Implied Terms and Exemption Clauses — SQE1 FLK1 Contract Law

A haulage company pays an annual fee to a farmer for the right to park its lorries overnight on a hard standing at the edge of a field. The agreement fixes the fee and the number of vehicles, and says nothing about the ground. Underneath is a disused slurry pit the farmer covered over. A loaded lorry breaks through. Recovery and repair cost £30,000.

Is the farmer liable? Yes. Nobody wrote a word about the state of that ground, and the law wrote it in for him. This is Implied Terms and Exemption Clauses, the fifth topic in Contract Law, and it is two halves of one idea. The law puts terms into your contract. Then it stops you taking them out. Keep the lorry in mind.

Here is the route. Terms the courts imply, in fact and in law. Then terms Parliament implies, and the three statutes that do it. Then exemption clauses, and the three stages every one of them must clear. And the statutory controls, which split down the middle on whether your client is a business or a consumer.

Back to the lorry. There are two ways a term gets into a contract without anyone agreeing it. The courts imply it, or Parliament does. And the courts have two routes of their own. A term implied in fact, and a term implied in law. Hold on to that difference. Implied in fact is about this contract. Implied in law is about this kind of contract.

Fact first, and the business efficacy test. The question is not whether the term would be nice to have. It is whether the contract works without it. If the deal would be commercially absurd, the court puts the term in. A wharf owner charged for a mooring, and was held to have impliedly undertaken that the riverbed was safe for the moored vessel. The Moorcock, 1889. No shipowner would pay to moor at an unsafe berth.

And the lorry. A right to park loaded lorries on ground that will not carry them is worth nothing. The term is necessary, not merely desirable. That the farmer did not know the pit would give way is no answer.

The second route into fact is the officious bystander. Imagine one leaning in at the moment of contracting and suggesting the term. Would both parties have said, oh, of course? It has to be so obvious that it goes without saying. If either party might have hesitated, it cannot be implied.

Now the trap that costs marks. A company leases second floor offices. The lease says nothing about the lifts, and the lifts break down for weeks at a time. The landlord accepts a repairing obligation would be reasonable. Implied? No. There is a staircase, still in use throughout, so the lease works without a lift covenant. Reasonable is not the test.

The Supreme Court settled that in Marks and Spencer v BNP Paribas, in 2015. A term will not be implied merely because it would be reasonable. It must be necessary for business efficacy, or so obvious that it goes without saying. Reasonableness is a necessary condition. It is never a sufficient one.

There is a third and narrower route. Custom. A term may come from the usage of a trade or a locality, but only if the custom is notorious, certain, reasonable, and not inconsistent with the express terms.

Now implied in law, and here you forget the parties' intentions altogether. The court asks whether the term is a necessary incident of this type of contract. Tenants of a local authority tower block reached their flats only through the common parts. The House of Lords implied an obligation on the landlord to take reasonable care to maintain them. Not because these parties intended it. Because a letting of that kind needs it. Liverpool City Council v Irwin.

So the difference bites twice. In fact rests on the presumed intention of these parties, and an express term can knock it out. In law rests on policy, applies to every contract of the type, and is much harder to exclude.

Parliament fills gaps too, and the first move in the exam hall is working out who is contracting with whom. Business to business, or a private sale? The Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982. Business to consumer? The Consumer Rights Act 2015. Get that wrong and every answer after it is wrong.

The 1979 Act, four numbers. s.12 is title. The seller has the right to sell and the buyer will enjoy quiet possession, and that term can never be excluded. s.13 is description. Goods sold by description must correspond with it, and that applies to every sale, private ones included, and even to specific goods the buyer picked out himself.

s.14(2) is satisfactory quality, judged against the description, the price and all the relevant circumstances. Quality is a broad word here. Fitness for the ordinary purposes. Appearance and finish. Freedom from minor defects. Safety. Durability.

s.14(3) is fitness for a particular purpose. Where the buyer makes a particular purpose known, the goods must be reasonably fit for it. Unless the buyer did not rely on the seller's skill and judgement, or it was unreasonable to rely. And s.15 covers sale by sample. But note this. Both quality and fitness apply only where the seller sells in the course of a business. Sell your old car to a neighbour and neither is implied.

Services next, under the Supply of Goods and Services Act 1982. Three gaps. s.13: where the supplier acts in the course of a business, the service will be carried out with reasonable care and skill. s.14: where no time is fixed, within a reasonable time. s.15: where no price is fixed, a reasonable charge. The same Act mirrors the goods terms for hire and work and materials.

