Using exemption clauses in web sales

Out-Law Guide | 30 Mar 2005 | 3:21 pm | 7 min. read

Suppliers of goods or services planning to do business on the web will need to comply with numerous regulations, old and new. 

This guide is based on UK law. It was last updated in September 2007.

Overview

Among the regulations which largely pre-date the internet-age are those relating to exemption clauses which are commonly found in contracts. Such clauses must be prepared with care to avoid problems.

Exemption clauses fall into two categories:

  • those which seek to exclude liability for specified breaches of contract; and
  • those which seek to limit liability to a set sum or to particular types of loss.

When dealing with a consumer it's hard to exclude liability. There is more scope to exclude liability when dealing with a business, but there are a number of issues involved which are looked at below.

Consider a supplier who sells monitors via its web site, operating on tight margins in a competitive market. The supplier can generally achieve delivery within seven days, but is reliant on steady demand, its own supplier and a third party delivery service. The supplier may want to use a contract clause to limit damages payable for late delivery to consumers to £5 per day. In a business to business transaction, it may want to exclude altogether liability for lost profits caused by late delivery. The law regulates how far objectives like these may be achieved.

How to make an exemption clause

Recognising an exemption clause is not always straightforward. Returning to the example of the monitor supplier, its terms and conditions may say that it will not be liable for any loss resulting from delivery up to 7 days after the date specified in the contract. Alternatively, the supplier's terms may say that delivery is guaranteed to within 7 days of the delivery date. Whilst the effect of both is broadly the same, each may have different consequences.

Vitally significant is incorporation of the exemption clause as a contractual term – i.e. the clause must form part of the contract. See our guide, On-line Contract Formation. A clause which appears only in a supplier's e-mail confirming an order is unlikely to be incorporated and therefore it is not effective.

Is the clause visible?

Closely linked with the issue of incorporation is the question of whether a supplier has done enough to draw attention to an exemption clause. Depending on the nature of the terms and conditions, a link to a separate page which displays them might be insufficient. The best practice is to display them as part of an ordering process so that the site user must click to indicate acceptance of them.

Advice should be taken on the precise wording of an exemption clause since, if there is any doubt about the meaning and scope of the clause, the ambiguity will be resolved by a court against the party who has inserted it and who is relying on it.

Unfair terms

The Unfair Contract Terms Act (UCTA) of 1977 restricts the ability of businesses, including those trading on the internet, to exclude or limit liability.

Liability for negligence

A business cannot exclude or limit liability for death or personal injury caused by negligence. For other types of loss caused by negligence, liability can only be restricted if it is reasonable for the business to do so.

Terms implied by law

Certain terms are implied into contracts for the sale of goods or supply of services, for example that a seller actually owns the goods he is trying to sell. Liability for breach of this term cannot be excluded by the seller. It should be borne in mind that UCTA does not apply to the international sale of goods.

Other breaches

If, in the standard terms and conditions of a business, a clause seeks to exclude liability for a breach of contract by that business, the clause shall have no effect, unless the exclusion is reasonable.

The reasonableness test

Where the reasonableness test applies, it is for the party wishing to rely on the exemption to prove that it is reasonable. The following considerations apply in UK law:-

  • Whether the two parties were of equal bargaining power and whether the customer could have obtained the goods or services elsewhere.
  • Whether the customer received an inducement to accept the term such as reduction in price.
  • Whether the goods were manufactured or processed to the customer's special order.
  • Whether the customer knew or should have known of the term.
  • For limitation clauses, the resources available to the supplier and whether he could have insured himself against the type of loss to which the limitation applies.

Is the test tougher for e-commerce suppliers?

The answer should be 'no', but in practice, such businesses may find that it is because of the way they do business. Courts may be suspicious of new methods of selling, especially because internet sales are generally on a 'take it or leave it' basis. In most cases there will be no human interaction or negotiation between supplier and customer. This means that the supplier immediately risks falling foul of the first three considerations above: one transaction is much like another and there is no scope for discussion as to the price or to the customer's specific requirements.

In sales involving consumers, the first and last above considerations are likely to be decided against the supplier. The supplier's bargaining power far outweighs that of the consumer, so much so that the supplier need not bargain at all; and the supplier is far better placed to insure and pass on that cost when compared to a consumer arranging a one-off policy.

Negotiated contracts

Some of these legal restraints can be avoided if the supplier can show that the contract was not concluded on its written standard terms and that it was not dealing with a consumer. If the parties negotiated the terms before signing up, there is less room for one party to argue that it did not appreciate the terms on which it was contracting.

In the past, the courts have shown some willingness to use UCTA to overturn even negotiated contracts. However, each case will turn on its particular set of facts and, more recently, the courts have taken a hands-off approach to negotiated contracts between businesses.

In practice, suppliers trading with other businesses on the web will generally be doing so on the basis of written standard terms. In a business to business context, therefore, internet trading may place higher burdens on suppliers than more traditional methods of contracting.

Misrepresentation

Broadly speaking, a misrepresentation is an untrue statement which causes a party to enter into a contract. It is not uncommon for a contract to state that it forms the entire agreement and that any statements made previously, leading up to the contract, will have no effect. To protect a customer from misrepresentations, the law of England and Wales provides that any attempt to exclude previous misrepresentations will only have effect if it is reasonable to do so. In Scotland, such clauses are usually effective, unless the statements were fraudulent or, for example, comments made by an employee of the supplier (which would also be grounds for making the clauses ineffective under English law).

Statements made before a contract is entered into may or may not amount to representations. For example, a cosmetics supplier with a home page bearing the slogan, "Making you look 25 years younger", would not attract liability – this is just an advertising 'puff'. Although care should always be taken to avoid infringing the Trade Descriptions Act. Consider, however, a compact disc seller with the banner, "The lowest prices on the net – guaranteed". This may amount to a representation. As well as keeping a careful watch on its homepages, a supplier will need to ensure that its advertisements on other sites are kept up to date.

Consequential loss

Many limitation clauses seek to exclude what is known as 'consequential loss.' A party may normally recover damages for breach of contract if the loss in question:

  • arises automatically, i.e. in the usual course of events; or
  • was in the contemplation of both parties at the time the contract was made.

An English court has said that consequential loss is a type of loss falling within the second category, i.e. it is not loss that arose in the ordinary course of events. To exclude consequential loss would not cover loss of profit which flows naturally from the breach of contract. In putting terms and conditions together, great care must be taken in defining the types of loss limited or excluded.

Additional protection for consumers

The Unfair Terms in Consumer Contracts Regulations 1999 apply to every term in a contract between a supplier and a consumer unless the term has been specifically negotiated. The regulations will therefore need to be considered by every business selling to consumers on the web.

An unfair term is one which creates a significant imbalance in the parties' rights to the detriment of the consumer. Any ambiguity is resolved in favour of the consumer and there is an obligation to draft contracts in plain language.

If a term is unfair then it is not binding on the consumer. Terms which may be unfair include the following:

  • those excluding liability for death or personal injury caused by negligence;
  • those limiting the rights of the consumer in the event of total or partial performance by the seller;
  • punitive cancellation clauses;
  • clauses allowing the supplier to change the price or service rendered without reference to the consumer.

The Regulations also give powers to and put obligations on the Director General of Fair Trading to investigate the use of unfair contract terms and, in the event of persistent breach, to seek an injunction preventing their continued use.

Changes to legislation on the horizon

The Unfair Contract Terms Bill is under consultation which will overhaul the law in relation to unfair terms.  Under the proposals, all terms in consumer contracts will be subject to a fair and reasonableness test, whether or not individually negotiated.  Watch this space for further developments!

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