Contract Law Essay Analysis

The case, as set out, concerns two companies, Smart Co (hereinafter S Co) and Bright Co (hereinafter B Co). S Co needs to be advised as to whether it can claim compensation under the breach of the contract, which can exceed the 50£ limitation, which limitation is included in the contract under a clause. In simple words the validity and therefore the effectiveness of the limitation clause is to be considered under the Unfair Contract Terms Act 1977 . For the purposes of the examination of the effectiveness of the contractual clause in this case, the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) is deemed unsuitable. This is made clear under section 3(1) of the UTCCR : “3 Interpretation

(1)In these Regulations-…“consumer” means any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession;…” Given that S Co buys computer for the private and business use of one of its directors, it acts for purposes, which are within its business, it is obvious that UTCCR cannot apply to this case.

Furthermore this examination requires the consideration of three key issues, which are as follows: 1) the incorporation of the clause into the contract, 2) its scope of effectiveness over the breach of terms in this case, in McKendrick’s words whether “the exclusion clause, as a matter of construction, is effective to exclude liability for the loss that the claimant [here S Co] has suffered” . 3)third issue weather the contract could be considered as a breach of warranty, or breach in Sale of goods act 1979 of satisfactory good. Main Part

As far as the incorporation of the clause is concerned, the facts of the case along with principals on incorporation can provide useful information. It appears that, “S Co has made a number of similar computer purchases fromB Co in the past”. In addition, B Co normally asks its customers to sign its “standard terms” containing the clause of limited liability.

On the basis of the principal that “a term may be incorporated into a contract as a result of a course of dealing between the parties or as a result of the custom of the trade in which the parties work” it can be argued that in this case the terms of the contract are undeniably incorporated. S Co had made a number of similar purchases from B Co in the past.

Two cases as dealt by the courts can also serve as an affirmation of this principle. The first is the case of Spurling Ltd v Bradshaw , in which L. J. Denning concluded in his judgement that “by the course of business and conduct of the parties, these conditions were part of the contract” .Furthermore, in the case of Henry Kendall & Sons v William Lillico & Sons Ltd “there had been three or four contracts a month between two of the parties” .

Thus, the Court of Appeal decided that, on the grounds of the “regularity” of the dealing between the two parties, the exemption clause was valid and effective by consistency of dealing. Consequently, the exemption clause in the case of S Co and B Co falls within the principle of incorporation of a term by course of dealing. The case law referred to above indicates that the courts do not ignore the regularity of the dealing between the two parties, which regularity is present in this case of S Co and B Co. We must now consider the second issue in relation to the exemption clause of this contract between S Co and B Co, namely the construction of the clause and whether it covers the breach of the terms implied by Sale of goods Act 1979(hereinafter SOGA).

According to SOGA14.Implied terms about quality or fitness:(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods— (a)fitness for all the purposes for which goods of the kind in question are commonly supplied,(b)appearance and finish,(c)freedom from minor defects,(d)safety, and (e) durability.

Goods supplied by seller has to be of satisfactory quality and maintain all aspects above, as we know from the case, that ”It quickly became clear that the computer was seriously defective and that it would cost at least £500 to deal with the problems.”

The wording of the clause is clear:“Bright Co limits its liability for any breach of the terms implied by ss13-15 of the SOGA to £50.” As the facts are set out, it was clear that computer sold by B Co to S Co was seriously defective, ”and that it would cost at least £500 to deal with the problems”. Consequently, it can be assumed that the clause covers circumstances.

Furthermore, the clause states that B Co always offer’s to purchase a service contract covering parts and labour on the computer purchased for 2 years, which does not limit liability, however S Co always declines such offers from B Co.

More could be said on the construction of this exception clause of limiting liability, such as remarks on the ‘unreasonable’ liability of 50£ considering the potential breach of the terms implied by ss13-15 of the Sale of Goods Act 1979. However, since the UCTA was passed in 1977, matters of reasonability are dealt within the Act itself. As Lord Wilberforce said in Photo Production Ltd v. Securicor Transport Ltd, “This Act…enables exception clauses to be applied with regard to what is just and reasonable” .

Having established that the construction of the clause does cover the presence of breach, we must turn now to the third key issue. First question that would arise is that weather B Co had made all precautions to inform S Co about the clause of limited liability, nevertheless that S Co B Co have made a number of similar purchases in the past ”Smart Co were never asked to sign the standard terms.” And according to SOGA:

12.Implied terms about title, etc.

“(4) In a contract to which subsection (3) applies there is an implied term that all charges or encumbrances known to the seller and not known tothe buyer have been disclosed to the buyer before the contract is made.” And B Co didn’t inform S Co about signing the standard terms for this purchase. So therefore it would be hard to rely on exemption clause as S Co did not judicially approve the clause of limited liability.

But, afterwards S Co declined the offer of B Co to purchase a contract covering parts and labour on the computer purchased for 2 years. In this case S Co was aware of not covering it purchase with a warranty or at least was able to contemplate the circumstances at the time of the contract.

11.When condition to be treated as warranty

“Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract; and a stipulation may be a condition, though called a warranty in the contract.”

And for that reason it’s possible to identify that contract couldn’t be considered as a breach of warranty, but a breach in SOGA of satisfactory goods.

14.Implied terms about quality or fitness

“(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.”


In the course of business between S Co and B Co, the latter has several times set out the same exemption clause. But S Co haven’t signed any terms of clause of limited liability, thus it could use it as a defence against B Co, objected to this standard terms including the clause, which restricted B Co’s liability to the amount of 50£, in case of breach of terms implied by SOGA. It seems that S Co was aware of the circumstances, or could take matter into own choice and accept the offer of contract covering parts and labour on the computer purchased for 2 years. In a simpler wording: S Co was aware of the offer and possible malfunctions and could have contemplated them. But however the B Co didn’t inform of necessary extra regulations judicially thus it could hardly rely on exemption clause. S Co would be liable for restitution; however, the answer depends on the discretion of the courts.

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