Consumers get their own regime. The Consumer Rights Act 2015 took the consumer provisions out of both those Acts and put statutory rights in their place. Goods, from s.9: satisfactory quality, fitness for purpose, match the description, match the sample, and the right to supply. Digital content, from s.34. Services, from s.49: reasonable care and skill, a reasonable price, a reasonable time, and information the trader gives about the service is binding.

Second half, and the same idea in reverse. An exemption clause seeks to exclude or limit liability for breach of contract or negligence. Two kinds. An exclusion clause removes liability altogether. A limitation clause caps it at a figure or cuts down the remedies.

Three stages, in order. Incorporation. Construction. Statutory validity. Fail one and you never reach the next. Stage one asks whether the clause is part of the contract at all, by signature, by reasonable notice, or by a course of dealing. Stage two is construction, and it asks a narrower question than you expect. Not whether the clause is fair. Whether it covers what actually happened.

Contra proferentem first. Any ambiguity in an exemption clause is read against the party relying on it. Two possible meanings, and the court takes the one less favourable to the drafter.

Negligence gets its own rules, from Canada Steamship Lines v The King, 1952. Three questions, in order. One: does the clause refer to negligence expressly, or by a synonym? If so, effect is given to it. Two: if not, are the words wide enough in their ordinary meaning to cover negligence? If they are not, they do not.

Three: if they are wide enough, could they apply instead to some other head of liability? If there is an alternative for them to bite on, the clause is read as applying to that, and negligence is left outside it.

Test it. A boatyard stores a yacht ashore for the winter, taking the vessel into its own possession and custody. The contract says the yard is not liable for any loss or damage to vessels stored on its premises, howsoever caused. An employee leaves an electric heater running overnight inside the yacht. The yacht burns. Does the clause cover the yard's negligence? No.

Work the steps. Howsoever caused is not an express reference to negligence, so step one fails. The words are wide enough, so step two passes. But the yard took the yacht into its possession and custody, and as a bailee it would be liable unless it proved reasonable care. The words can bite on that instead, so they are confined to it.

One qualification. The courts now construe an exemption clause like any other term, in context, and contra proferentem is close to a last resort.

Stage three, and the statute's name misleads. The Unfair Contract Terms Act 1977 is not about unfair terms generally. It is about exemption clauses, and it bites on business liability. Since the Consumer Rights Act 2015 it is business to business only. Start with s.2(1). You cannot exclude liability for death or personal injury resulting from negligence.

No reasonableness defence. The clause is simply struck out.

Which brings in a man you are about to meet. He runs a joinery business and hires a bench saw on the supplier's written standard terms, which he signs. The supplier fitted the blade guard wrongly. It gives way and he loses two fingers. The supplier points at the clause. He comes back at the quick check.

s.2(2) is the other half of that section. For any other loss or damage caused by negligence, property damage, economic loss, liability can be excluded only so far as the term satisfies the requirement of reasonableness.

Then s.3, which applies where one party deals on the other's written standard terms of business. That party cannot exclude liability for its own breach, nor claim to be entitled to render a performance substantially different from what was reasonably expected, or none at all. Except, again, so far as the term is reasonable.

s.6 handles sales of goods. Title under s.12 can never be excluded. Description, quality, fitness and sample can be excluded between businesses, but only if the clause is reasonable. s.7 does the same for hire and work and materials.

So what counts as reasonable? s.11(1). The term must be fair and reasonable having regard to the circumstances known to or in the contemplation of the parties when the contract was made. When it was made. Not when it was broken.

And the burden is on the party relying on the clause, under s.11(5). For a limitation clause, s.11(4) points the court at the resources available to meet the liability and at the availability of insurance. Schedule 2 adds guidelines: relative bargaining power, any inducement to accept the term, and whether the customer knew of it.

Watch those factors decide a case. A seed merchant sold a farmer cabbage seed for £200 under conditions limiting liability to replacing the seed or refunding the price. The seed was both the wrong variety and defective. The farmer planted over sixty acres. The entire crop failed. Losses, about £61,000.

The limitation was held unreasonable, and two facts did it. The merchants could have insured against crop failure without materially increasing the price of seed. And the trade's own practice was to settle above the cap where a complaint seemed genuine. Their own conduct showed they did not think strict reliance fair. That is George Mitchell v Finney Lock Seeds, 1983.

