Implied Terms and Exemption Clauses

Not every term in a contract is written down or spoken aloud. The law fills gaps by implying terms — inserting obligations the parties didn't expressly agree to but which the law treats as part of the deal. Terms can be implied by common law (through the courts) or by statute (through legislation). Understanding which route applies, and the different tests involved, is essential for SQE1.

The Business Efficacy Test

The business efficacy test asks: is the implied term necessary to make the contract work? If, without the term, the contract would be commercially absurd or unworkable, the court will imply it. The leading case is The Moorcock (1889), where a wharf owner impliedly undertook that the riverbed was safe for a moored vessel. Without this term, the contract made no commercial sense — no shipowner would pay to moor at an unsafe berth.

The Officious Bystander Test

The officious bystander test, from Shirlaw v Southern Foundries (1926), asks: if an officious bystander had suggested the term to the parties at the time of contracting, would they both have said 'Oh, of course!'? The term must be so obvious that it goes without saying. If either party might not have agreed, the term cannot be implied. In Marks & Spencer plc v BNP Paribas (2015), the Supreme Court confirmed both tests must be satisfied and stressed that a term will not be implied merely because it would be reasonable — it must be necessary.

Terms Implied by Custom or Trade Usage

A term may be implied if it reflects a well-known custom or usage of a particular trade, market, or locality. The custom must be notorious (widely known), certain, reasonable, and not inconsistent with the express terms of the contract. For example, in Hutton v Warren (1836) a term was implied based on agricultural custom that a tenant should receive an allowance for seeds and labour on quitting.

Terms Implied in Law

Unlike terms implied in fact (which depend on the specific parties' presumed intentions), terms implied in law are imposed by the court as a legal incident of a particular type of relationship. The test is whether the term is a necessary incident of the type of contract in question. The leading case is Liverpool City Council v Irwin (1977), where the House of Lords implied an obligation on a local authority landlord to take reasonable care to maintain the common parts of a tower block — not because of the parties' intentions, but because such a duty was a necessary feature of that type of tenancy.

Terms Implied in Fact vs in Law

Parliament has enacted several statutes that imply terms into particular categories of contract. The most important for SQE1 are the Sale of Goods Act 1979 (SGA), the Supply of Goods and Services Act 1982 (SGSA), and the Consumer Rights Act 2015 (CRA). The SGA and SGSA apply to business-to-business (B2B) contracts, while the CRA governs business-to-consumer (B2C) contracts.

Implied Terms Under the SGA 1979

• s.12 — Title: The seller has the right to sell the goods and the buyer will enjoy quiet possession. This cannot be excluded.
• s.13 — Description: Where goods are sold by description, they must correspond with that description. Applies to all sales, including specific goods selected by the buyer (Beale v Taylor (1967)).
• s.14(2) — Satisfactory quality: Goods must be of satisfactory quality, taking into account description, price, and all relevant circumstances. Quality includes fitness for ordinary purposes, appearance and finish, freedom from minor defects, safety, and durability.
• s.14(3) — Fitness for particular purpose: Where the buyer makes known a particular purpose, the goods must be reasonably fit for that purpose, unless the buyer did not rely (or it was unreasonable to rely) on the seller's skill and judgement.
• s.15 — Sale by sample: Where goods are sold by sample, the bulk must correspond with the sample in quality, the buyer must have a reasonable opportunity to compare, and the goods must be free from defects rendering them unsatisfactory that a reasonable examination of the sample would not reveal.

Implied Terms for Services Under the SGSA 1982

• s.13 — Care and skill: Where a supplier acts in the course of a business, there is an implied term that the service will be carried out with reasonable care and skill.
• s.14 — Time for performance: Where no time is fixed, there is an implied term that the service will be carried out within a reasonable time.
• s.15 — Price: Where no price is fixed, there is an implied term that the party contracting with the supplier will pay a reasonable charge.

The SGSA 1982 also implies terms as to title, description, quality, and fitness for purpose into contracts for the transfer of goods (e.g. work and materials contracts) and hire contracts under ss.2–5 and ss.7–10 respectively, mirroring the SGA 1979 provisions.

