Thrown under the bus – when does a contract go too far?
11 December 2023
It is common practice for businesses to have their own standard Terms and Conditions that they use to govern the terms of contractual relationships they enter into. Such Terms and Conditions seek to define, control, and limit a business’s obligations during any particular contract.
Whilst, for the most part, businesses are free to include and exclude whatever they choose within their standard Terms and Conditions, there are some instances where statute will limit or otherwise imply certain terms within contracts – such as, for example, a requirement for goods to be as described and of a satisfactory quality and durability. This is, largely, to protect both consumers and smaller businesses who may not have much bargaining power when it comes to contracting with larger organisations. The aim of the court is to try and ensure that business is conducted fairly, and everyone can be held to account if something goes wrong, whilst balancing the parties’ freedom to contract as they choose.
The court has recently had to consider the question of whether, as a matter of law and public policy, a business is permitted to exclude any of the terms that are implied by statute.
What was the dispute about?
This issue was dealt with in the case of Last Bus Ltd v Dawsongroup Bus and Coach Ltd. The dispute related to the hire purchase by Last Bus Ltd of coaches from Dawsongroup under agreements which were subject to Dawsongroup’s standard Terms and Conditions. Dawsongroup’s Terms and Conditions purported to exclude the statutory implied term that the goods it supplied would be of satisfactory quality.
Last Bus Ltd was unhappy with the quality of the coaches. Four of them had caught fire and Last Bus alleged that this was caused by a defective cooling system. As such, it brought court proceedings for damages, alleging breach of contract by Dawsongroup. The claim was defended by Dawsongroup on the basis that its Terms and Conditions excluded the implied term that its products would be of satisfactory quality and, as such, it was not in breach. Last Bus Ltd contended that this term was unfair and that Dawsongroup should not be allowed to rely on it.
What was decided in the first trial?
At the first trial, the Judge considered the test of “reasonableness”, which is required when determining whether a contract term is unfair. The Judge considered that Last Bus Ltd was of equal standing to Dawsongroup and so it was determined that it was reasonable and fair for Dawsongroup to exclude the implied term of quality. This meant that, in the first instance, Last Bus Ltd was unsuccessful with its claim.
What was decided on appeal?
Last Bus Ltd then appealed this decision. At the Court of Appeal, the Judges decided that the parties were not, in fact, of equal bargaining power. The fact that Dawsongroup would have refused to enter into the contract if it was forced to include the term of quality, and that Last Bus Ltd had no other practical option to purchase elsewhere in the market, meant that there was not an equal bargaining position. In addition, the court took the effect of the clause into account. If it were allowed to stand, it would have removed all remedies available to Last Bus Ltd in a contract worth £7.5 million.
Given these factors, the Court of Appeal determined that the term was unreasonable, and that Dawsongroup was therefore unable to rely on it.
What this means for your business
This decision should be a word of warning to businesses. If you seek to limit your liability too much or remove statutory implied terms within your standard Terms and Conditions, you run the risk that, if something goes wrong within the contract, the court may determine that you cannot rely on the clause.
The general rule should always be borne in mind that the more onerous or unusual a term is, the more difficult it is for businesses to prove that they are able to rely on it, and the more they will have to do to convince the court that they should be allowed to rely on it. There are certain things businesses can do to try and protect themselves and improve the prospects of such terms being upheld as enforceable, such as specifically drawing any onerous or unusual terms to the other party’s attention before the contract is entered into.
However, this may still not guarantee that the term is enforceable. The decision in Dawsongroup shows that the effect of the clause can be taken into account. As such, if the clause a business is seeking to include has too much of a detrimental effect, it may be unenforceable.
If you have any queries about this, please get in touch.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at December 2023.