Now the consumer side. Part 2 of the Consumer Rights Act 2015, ss.61 to 76, replaced the 1999 Regulations and took consumer contracts out of the 1977 Act. And it reaches further. The 1977 Act controls exemption clauses only. Part 2 can strike at any term at all.

Under s.62, a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations. An imbalance to the detriment of the consumer. One carve out. Under s.64, a term about the main subject matter, or the adequacy of the price, cannot be assessed for fairness. But only if it is transparent and prominent.

Transparent means plain, intelligible language, and legible. Prominent means brought to the consumer's attention so that an average consumer would be aware of it.

So try this. A consumer takes a two year broadband contract at £30 a month. Clause 47, of 52 printed clauses, sits in the same small type as the rest. It lets the provider raise the charge by up to 15 per cent on seven days' notice. The provider says a price term is not open to review. Is it? It is. Clause 47 of 52 in uniform type is not prominent, so s.64 does not save it.

Two last pieces. Schedule 2 to the 2015 Act is the grey list, indicative and not exhaustive, of terms that may be unfair. A signpost, not a verdict. And under s.67 an unfair term is not binding on the consumer, while the contract carries on so far as it can without it.

And the 2015 Act has absolute bans of its own. s.31 for the goods rights. s.47 for digital content. s.57 for reasonable care and skill in services. No fairness argument saves a clause that crosses those lines.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction. Pick the best. So learn the rules and the reasons behind them. The names here are memory pegs, nothing more.

If you keep only three, keep these. The Moorcock, where a term goes in because the contract cannot work without it. Marks and Spencer v BNP Paribas, where reasonable was not enough and necessary was. And s.2(1) of the Unfair Contract Terms Act 1977, the line no clause in this topic gets past.

Four traps. One: reasonableness. A term is not implied because it would be fair, or because the contract would work better with it. Necessary, or so obvious it goes without saying. Many candidates lose marks by applying a reasonableness test instead.

Two: the wrong statute. The 1979 and 1982 Acts now reach business contracts and private sales only. For a consumer buying goods, digital content or services, it is the Consumer Rights Act 2015. Identify who is contracting with whom before you pick the statute.

Three: the absolute bans. Death or personal injury caused by negligence, under s.2(1), is one of the most commonly tested rules here. No reasonableness defence. The clause is struck out. Title under s.12 is the same. And on the consumer side, ss.31, 47 and 57 do the same.

Four: order. Incorporation, then construction, then statutory validity. If the clause fails at any stage, stop there. Working the stages in order is what scores.

Quick check, and you have met this man already. He hires a bench saw for his joinery workshop and signs the supplier's written standard terms. One clause says the supplier accepts no liability for any injury to the hirer, however caused, including injury caused by defective equipment or by its own negligence. The supplier fitted the blade guard wrongly. It gives way and he loses two fingers. Can the supplier rely on the clause?

Three answers. One: yes, because he signed standard terms that expressly covered injury caused by the supplier's negligence. Two: yes, provided the supplier shows the clause was reasonable. Three: no, because liability for personal injury caused by negligence cannot be excluded at all. Pause here if you want a moment.

The answer is three. Under s.2(1) of the Unfair Contract Terms Act 1977, a person cannot exclude or restrict business liability for death or personal injury resulting from negligence. Not by any contract term. Not by any notice. The prohibition is absolute. And the saw was hired for his business, so it is the 1977 Act that governs.

Why the other two fail. Option one confuses incorporation with validity: signature puts the term in the contract, but a term stripped of effect by statute cannot be revived because it was agreed to. Option two applies the reasonableness test in s.11, which belongs to other loss or damage under s.2(2), not to injury.

Five things to take away. One: a term is implied in fact only where it is necessary, for business efficacy or by sheer obviousness. Reasonable is never enough. Two: a term implied in law attaches to a type of relationship, whatever these parties intended.

Three: pick the statute by the parties. Sale of Goods Act 1979 and Supply of Goods and Services Act 1982 for business and private contracts, Consumer Rights Act 2015 for consumers. Four: exemption clauses run incorporation, construction, statutory validity, and die at the first stage they fail.

Five: the joiner's supplier was never going to win. Death or personal injury caused by negligence cannot be excluded, and neither drafting nor signature changes that. And back at the field, the farmer is answerable for the ground, on a term neither party ever wrote down. Next time, Classification and Interpretation of Terms.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.