Reasonableness of exclusion clause under UCTA: Equality of commercial bargaining strength does not necessarily mean equality of bargaining strength as to contract terms

The Court of Appeal recently considered the factors to be taken into account in determining the reasonableness of a term excluding the statutory implied term as to quality in either a hire purchase agreement or an agreement based on a party's standard terms of business: Last Bus Ltd v Dawsongroup Bus and Coach [2023] EWCA Civ 1297.

The Court of Appeal overturned the High Court's decision to grant summary judgment on the basis that the exclusion clause met the statutory requirement of reasonableness under the Unfair Contract Terms Act 1977 (UCTA). It found that the judge had taken the wrong approach to assessing whether or not the parties were of equal bargaining power, which is one of the factors it must consider in assessing reasonableness.

The decision establishes that, when assessing whether parties are on an equal footing for the purposes of UCTA, the court should not limit itself to considering their relative commercial bargaining power as to price but must take into account their bargaining power as to the terms of the contract. Where parties are of equal bargaining strength in this sense, and particularly where they have insurance, the courts will generally be reluctant to interfere with their commercial allocation of risk. Accordingly, in such cases, the exclusion clause will generally be found to meet the reasonableness test.

By focusing on the question of bargaining power as to contract terms, rather than bargaining power more generally, this decision may make it harder than previously thought for a business to meet the burden of establishing the reasonableness of an exclusion clause, where it is contracting with another commercial party on its own standard terms or as the seller under a hire purchase agreement.

It also suggests that the courts will be reluctant to determine reasonableness on a summary basis. The court noted that neither party had been able to point to any previous decision in which a challenge to reasonableness under UCTA was dismissed summarily rather than following a full trial or the trial of a preliminary issue. As a result of the Court of Appeal's decision, the question of reasonableness in this case will also be a matter for trial.

Background

The claimant passenger coach operator, Last Bus, acquired a number of coaches on hire purchase terms from the defendant hire purchase financing company, Dawson. Dawson had purchased the coaches from another party (EvoBus) and then leased the coaches to Last Bus under hire purchase agreements. These were agreed on Dawson's standard terms and conditions, which contained (at clause 5(b)) a term which purported to exclude all "representations, conditions and warranties whether express or implied by law".

Some of the coaches suffered fires, which Last Bus alleged were caused by a defective cooling system, requiring Last Bus to undertake a more rigorous and expensive maintenance regime. Last Bus brought a claim against Dawson asserting that the coaches were not of satisfactory quality, in breach of the term implied as to quality or fitness in hire purchase agreements by s.10(2) of the Supply of Goods (Implied Terms) Act 1973.

Dawson sought summary judgment on the claim, based on the exclusion at clause 5(b) of its standard terms. Last Bus relied on s.6(1A) of UCTA, which applies to hire purchase agreements, and provides that the implied term as to satisfactory quality in s.10 of the 1973 Act cannot be excluded or restricted unless it satisfies the requirement of reasonableness. In assessing reasonableness, the court will give consideration to the matters in Schedule 2 of UCTA which includes:

"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".

It is for the party claiming that a contract term satisfies the requirement of reasonableness to show that it does.

While it was not relied on in this case, it was common ground that s.3 of UCTA (which also requires an exclusion of liability to be reasonable) would apply to clause 5(b) given that Last Bus was contracting on Dawson's written standard terms of business.

Last Bus also brought a claim against EvoBus on the basis of a continuing contract and/or collateral contract, but EvoBus was not a party to the application for summary judgment.

The High Court (Andrew Baker J) granted Dawson's application, finding that there was no need for a trial to see that clause 5(b) satisfied the requirement of reasonableness. Considering the matters set out in Schedule 2 of UCTA, the court found that there was no inequality of bargaining power between Last Bus and Dawson and that Last Bus ought reasonably to have known of the existence and extent of clause 5(b) given its previous dealings with Dawson. The only factor the judge believed pointed away from the term being reasonable was that Last Bus did not have the option to contract with anyone else on terms that would not have involved an equivalent exclusion of liability.

Last Bus appealed, arguing that the judge should not have determined the highly fact-sensitive issue of reasonableness on a summary basis, as not all potentially relevant facts were before the court.

In response, Dawson stressed that, considering the highly fact-sensitive nature of the question of reasonableness, the Court of Appeal should be very slow to interfere with the High Court's assessment of those facts. It submitted that Last Bus was trying to circumvent very clear Court of Appeal authority as to reasonableness of terms in commercial contracts and to rely on UCTA, which was aimed primarily at protecting vulnerable customers, to avoid the consequences of its failure to properly read and understand the terms to which it had subscribed for many years.

