Contract Assignment

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This problem question contains various issues that need to be explored. However, it is apparent that the primary concern is one of liability. The major question that needs to be answered is whether Smart Co can claim damages for the defective computer and whether Bright Co are liable for this. Thus it needs to be ascertained whether the terms implied by sections 13-15 of the Sale of Goods Act have been breached, and if so, whether the standard terms which contained the clause in question were incorporated into the contract.

The issue of the extent of contractual liability for a breach often raises a question as to the effectiveness of an exemption clause. In this question we are specifically dealing with a limitation clause. An exemption clause is a term in a contract purporting to exclude or restrict the liability of one of the parties in specified circumstances; usually breach of contract, or other liability arising through tort, bailment or by statute. ‘Exclusion’ clauses are restricted to those clauses which remove, or purport to remove, liability. As mentioned, in this problem we are dealing with a limitation clause. A limitation clause is used solely for those clauses which do not remove, or purport to remove, liability entirely but, for example, restrict, or purport to restrict, damages payable on a breach of a contract to a specified sum. We can tell that it is a limitation clause because in the clause it states that it “limits its liability for any breach…to �50”.

The question of the effectiveness of exemption clauses raises three basic issues as to (i) the incorporation of such clauses as contract terms (ii) the construction of the term and (iii) the impact of legislation. In normal circumstances when dealing with an exemption clause we would need to ascertain whether ;(i) the clause is part of the contract, (ii) Is the clause appropriately worded to cover what has occurred and (iii) is the clause affected by the Unfair Contract Terms Act 1977 or the Unfair terms in Consumer Contracts regulations 1999, In this question I am going to concentrate on the matters of incorporation and legislation.

For an exemption clause (or a limitation clause in this case) to be relied upon it needs to be a part of the contract. In more specific terms it needs to be incorporated. The basic rule for incorporation of a clause in an unsigned document or sign is that such a clause is part of the contract if there has been reasonably sufficient notice of it (derived from Parker v South Eastern Railway Co Ltd [1877] 2 CPD 416). Incorporation poses no problems where both parties have actual knowledge of all the terms contained in the offer which was accepted, however, incorporation cannot be said to based upon any simple notion of what the parties agreed to if there is no knowledge of all the terms.

In this case, it is quite problematic as it is not certain that Smart Co were aware of the terms, as they were not asked to sign them. It states in the problem that normally, Bright Co asks its customers to sign the standard terms containing any exemption clause (however in this problem, Bright Co did not ask Smart Co to sign any terms). Incorporation of a clause by signature is a very mechanical process as it leaves little room for any questioning of the incorporation of the clause. It also has the benefit of certainty. Even if a party has no actual knowledge of the content of the content of clauses, signature will ensure that the clauses will become terms of contract. Incorporation of a clause from a notice or unsigned document depends upon whether reasonably sufficient notice has been given. In general, all that is required is reasonably sufficient notice of the existence of the clause and the intent to use it as a contract term

It is obvious in this problem that the standard terms were not incorporated into the contract by signature. It can be argued that there may be incorporation of a clause by a long, continuous and consistent course of dealing between the two parties. The case of Spurling v Bradshaw [1956] 1 WLR 461 demonstrates how an exclusion clause can be considered incorporated, even without explicit reference when a contract is formed, by the course of former dealings between the parties.

Bradshaw had a regular contract with Spurling to store materials; on one occasion some barrels of orange juice were damaged by the latter’s negligence, so Bradshaw refused to pay. When sued for payment, his defence was that Spurling’s exclusion clause was unknown to him, and could not form part of the contract. Spurling were able to show that Bradshaw had received many accounts from them in previous business, and would have had the opportunity to read the terms of business. This argument was upheld by the court, and the exclusion clause was allowed to stand.

Thus, if following this case, it can be argued that as Smart Co has made a number of similar computer purchases from Bright Co in the past, the standard terms including the limitation clause were incorporated. In Spurling the clause had been incorporated despite the late arrival of the document containing it.

The case of Kendall v Lillico [1969] 2 AC 31 provides another example. The seller in this case sold Brazilian ground nut extract to the buyer. This was to be used as poultry food. The contract was made over the phone by the parties, but was followed the next day by the dispatch of a document, a sold note, which contained an exemption clause. The parties had followed this practice for a number of years, during which time there had been three or four transactions. It was found in the instant case that the ground nut extract contained a substance poisonous to poultry, thus the liability of the seller was questioned.

The House of Lords held that, although the document arrived too late to incorporate the clause into the particular transaction, the clause was part of the contract on the basis of the previous dealings. Again we can apply this case to this particular problem and argue that the clause is incorporated. However, in the problem, it does not specify exactly how many times Bright Co were engaged in other contracts with Smart Co, we can only assume that there were enough previous occasions for it to be considered sufficient. If, like in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd where it was held that an indemnity clause was a term of the contract, both parties (being businesses) understand that they are contracting on normal trade terms then a general course of dealing may amount to a trade custom or usage.

