstead was relying on assurances given on 12 September 1989 (in which case the further question of reasonableness does not arise) – it would have been clear that Mr McGarrigan was only prepared to enter into the agreement on the basis that the purchaser relied on its own investigations and judgment. In such a case it seems to me wholly fair and reasonable that the purchaser should seek his remedies (if any) within the four corners of the agreement; and should not be permitted to rely on pre-contractual representations which are, deliberately, not reflected in contractual warranties.
There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power – a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party – or, more usually, the purchaser – is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the waranties, the less the risk and (in principle, at least) the greater the price which the vendor will require
and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.
Conclusion
For the reasons which I have given I am satisfied that the judge was wrong to hold that the representations which, as he found, were made by Mr McGarrigan were false. I would allow the appeal on that ground.
LORD JUSTICE PILL: I agree that the appeal should be allowed.
LORD JUSTICE PETER GIBSON: I also agree.
Order: Appeal allowed with costs on standard basis; leave to appeal refused; Mareva order and charging order discharged as far as extant.