Decision

The Court of Appeal unanimously allowed the appeal, finding that the High Court had made the following three errors:

1. Approaching the question of reasonableness on the basis the parties were of equal bargaining strength.
2. Failing to take into account the direct legal and practical consequence of clause 5(b), which potentially left Last Bus without a remedy.
3. Considering that the case was suitable for summary determination.

Phillips LJ gave the lead judgment, with which Bean and Singh LJJ agreed.

(1)   Equality of bargaining power as to terms of the contract

The Court of Appeal noted the rationale underlying the requirement for exclusion clauses in hire purchase contracts (s.6 of UCTA) and standard terms of business (s.3) to meet the requirement of reasonableness. Customers in these cases are considered, on the face of it, not to be of equal bargaining power, at least in relation to the terms of business which have not been individually negotiated. Parliament therefore decided that businesses seeking to rely on those terms to exclude liability must prove their reasonableness.

That did not, however, mean that a business dealing on a counterparty's standard terms may not be of equal bargaining power. The Court of Appeal went on to consider Schedule 2 to UCTA and, in particular, the factor relating to the respective strength of the parties' bargaining positions. The High Court judge had mentioned three cases in which the parties were found to be of equal bargaining strength and the terms were reasonable under UCTA. The Court of Appeal said that, in such cases (and particularly where the parties have insurance), it was not surprising that the Court of Appeal had emphasised that the bargain agreed by the parties should generally prevail. .

Referring to Balmoral Group Ltd v Borealis (UK) Ltd [2005] EWHC 1900 (Comm), the Court of Appeal stressed that there is a distinction between bargaining strength concerning the contract price and the contract terms. Notably, it stated: "Even where the parties are large commercial concerns and of equal bargaining strength as regards the price to be paid under the contract, that does not mean that they are of equal bargaining strength in respect of the terms" (emphasis in the original).

The Court of Appeal therefore found that the High Court was wrong to approach the question of reasonableness on the basis that the parties were of equal bargaining strength such that it should be reluctant to interfere with the parties' bargain. Instead, the High Court should have considered whether, in a situation where Last Bus was contracting on Dawson's standard terms of business, the parties were on an equal footing as regards those terms.

The Court of Appeal went on to find that it was plain that Dawson would not have contracted without the exclusion clause and, given the judge's finding that no materially different terms were available in the market, the conclusion (at least arguably) should have been that the parties were not of equal bargaining strength as regards clause 5(b). The High Court judge had therefore adopted the wrong approach, which was a major factor in his conclusion.

(2)   Last Bus potentially left without remedy

The Court of Appeal also found that High Court erred in stating that the unavailability of hire purchase on different terms was the only factor pointing away from the reasonableness of clause 5(b). The judge had left out of account the direct legal and practical consequences of the clause, that Last Bus would potentially be left without a remedy if the coaches were entirely worthless. Lease Management Serviced Ltd v Purnell Secretarial Serviced Ltd [1993] Tr.L.R. 337 made clear that such clauses are prima facie unreasonable under UCTA.

While this factor might have been minimised if Last Bus had insurance, there was no evidence of that before the court. Equally the judge could not have discounted this factor on the basis of Last Bus' contractual claim against EvoBus, as EvoBus denied any contract and (in the alternative) relied on its own exclusion clause.

(3)   Case not suitable for summary determination

The Court of Appeal held that the High Court also erred in determining that a trial was not necessary to assess reasonableness. The fact-sensitive nature of this issue would ordinarily necessitate a trial, and while summary determination may be possible in some cases, it was inappropriate in this instance since there were obvious matters that required investigation. By way of example, it noted that whether Dawson had the right to an indemnity from EvoBus would potentially be relevant to the reasonableness of the exclusion clause, as would be the insurance position of the three parties.

Conclusion

The Court of Appeal therefore held that the High Court should have refused the application for summary judgment and directed that the matter proceed to trial. The Court of Appeal emphasised that it made no findings on the reasonableness of clause 5(b), explicitly stating that such determination is for the trial judge.

It concluded by noting that the Court of Appeal should generally be slow to interfere with a first instance judge's assessment of the reasonableness of a contract term where the assessment was made at trial on the basis of all the evidence. However, it did not consider that this point applied with the same force where there had been a summary determination.