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Scenario examining valid contracts for the sale and modification of goods
Example Contract Law Problem Question
Elliot is starting up a small buying and selling business. He intends to use the Internet for his transactions and needs to buy a more powerful computer than his rather old model. He visits PC Planet and describes his requirements to one of the assistants, who recommends the new Macrofirm X2.
The assistant further recommends a particular software package, Macrofirm Doorways which PC Planet would install if Elliot could wait for half an hour.
Elliot agrees to the installation and the computer for the price of £800.
At the cash desk, Elliot is given a form to sign, which he does, without reading the contents.
The software package is installed by Jack, an employee of PC Planet and a delighted Elliot takes his new computer home.
Three weeks of perfect service from the computer, end in misery two weeks ago, just as Elliot is about to clinch a purchase on E-Bay. The computer crashes and fails to start again, despite repeated attempts.
PC Planet now report to Elliot that the Macrofirm Doorways software which they had installed into the computer has rendered the computer irreparable.
When Elliot complains, he is shown the document which he signed at the time of the purchase, in particular, the following clause:
- 2.1. PC Planet accept no liability for the quality of their computers or software, or for any other losses, howsoever arising.
Advise Elliot of any claims he might make against PC Planet or their employees.
The construction of the contract is vital. Clause 2.1 was therefore incorporated as a result of Elliot signing the contract1 (regardless of whether or not he read the document2) as the exclusion clause was present at the time the contract was made3. Elliot had discussed his requirements with the assistant and agreed to the installation of software but signed the form before the latter occurred.
The next step is therefore to consider whether this exclusion clause covers the situation that occurred.
Did Elliot contract with PC Planet as a business or as a consumer? In either event, what, if any, provisions of the Unfair Contract Terms Act 1977 ('UCTA') and/or the Unfair Terms in Consumer Contracts Regulations 1999 ('UTCCRs') apply? What if any protection is afforded by the Sale of Goods Act 1979? Does the common law assist Elliot?
Did Elliot contract in the course of business or as a consumer?
Elliot is buying the computer for his new online buying and selling business. UCTA s12 defines 'dealing as a consumer' as the relevant party not making the contract in the course of a business whilst the other party does so, and the goods being purchased being 'of a type ordinarily supplied for private use'. To be 'in the course of business', the transaction must be 'an integral part of the business carried on .... or of a type regularly entered into'4.
From the information available, Elliot is not trading in computers but will simply need a computer to access the internet in the course of his business. The above definitions enable Elliot to argue that he is entitled to the consumer protection of UCTA in relation to (a) negligence (section 2), and (b) implied terms as to quality (section 6) and other liabilities arising under a contract (section 3).
(a) Negligence - s2 UCTA
For Elliot's purposes, s2 of UCTA deals with clauses that try to exclude or restrict business liability for both the negligent performance of a contract5 and common law negligence arising from a failure to take reasonable care or exercise reasonable skill6.
PC Planet's exclusion clause does not specifically mention negligence, but does refer to 'any other losses, howsoever arising'. This amounts to a clear attempt to exclude, not even limit, liability, and any such clause is subject to a requirement of reasonableness7.
Any attempt to exclude liability under s3 is subject to the requirement of reasonableness. The test for this is set out in s11(1) of UCTA and asks was the clause:
'a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made'
The test applies to both business and consumer contracts. Schedule 2 sets out guidelines on the reasonableness test and most recently8, the House of Lords further set out factors which should always be considered:
- Whether the parties are of equal bargaining power;
- How difficult was the task for which liability is being excluded;
- Was it reasonably practicable to have obtained the advice gained from an alternative source; and
- What are the practical consequences of the decision on reasonableness?9
(i) Elliot can comfortably establish that the parties were not equally matched in their bargaining power10. He as a natural person sought a new computer from a company which specialises in the selling of computer hardware and software. He also sought advice from an assistant and was recommended both a computer model and a software package.
(ii) Clause 2.1 seeks to exclude all liability for any action, even when as here, it covers the company's core business of selling new products to customers. Elliot will satisfy a court that this 'task' is hardly one which is suitable to be covered by any exclusion clause.
(iii) Elliot could have obtained his advice from elsewhere, but it was not reasonably practicable to have done so. The obvious rationale is that he went to PC Planet because of the company's assumed expertise.