The Consumer Rights Act 2015 replaced the consumer provisions of the SGA and SGSA for B2C contracts. It implies terms (called 'statutory rights') into contracts for goods, digital content, and services between a trader and a consumer. If the trader breaches these rights, the consumer has a tiered system of remedies.

CRA 2015 — Key Implied Terms

An exemption clause is a term that seeks to exclude or limit a party's liability for breach of contract or negligence. There are two main types: exclusion clauses (which remove liability altogether) and limitation clauses (which cap liability at a specified amount or restrict the available remedies). The law subjects exemption clauses to a three-stage analysis: (1) Has the clause been incorporated into the contract? (2) As a matter of construction, does it cover the breach that occurred? (3) Is it rendered void or unenforceable by statute (UCTA 1977 or CRA 2015)?

The Contra Proferentem Rule

Under the contra proferentem rule, any ambiguity in an exemption clause is construed against the party seeking to rely on it (the proferens). If the clause could bear two meanings, the court adopts the interpretation less favourable to the party who drafted it. This is particularly strict where the clause attempts to exclude liability for negligence.

The Canada Steamship Rules for Negligence

Canada Steamship Lines v The King (1952) laid down guidelines for construing exemption clauses that allegedly cover negligence: (1) If the clause expressly mentions negligence (or a synonym), effect is given to it. (2) If there is no express reference to negligence, the court asks whether the words used are wide enough, in their ordinary meaning, to cover negligence. (3) If so, the court then asks whether the clause might cover a non-negligence-based liability. If there is an alternative head of liability the clause could apply to, it will be construed as applying to that other liability rather than to negligence.

Canada Steamship — The Three Steps

• Step 1: Does the clause expressly refer to negligence? If yes — it covers negligence.
• Step 2: If not express, are the words wide enough in ordinary meaning to cover negligence? If no — it does not cover negligence.
• Step 3: If the words are wide enough, could they apply to a non-negligence liability? If yes — the clause is restricted to that other liability and does not cover negligence.

Modern Approach to Construction

In the modern law, the Supreme Court in Persimmon Homes Ltd v Ove Arup (2017) and other cases has emphasised that exemption clauses should be construed in the same way as any other contractual term, applying the principles from Investors Compensation Scheme v West Bromwich Building Society (1998). The contra proferentem rule remains relevant but the courts now focus on what the clause means in context, read as a whole, rather than applying a hostile construction. Between commercial parties of equal bargaining power, the court is less inclined to strain against the natural meaning of a clause.

Scope of UCTA 1977

Despite its name, UCTA 1977 does not deal with unfair terms generally — it deals specifically with exemption clauses (exclusion and limitation of liability). It applies primarily to 'business liability', meaning liability arising from things done in the course of a business or from occupation of business premises (s.1(3)). Since the CRA 2015, UCTA no longer applies to consumer contracts — it is now a B2B statute only.

s.2 — Negligence Liability

Section 2(1): A person cannot by reference to any contract term or notice exclude or restrict liability for death or personal injury resulting from negligence. This is an absolute ban — no reasonableness test applies. Section 2(2): For other loss or damage (e.g. property damage, economic loss) caused by negligence, liability can only be excluded or restricted insofar as the term satisfies the requirement of reasonableness (s.11).

s.3 — Liability Arising in Contract

Section 3 applies where one party deals on the other's written standard terms of business (or, before CRA 2015, where one party dealt as consumer). Where s.3 applies, the party relying on their standard terms cannot: (a) exclude or restrict liability for their own breach, or (b) claim to be entitled to render a contractual performance substantially different from that reasonably expected, or to render no performance at all — except insofar as the clause satisfies the reasonableness test.

s.6 — Sale of Goods Implied Terms

Section 6 controls exemption clauses in sale of goods contracts: s.6(1): The implied term as to title (SGA s.12) can never be excluded or restricted. s.6(1A): The implied terms as to description (s.13), satisfactory quality (s.14), fitness for purpose (s.14), and sample (s.15) can be excluded or restricted in a B2B contract but only if the term is reasonable.

s.7 — Other Contracts for Supply of Goods

Section 7 mirrors s.6 for contracts that are not sales of goods but involve a transfer of goods (e.g. hire, work and materials). The implied term as to title cannot be excluded. The implied terms as to description, quality, fitness, and sample can only be excluded if reasonable.

