Chapter 9The terms of business contractsExemption of liability for negligence
(s 2)
Under s 2(1) no one acting in the course of a business
can exclude or restrict his or her liability in negligence
for death or personal injury by means of a term in a con-
tract or by way of a notice. Liability for negligence for
any other kind of loss or damage can be excluded if the
term or notice satisfies the ‘reasonableness test’ (s 2(2)).
third party (s 7(2) of the Contracts (Rights of Third
Parties) Act 1999). The effect of this provision is best
explained by the following example.293
upheld the trial judge’s conclusion that the limitation
clause was unreasonable. It was accepted that the par-
ties should be regarded as having equality of bargaining
power as there were other suppliers of CO 2 to which the
claimants could have gone for supplies. However, the
parties did not discuss or negotiate about the clause; it
was simply incorporated as part of the defendants’ stand-
ard provisions. The court did not accept that it was
reasonable for a supplier (as opposed to a manufacturer)
to limit its liability for breach of the implied conditions
under s 14 of the Sale of Goods Act 1979.Phillips Products Ltdv Hyland(1987)The claimant company hired an excavator and driver
from the defendant plant hire company. A term in the
standard form hire contract provided that the hirer was
responsible for all claims arising in connection with the
operation of the plant by the driver. The driver negligently
drove the excavator into the claimant’s building, causing
damage. The trial judge held that the term was covered
by s 2(2) of the Unfair Contract Terms Act 1977 and was,
therefore, subject to the reasonableness test. The ex-
clusion of liability was unreasonable because the hire
was for a short period, arranged at short notice and on
the defendant’s standard terms. The claimant had little
experience of such hiring agreements and virtually no
opportunity to arrange insurance cover. Moreover, the
claimant did not have the power to select the driver or to
control the way in which he did his job. As the defendant
was unable to satisfy the judge that the term was fair
and reasonable, the exclusion of liability was invalid. The
defendant was held liable for the damage caused to
the claimant’s building. The Court of Appeal dismissed
the defendant’s appeal.Section 2(2) will not apply where the negligence con-
sists of a breach of an obligation arising from a contract
and the person seeking to enforce the obligation is a
Example
Alan enters into a contract with Brian, a builder, to build
a detached double garage for his mother, Cynthia. The
contract contains an exemption clause which seeks to
exclude Brian’s liability for negligent construction work.
Brian carries out the work defectively and, as a result, the
roof of the garage collapses. If Alan and Cynthia were in
the garage at the time and were injured, the exemption
clause would be void under s 2(1) of the Unfair Contract
Terms Act 1977, and both Alan and Cynthia would be
able to bring a claim against Brian: in Alan’s case as party
to the contract, and in Cynthia’s case under the provi-
sions of s 1 of the Contracts (Rights of Third Parties) Act- If, however, the roof collapse only caused damage
to Alan’s and Cynthia’s cars, the position would be differ-
ent. Alan would be able to sue Brian as a party to the
contract unless Brian were able to show that the exemp-
tion clause was reasonable under s 2(2) of the Unfair
Contract Terms Act 1977. If Cynthia sues Brian as a third
party to the contract, the effect of s 7(2) of the Contracts
(Rights of Third Parties) Act 1999 is that Brian will be
able to rely on the exemption clause no matter how
unreasonable.
Exemption of liability for breach of
contract (s 3)
Section 3 applies to two types of contract made in the
course of a business:
■where the other party deals as a consumer; and
■where the businessman contracts on his own written
standard terms of business.
In both cases, the businessman cannot exclude or limit
his liability for breach of contract, non-performance of
the contract or different performance of the contract
unless the exemption clause satisfies the requirement of
reasonableness.Unreasonable indemnity clauses (s 4)
An indemnity clause is a term in a contract between
two parties (A and B) in which B agrees to indemnify
A for any liability that A may be under. A may incur
liability in respect of a third party (C), in which case B