(iv) The practical consequence of allowing the clause to stand would be the complete protection of PC Planet from a claim for negligence brought by a consumer. Elliot will succeed in establishing that such a wide clause is unreasonable.
If the clause is not reasonable, then Elliot can bring a claim for negligence against PC Planet. This should incorporate negligent performance of the contract and a separate head of claim for negligence of the two employees arising from the giving of the advice relied upon by him and the installation of the software package into the Macrofirm x2.
Elliot might also consider a claim for breach of contract on the basis that he relied on the assistant's skill and knowledge in accepting his recommendations for both the computer and software11. These 'preliminary stipulations'12 were taken by him to be statements of fact, and therefore formed part of the contract.
(b) Implied terms as to quality - s6 UCTA & other liabilities arising under a contract - s3 UCTA
As a consumer, Elliot enjoys the benefit of s6 of UCTA which provides that liability cannot be excluded for the implied terms as to quality set out in s14 of the Sale of Goods Act 1979 ('SGA'). Goods must be of satisfactory quality and fit for all purposes for which goods of the kind in question are commonly supplied.
On the face of it, given that he got only 3 weeks of use from them, Elliot's computer and software were neither of those things. However, PC Planet will successfully argue that it was the combining of the Macrofirm X2 computer with the Macrofirm Doorways software which caused the mischief not an inherent fault with the goods. Elliot's damage was caused by human error in pairing the two together, resulting from the initial assistant's advice and Jack's installation of the software in the store. Human error, or negligence, is outside the scope of s6 of UCTA and Elliot will not establish liability under s6 against PC Planet.
Section 3 of UCTA covers other forms of liability arising under a contract, including liability for breaches of express terms, providing that one party deals as a consumer - as Elliot did - or on the other's written standard terms of business.
The same reasonableness test as for s2 (above) applies.
Elliot's argument is that PC Planet provided substantially different performance to that reasonably expected. However, it must be expected that PC Planet will employ the same arguments as above on the relevance of the quality of the goods so that Elliot will not succeed under s3 of UCTA.
What if Elliot is considered a 'business'?
The court might possibly find that Elliot contracted with PC Planet as a business on the basis that his purchase of the computer was a transaction of the type that formed a regular part of his business13. However, it is for PC Planet to claim and to prove that Elliot was not dealing as a consumer14.
Even if Elliot cannot persuade the court that he was a consumer, he will still be able to take advantage of the same provisions in UCTA. Section 2 applies regardless of status, as the test is one of reasonableness in all the circumstances.
For s3, Elliot contracts with PC Planet on its written standard terms of business and so again falls within the reasonableness test. Regarding s6, if Elliot is a business, then rather than the blanket ban on the statutorily implied terms being excluded, the test again reverts to one of reasonableness.
Given the conclusions reached above, Elliot's position will be substantially unchanged if he is regarded as a business.
The principle of damages is to put Elliot into the position he would have been in had the contract been performed. For his claim under s2 UCTA, Elliot's losses should include both the £800 cost of the computer and software and his consequential losses, e.g the value of the lost purchase on Ebay.
The Unfair Terms in Consumer Contracts Regulations 1999
Elliot is unable to make use of any of the wide provisions of the UTCCRs as the definition of consumer derives from the European definition of any 'natural person .... acting for purposes which are outside his business, trade or profession'15. As Tandy16 notes, the courts have interpreted this as any business purpose being negligible or insignificant17. It is fortunate for Elliot that the relevant provisions of the Consumer Rights Act 2015 are not yet in force as that Act substantially revises UCTA and the UTCCRs and utilises the latter's definition of consumer, which would be to Elliot's detriment.
Independent of the statutory controls above, does Elliot have any redress under common law? In practice, the statutory controls above have generally superceded this, but Elliot could choose alternatively to sue PC Planet under common law.
The courts have firmly applied the contra proferentem rule, where an exclusion clause is interpreted against the party seeking to rely upon it. An ambiguous phrase will generally be construed in the claimant's favour18, which will benefit Elliot in any claim against PC Planet.
The principles to be applied to the language used in an exclusion clause are set out in Canada Steamship Lines Ltd v The King19. These can be summarised as:
- Language expressly exempting negligence will be given effect to;
- More general language will entitle the courts to decide whether the words used can sensibly be considered to cover negligence; and
- If (2) holds, the court must also consider whether there is another head of damage aside from negligence.
