The Court of Appeal's recent decision in Last Bus Ltd (t/a Dublin Coach) v Dawsongroup Bus and Coach Ltd & Anor  EWCA Civ 1297 has provided a useful reminder of the circumstances in which commercial parties can (and cannot) exclude statutory implied terms and confirmed that the English courts might not be as hesitant to interfere with commercial contracts as is often assumed.
Exclusion clauses and unfair terms
Commercial contracts often contain limitation and exclusion clauses in an attempt by parties to restrict their liability and apportion risk. However, such clauses are subject to constraints, including the Unfair Contracts Terms Act 1977. Although UCTA does not apply to all contracts (such as contracts for the international supply of goods), where UCTA does apply it may render an exclusion clause void and unenforceable.
For example, where one party contracts on another's standard terms and conditions or in hire purchase agreements, an exclusion and/or limitation clause will only be valid if it is deemed 'reasonable' under section 11. This 'reasonableness test' is applied at the time the contract is made and considers what the parties knew, or should reasonably have contemplated, at the time.
The question as to whether a clause is 'reasonable' under UCTA is a question of fact in each case, and in applying the test, any relevant factor may be considered, though UCTA lists particular factors to which regard is to be had where relevant. Given that the question is always fact-specific, comparisons with previous case law tend to provide limited value, but there are some general themes which can be identified. The criteria of reasonableness will usually be easily satisfied where a clause is properly negotiated, the parties are well advised, legally represented and insured, and they understand the relevant contractual risks. The test is harder to satisfy when parties are contracting on one party's standard terms, as standard terms are not individually negotiated and tend to be heavily favourable to the side whose standard terms are being relied on.
The claimant, Last Bus Ltd, operated a fleet of passenger coaches in and around Dublin. In 2014 it purchased 30 Mercedes Tourismo coaches via a series of hire purchase agreements with the defendant, Dawsongroup Bus and Coach Ltd, who had acquired them from EvoBus, a subsidiary of Daimler AG. The agreements were on Dawsongroup's standard terms and conditions and incorporated an exclusion clause – Clause 5(b) – purporting to exclude the requirement that the goods supplied be of satisfactory quality. Such a term would otherwise be implied by section 10(2) Supply of Goods (Implied Terms) Act 1973. Instead, Clause 5(b) provided that:
"…The Company shall have no liability for selection, inspection or any warranty about the quality, fitness, specifications or description of the Vehicle and the Customer agrees that all such representations, conditions and warranties whether express or implied by law are excluded…"
Last Bus argued that the coaches supplied to it were not of satisfactory quality because they caught fire due to defects and brought a claim for €10 million in damages.
Dawsongroup sought reverse summary judgment to dismiss the claim, relying on a number of Court of Appeal decisions to argue that the courts have historically sought to uphold provisions contained in commercial agreements between parties of broadly equal bargaining power. Countering this, Last Bus argued Dawsongroup should not be allowed to rely on the exclusion clause because it amounted to a blanket exclusion of liability no matter how defective the coaches may have been, meaning it was prima facie unenforceable under UCTA.
After considering the parties' relative bargaining positions and whether Last Bus ought reasonably to have been aware of the exclusion clause, the High Court at first instance concluded the clause was reasonable and dismissed Last Bus' claim. Last Bus appealed.
The Court of Appeal's decision
The Court of Appeal acknowledged the well-established principle that, where parties to a commercial contract are of equal bargaining power, they can apportion risk how they see fit, including by way of exclusion clauses. However, Parliament's intention when enacting UCTA was to set parameters for such terms in circumstances where, on the face of it, parties are not of equal bargaining power, such as contracts based on one party's standard written terms or in hire purchase agreements.
The Court determined that the High Court had been wrong to conclude the parties were of equal bargaining power. It reached this conclusion on the basis of findings of fact that Dawsongroup would not have contracted with Last Bus without the exclusion clause and no materially different terms were available to Last Bus on the wider market.
Clause 5(b) purported to exclude any and all liability for the quality of the coaches, thereby leaving Last Bus without a remedy even if it had received no value at all. The Court agreed with Last Bus that such clauses were indeed prima facie unenforceable.
Furthermore, the High Court was also wrong to determine the question of reasonableness on a summary basis instead of after a full trial. There were matters which required investigation, including the tripartite nature of the transaction between EvoBus, Dawsongroup and Last Bus, and the insurance positions of the parties (Last Bus' lack of remedy might have been minimised had it obtained insurance, but no evidence on this issue had been put forward).
The Court of Appeal did not determine the question of reasonableness itself – as this was deemed a matter for trial - but found the High Court had been wrong to find that the clause was reasonable (and therefore enforceable) and order summary judgment.
Contracting parties naturally look to afford themselves as much protection as possible in their own standard terms and conditions. Exclusion and limitation clauses are an obvious way to do this, but the Court of Appeal's decision should serve as a reminder that such clauses may not necessarily prove effective in a commercial context, and will be struck down as unenforceable if they do not satisfy the reasonableness test under UCTA. In determining reasonableness, the parties' respective bargaining positions will be key.
In this case, the Court of Appeal held that when parties are contracting on one side's standard terms, in assessing reasonableness in the context of the parties' bargaining power, the correct question to ask is whether the parties are on an equal footing in relation to those specific standard terms. The circumstances to be considered are therefore wider than the parties' respective size or the length of their commercial relationship, and the courts may find that inequality in bargaining power exists where a party accepts standard terms because, for instance, no alternative terms are available in the wider market.
Other important points to consider are whether, despite the exclusion of an implied warranty, there is an alternate remedy available under the standard terms (e.g. as part of a narrower and more limited warranty), and whether insurance is available to protect against the excluded risk.
Parties should also consider Dawsongroup's experience of seeking summary judgment on the question of reasonableness. Lord Justice Phillips noted that neither party could find any precedent, at any level, for a challenge to the reasonableness of a contractual term under UCTA being dismissed summarily rather than following a trial and took it as a 'general point' that such a 'fact-sensitive issue' would usually, although not always, require a trial. Furthermore, he warned that, if there was to be a summary determination of the reasonableness of a contractual term, the Court of Appeal would not be hesitant to interfere with this in the right circumstances.