When it is unsafe to use your standard terms and conditions

8 April 2016

Beware insisting on your standard limitation clauses

Background – the Unfair Contract Terms Act 1977

The “evil” is to be found in section 3 of the Unfair Contract Terms Act 1977 (invariably referred to by lawyers as “UCTA” and pronounced “UCK-tar”). This applies to consumer transactions (which we will not look at here) and also where one party (not necessarily the seller/provider) “deals” on the other party’s “written standard terms of business”. So UCTA could apply equally to the situation where an organisation was using standard terms for the purposes of procurement or for supply.

Section 3 goes on to provide that, in these cases, exclusions or limitations of liability must be reasonable. If they are not reasonable, then they are invalid leaving the party facing unlimited liability – hence the fear instilled in IT lawyers.

The issue – just what exactly are “standard” terms?

The problem is that UCTA does not actually define what “written standard terms of business” are. All of us have the experience of having to sign standard forms to get goods or services – it is a commonplace of internet shopping.

The question in business becomes one of degree: if the parties negotiate the terms, at what point do “written standard terms of business” cease to be “standard”? How far must the changes go before the law will no longer regard them as “standard” and so outside UCTA?

How the courts have approached this

The question has come up several times – and not least in the IT industry. UCTA was held obviously to apply where one party imposed its “model” contract on the other. It could also apply where one party imposed its terms but allowed for some minor modifications during negotiations. In Salvage Association v. CAP Financial Services Ltd [1995] FSR 654, the customer more or less adopted CAP’s standard terms into the contract – it was for the judge a clear case of “written standard terms of business” which meant that UCTA applied.

However, the Court of Appeal in St Albans v ICL [1996] EWCA Civ 1296, observed that UCTA required one party to “deal” on the other’s terms, meaning that there could be at least some negotiation and re-drafting of the terms and they could still be “standard” if they were more or less untouched.

The shock came with Pegler v Wang [2000] BLR 218. Here, the contract was based on a sort of amalgamation of both parties’ terms and conditions, except that Wang had insisted on retaining its standard exclusion and limitation clauses. It was held that Pegler had therefore “dealt” with Wang on its written standard terms of business, even though there was extensive negotiation and re-drafting to incorporate many terms demanded by Pegler.

The current law

In Yuanda v Gear Construction [2010] EWHC 720 (TCC), many lawyers breathed a sigh of relief as it seemed that UCTA had been put to rest for all practical purposes. Gear had put together terms for around 30 contractors required to do work on the old GLC building in central London. All the of the contractors requested various changes, and Gear negotiated with them. Yuanda also requested various changes, which Gear acceded to. As the judge said, the contract was long and based on the industry standard JCT form, but it had a lot of  bespoke alterations for this specific project. In Yuanda’s case, the 30 or so changes to this form were on one view minor, but they did make some commercially significant changes like removing an insurance requirement, and changing various time limits. It was held that this meant that Yuanda had not dealt with Gear on Gear’s written standard terms of business.

The same judge from that case recently gave judgment in Commercial Management v Mitchell and Regorco [2016] EWHC 76 (TCC). Again, it was a construction project where Mitchell was the contractor and Regorco was a sub-contractor. One of the issues in the case was that R claimed that it had contracted under its standard form, which contained a time-limit for bringing claims. Instead of following his own judgment in Yuanda he expressly approved Pegler v Wang and decided to follow the reasoning in that judgment. He decided that, if the relevant had been incorporated, it would have fallen under UCTA and would furthermore have been unreasonable and invalid.

Implications

The resurrection of Pegler v Wang will raise severe problems for those contracting in the IT and other industries. It had been assumed in recent years that UCTA would not apply to most deals where there was some element of negotiation, and where the party presenting its standard form was prepared to make at least some changes to the draft. This, it was felt, took the case outside UCTA.

By approving the reasoning in Pegler v Wang, the judge has taken us back to the dark days where UCTA was raised in many cases – cases like Pegler itself, where there was extensive negotiation and where clearly neither party was able to impose its own terms on the other.

The lessons seem to be clear:

  • Don’t simply impose your standard terms on the other party – whether you are a procuring organisation or a supplier
  • In particular, don’t just cut and paste your standard liability clauses into a deal – they could still be “written standard terms of business” and be invalid under UCTA
  • Do keep good records of what terms you are using in each deal, and the changes being made by the other parties (easy to do in today’s age of computerised records)
  • Do be prepared to negotiate and accept changes as part of ordinary commercial negotiations

Remember – if UCTA applies, it potentially means that your exclusions and limitations are simply invalid, leaving you facing unlimited liability.

The law is stated as at 15 March 2016.

Remember that this is a general update, and do take legal advice for specific situations before acting on any of the information here.

For more information, please email me at richard.stephens@lorsonline.com