Clause 2.1 is very widely drafted without specifically mentioning negligence so only (ii) or (iii) above would apply. If there is more than one possible basis for liability, the drafting party will need to use language that covers negligence to avoid liability. If only negligence exists as a basis for liability, more general language will probably suffice20.
As above, Elliot will not succeed in establishing that the computer and software were not fit for purpose or of satisfactory quality as it was the fateful combination by Jack that resulted in the damage. Accordingly, negligence will be the only ground for a claim. The courts will still examine the intentions and reasonable expectations of the parties. Elliot's reasonable expectation was not that PC Planet could avoid all liability for its employees' negligence in providing him with mutually incompatible products. Construing the exclusion clause against PC Planet, it is unlikely to be upheld despite its (deliberately) wide wording.
Elliot should succeed in establishing that the exclusion clause does not apply to his situation and he will have a claim against PC Planet for breach of contract.
Has there been a breach of contract so serious that it effectively negated the whole purpose of the contract? PC Planet supplied hardware and software so totally incompatible as to result in complete failure.
The doctrine of 'fundamental breach of contract' refers to some breaches of contract being so serious that no exclusion clause could cover them, either because certain terms in a contract are so fundamental21 or because the overall effects of the breach destroyed the contract22.
This doctrine has been comprehensively removed from the ambit of commercial contracts23 but for contracts between businesses and consumers, the courts continue to consider the wording of the exclusion clause used and the intentions of the parties. The more serious the breach, the more weight will be required to persuade the court that an exclusion clause was intended to cover it.
Elliot will need to persuade the court that he did not anticipate that PC Planet could exclude liability for its defeat of the main object of the contract. Given the circumstances he should be able to prove this on the balance of probabilities and establish a claim for breach of contract.
Elliot has a number of potential claims under both statutory protection and the common law, regardless of whether he is found to be a consumer or a business. He is most likely to prove that he contracted with PC Planet as a consumer rather than as a business
In either case, the test of reasonableness to be employed by the court results in findings of negligence against PC Planet under s6 UCTA both for performance of the contract and as a result of the negligence of the two employees.
Elliot will be less successful in establishing a claim for breach of contract regarding either implied or express terms as it was not the quality of the goods which resulted in the breach.
Under common law, Elliot may have an alternative claim under the contra proferentem rule or because PC Planet have so seriously breached the contract as to destroy it.
1 L'Estrange v Graucob 1934 2 KB 394
2 Ibid p403 per Scrutton LJ
3 Unlike in e.g. Olley v Marlborough Court Hotel 1949 1 KB 532 where the exclusion clause was contained in a notice in the claimant's room and seen only after the contract had been made at the reception desk.
4 R & B Customs Brokers v UDT 1988 1 WLR 321 and see Chitty on Contracts para 14-066 footnote 348
5 As defined in UCTA s1(1)(a)
6 Ibid s1(1)(b)
7 UCTA s3(2)
8 Smith v Eric S Bush 1990 1 AC 831 at 858 per Lord Griffiths
9 These factors and other aspects to be considered were comprehensively reviewed by Potter LJ in Overseas Medical Supplies Ltd v Orient Transport Services Ltd 1999 CLC 1243
10 See particularly the judgment of Lord Diplock in Photo Production Ltd v Securicor Transport Ltd 1980 AC 827 at 850-851 for a review of the courts' approach to construction of exclusion clauses where parties are unevenly matched.
11 Bentley v Harold Smith (Motors) Ltd 1965 2 All ER 65
12 See Bannerman v White (1861) 10 CBNS 844
13 R & B Customs Brokers v UDT 1988 1 WLR 321
14 UCTA s12(3)
15 UTCCR s3(1)
16 Rachel Tandy Sale of Goods: consumer protection 2014 accessed 23 June 2015
17 See e.g. Overy v Paypal (Europe) Ltd 2012 EWHC 2659 (QB)
18 See eg. Andrews v Singer 1934 1 KB 17
19 1952 AC 192 208 (Lord Morton)
20 Rutter v Palmer 1922 KB 87
21 See Chanter v Hopkins (1838) 3 M&W 252 where beans were provided rather than peas
22 See Karsales v Wallis 1956 1 WLR 936
23 As a result of the House of Lords' decision in Photo Production Ltd v Securicor Transport Ltd 1980 AC 827
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