Section 11(1) provides that a term must be fair and reasonable 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 burden of proving reasonableness falls on the party seeking to rely on the clause (s.11(5)). For limitation clauses, s.11(4) directs the court to consider the resources available to meet the liability and the availability of insurance.

Schedule 2 Guidelines (Applied by Analogy to All Sections)

• Relative bargaining power of the parties — could the customer have contracted elsewhere?
• Whether the customer received an inducement to agree to the term (e.g. a price reduction)
• Whether the customer knew or ought to have known of the existence and extent of the term
• Where the term excludes liability for failure to comply with a condition, whether it was reasonable to expect compliance was practicable
• Whether the goods were manufactured, processed, or adapted to the special order of the customer

UCTA 1977 — Summary of Key Provisions

Scope and Application

Part 2 of the CRA 2015 (ss.61–76) replaces the Unfair Terms in Consumer Contracts Regulations 1999 and removes consumer contracts from UCTA's scope. It applies to contracts between a trader and a consumer. Unlike UCTA (which targets only exemption clauses), Part 2 CRA can render any term unfair, including terms about price escalation, penalties, or variation rights — not just exclusion and limitation clauses.

The Fairness Test

Under s.62 CRA, a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. In assessing fairness, the court considers the nature of the subject matter, all the circumstances existing at the time the term was agreed, and all the other terms of the contract or any other contract on which it depends (s.62(5)).

Core Terms Exemption

Section 64 CRA provides that a term relating to the main subject matter of the contract or the adequacy of the price cannot be assessed for fairness — but only if it is transparent and prominent. 'Transparent' means in plain and intelligible language and legible (s.64(3)). 'Prominent' means brought to the consumer's attention in such a way that an average consumer would be aware of the term (s.64(4)). If a core term is not transparent and prominent, it can be assessed for fairness like any other term. This codified and extended the approach in Office of Fair Trading v Abbey National (2009).

The Grey List — Schedule 2 CRA 2015

Schedule 2 to the CRA 2015 contains an indicative and non-exhaustive list ('grey list') of terms that may be regarded as unfair. These include terms that: exclude or limit liability for death/personal injury through negligence; inappropriately exclude legal rights; make the contract binding on the consumer but not the trader; allow the trader to retain sums paid if the consumer cancels but not vice versa; require disproportionate compensation if the consumer fails to perform; allow the trader to vary terms or the product unilaterally; and many others.

Effect of an Unfair Term

Under s.67 CRA, an unfair term is not binding on the consumer. However, the contract continues to exist so far as it is capable of continuing without the unfair term. The consumer can still rely on the term if they choose to. This is a key difference from UCTA, where void terms simply have no effect at all.

Comparing UCTA and CRA

When dealing with an exemption clause in a problem question, apply the three stages in order. First, has the clause been incorporated into the contract (by signature, reasonable notice, or course of dealing)? Second, as a matter of construction (using the contra proferentem rule and the Canada Steamship guidelines), does the clause cover the loss that actually occurred? Third, is the clause rendered void or unenforceable by UCTA 1977 (if B2B) or CRA 2015 Part 2 (if B2C)? A clause that fails at any stage is ineffective.

Exemption Clause Analysis Framework

• Step 1: INCORPORATION — Is the clause part of the contract? (Signature / reasonable notice / course of dealing) → If NO → Clause fails.
• Step 2: CONSTRUCTION — Does the clause, properly interpreted, cover the breach? (Contra proferentem / Canada Steamship for negligence) → If NO → Clause fails.
• Step 3: STATUTORY VALIDITY — Is the clause valid under UCTA (B2B) or CRA Part 2 (B2C)? → Check absolute bans first, then reasonableness/fairness test → If INVALID → Clause fails.
• If the clause passes all three stages → Clause is effective.