Construction is another issue that needs to be explored when looking at exemption clauses. When considering the construction, we need to ask whether the clause used is appropriately worded to cover what has happened. This is not a primary issue in this problem because we are focusing on the issues of incorporation and legislation. It is evident that the clause is well structured; it is very clear and concise and without ambiguity states how Bright Co is limiting their liability. The contra proferentum rule would apply here so that any ambiguity in the clause is resolved against the person seeking to rely upon it. Even though the clause appears to be well constructed

Moving onto the topic of legislation, it has already been ascertained that the limitation clause is part of the contract; therefore we can now give consideration to the Unfair Contract Terms Act (UCTA). As is said in Koffman and MacDonald’s Law of Contract;

“The Act is the first piece of legislation to deal with exemption clauses on a fairly general basis rather than merely dealing with specific types of contract…This contrasts with the EC Directive/Regulations on Unfair Terms in Consumer Contracts which strike down unfair non-individually negotiated terms in contracts between consumers and sellers or suppliers.”1

It is correct to give careful consideration of the specific provisions of UCTA as opposed to the Unfair Terms in Consumer Contracts, as the Act only applies to business liability, which appears to be what we are dealing with. Section 6 of UCTA deals with exemption clauses relating to the implied terms in contracts for the sale or hire purchase of goods. In relation to this section it is important to determine whether the exemption clause is being used against a person who deals as a consumer. Therefore we need to consult the definition in Section 12. The key to determining whether someone ‘deals as a consumer’ under the definition is the question of when a contract is made “in the course of a business”. Dealing as a consumer means not contracting in the course of a business and the other party contracting in the course of a business.

The court of appeal had to consider this issue in the case of R&B Customs Brokers Co Ltd v United Dominions Trust [1988] 1 All ER 847. It was held that a person bought goods `in the course of a business’ for the purposes of UCTA where either (i) the purchase was an integral part of the business, or (ii) although the purchase was incidental to the business, there was a sufficient degree of regularity of similar purchases.

Thus, if we apply this to the current problem, it can be argued that, although Smart Co also bought the laptop for the private use of one of its directors, it was also bought for business use, and there has been a sufficient degree of regularity of similar purchases.

If it were to be argued that Smart Co were not dealing as a consumer, then section 6(2)(a) would be relevant. The terms implied by sections 13-15 of the Sale of Goods Act relate to the conformity of the goods with description and sample, and their fitness for purpose and satisfactory quality. The requirement of reasonableness for the purposes of this section is irrelevant; any exemption clause is automatically ineffective. This is shown in the case of Peter Symmons & Co v Cook [1981] NLJ 758 In this case the plaintiff firm of surveyors bought a second-hand Rolls Royce from the defendants which developed serious defects after 2,000.

It was held that the firm was acting as a consumer and that to buy in the course of a business ‘the buying of cars must form at the very least an integral part of the buyer’s business or a necessary incidental thereto’. It was emphasised that only in those circumstances could the buyer be said to be on equal footing with his seller in terms of bargaining strength; meaning that the clause was ineffective under s 6(2). However, if, as we have ascertained, the person in this problem who is seeking to use the exemption clause is not dealing as consumer, thus section 6(3), which does not make exemption clauses automatically ineffective will be used. Exclusion or restriction of the implied terms is possible in so far as the exemption clause satisfies the requirement of reasonableness.

Meaning is given to the requirement of reasonableness in section 11, with guidelines in schedule 2. Section 11 (5) places the burden of proof upon the person claiming that the contract term satisfies the requirement of reasonableness. Therefore it is Bright Co upon whom the burden of proof is placed on. Section 11 (4) deals with limitation of liability to a specified sum. When someone tries to use a liability clause, regard has to be given to:

“(a) the resource which he could expect to be available to him for the purpose of meeting the liability should arise; and

(b) how far it was open to him to cover himself by insurance.”

In this case it states that Bright Co did offer the opportunity to purchase a service contract covering parts and labour on the computer purchased for 2 years. However, Smart Co have always declined such offers. The case of Singer Co (UK) Ltd v Tees and Hartlepool Port Authority [1988] 2 Lloyds Rep 164 shows that although the limitation clause was found to reasonable, there were factors in s 11(4) that indicated otherwise, as the port authority had sufficient resources to meet such a claim as was made and could have insured.

In this case liability is being limited to a specific sum. Under section 11 (4), the sum has to be justified to satisfy the requirement of reasonableness. It could be argued, in this case that the sum does not satisfy the requirement of reasonableness. The limitation clause states that it “limits its liability for any breach of the terms implied by ss 13-15 of the Sale of Goods Act 1979 to �50”. The section that has been breached is 14 (2B) (c);

‘For the purposes of this Act, the quality of goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price and all other relevant circumstances- freedom from minor defects’.

However, it states in the problem that the computer was seriously defective. Therefore it could be argued that Bright Co are being unreasonable because they are trying to limit their liability to too great an extent.

In conclusion, although it could be argued that the extent to which Bright Co are trying to limit their liability is unreasonable, it must be considered that Smart Co has made a number of similar computer purchases from them before and have encountered the same limitation clause before and they have not made any complaint as far as we know. We

have ascertained from the consistent course of dealing that the clause is incorporated into the contract, thus Bright Co can legitimately rely on the clause to be effective. The factor that Smart Co have always declined offers of purchasing a service contract covering parts and labour is very significant; we must assess the reasonableness of the risk allocation in the limitation clause against the possibility open to Smart Co to insure against it. Smart Co regularly had the opportunity to insure but did not take it, and having encountered the limitation clause in previous dealings should have been more conscientious when contracting on this occasion. Conclusively, it can be argued that Smart Co cannot claim for damages, and Bright Co are not liable.

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