Legal briefing | 01 Jul 2021 |

UCTA: don't assume it only bites if there's unequal bargaining power

It is sometimes suggested that the courts only intervene based on the Unfair Contract Terms Act 1977 (UCTA) where there is inequality of bargaining power. But a recent case provides a reminder that UCTA can also apply where a contractual provision is regarded as particularly destructive of one party's rights – even where there is no obvious imbalance between the parties.

The offending term

In Phoenix Interior Design v Henley Homes (2021), the court had to consider whether the following provision (included in standard terms of supply) was reasonable under UCTA:

The Seller shall be under no liability under the above warranty (or any other warranty, condition or guarantee) if the total price of the Goods has not been paid by the due date for payment.

The case related to a dispute over the quality of furniture provided for an upmarket hotel in Scotland – for more detail, see our earlier briefing which discusses the quality issues in more detail. The Seller argued that, as the Buyer had withheld a substantial portion of the price, this clause meant that it had no liability for the quality issues raised by the Buyer. The court had to consider whether UCTA applied so as to render this clause unenforceable.

UCTA: a reminder

UCTA imposes certain constraints on the terms of business-to-business contracts which exclude or limit liability. For the purposes of this dispute, the key provision was section 3, which applies to standard terms. In summary, it requires terms excluding or limiting liability to meet the test of reasonableness, which sets out a series of factors that the courts are required to consider. One of these is "the strength of the bargaining positions of the parties relative to each other". In practice, this has often been a very significant factor, with the courts often being more reluctant to intervene where there was no obvious imbalance between the parties. However, there is also a line of caselaw – going back to the House of Lords ruling in George Mitchell v Finney Lock Seeds (1983) – where the courts have intervened primarily because the clause in question was felt to be particularly destructive of the other party's rights (even where there was no clear imbalance).

What the court decided

The court concluded that the clause was "potentially exorbitant in that the consequence of the slightest delay or deduction might bar all rights of redress against the [Buyer] relating to the quality of the goods supplied". Among other things, it also noted that:

the clause was "tucked away in the undergrowth of the Standard Terms and Conditions without any particular highlighting";
the potential unfairness for the Buyer was further exacerbated by the difficulty of working out when final payment was actually due (other provisions indicated that it was due on "Completion", but this had not been clearly defined in the contract); and
the Seller could have addressed concerns about the Buyer withholding payment in a less restrictive way, for example by including an anti-set off clause (which have, in the past, often been held to be reasonable under UCTA).

Comment

Although equality of bargaining power features prominently in many cases involving UCTA, it does not appear to have been a decisive factor here. Instead, the court seems to have concerned about the highly destructive effect of the provision on the Buyer's remedies. Previous cases have seen the courts adopt a similar approach to clauses that purport to impose extremely short time limits for customers to bring claims in relation to defective goods or services. It is worth remembering that it is for the party relying on the clause to justify it under UCTA. Suppliers sometimes argue that clauses of this type are merely intended to promote prompt payment or prompt notification of warranty claims. However, that view overlooks the fact that such provisions are often drafted so as to completely remove the customer's remedies, even where there may be a reasonable justification for any delay in payment or where the period for notifying warranty claims is unreasonably short.

Finally, another common misconception about UCTA is that it only applies to standard terms; this is not the case. For example, under section 2, it can also apply to negotiated contracts containing terms which purport to exclude or limit liability for negligent performance (any attempt to exclude or limit liability for personal injury or death due to negligence is void, whilst restrictions on liability for other types of loss due to negligence are subject to the reasonableness test).

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