Macdonald & Poyton, 'A particular problem for e-commerce: Section 3 of the Unfair Contract Terms Act 1977'

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You are here: BAILII >> Databases >> United Kingdom Journals >> Macdonald & Poyton, 'A particular problem for e-commerce: Section 3 of the Unfair Contract Terms Act 1977' URL: http://www.bailii.org/uk/other/journals/WebJCLI/2000/issue3/macdonald3.html Cite as: Macdonald &amp, Poyton, 'A particular problem for e-commerce: Section 3 of the Unfair Contract Terms Act 1977'

A particular problem for e-commerce: Section 3 of the Unfair Contract Terms Act 1977.

Elizabeth Macdonald

and

David Poyton

Copyright © 2000 Elizabeth Macdonald and David Poyton.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

Statutory references such as those to `writing' and `signature' may provide barriers to efficient e-commerce and it is with amendment of many such legislative references that the Electronic Communications Act 2000 is concerned. This article considers the scope of the protection afforded to non-consumers, contracting by e-mail or on the Internet, by s3 of the Unfair Contract Terms Act 1977, with its reference to those dealing on the other party's `written standard terms of business'. It examines the coverage of s3 in relation to contracts made electronically, the justification for the section's application to contracts made on one party's `standard terms of business' even if they are not `written' in the traditional sense, and the question of whether the Electronic Communications Act 2000 could bring about any necessary amendment of s3.

Introduction

There is currently much concern to ensure the successful development of electronic commerce in the UK and the approach has been taken that 'one of the most important ways of doing this is by ensuring that, as far as possible, the law does not discriminate between traditional and electronic ways of doing business, i.e. that the law should be "technology neutral" in its application' (DTI 1999, para 16)⁽¹⁾. The 'electronic ways of doing business' with which this article is concerned are by e-mail or simply on the Internet, and issues are immediately raised in relation to statutory references to signature and writing. It is with such matters that the Electronic Communications Act 2000 deals and it is 'writing', in a particular context, which is the concern of this article. The Act does not itself set out to make the necessary amendments to the statutory references to writing, but rather to provide powers for the making of Statutory Instruments to meet specific instances of the problem. The most obvious situations to be dealt with are where there are requirements that transactions be carried out in writing or that certain communications be made in writing. Such requirements present major obstacles to the efficient adoption of electronic communication as a means of facilitating commerce. However, the concern of this article is with 'technology neutrality' in less obvious cases. In particular, the focus here is on the Unfair Contract Terms Act 1977, s3, which, inter alia, subjects exemption clauses to a reasonableness test where one party contracts on the other's 'written standard terms of business'. The need for the amendment of that section will be considered, as well as the question of whether such amendment will be brought about by the Electronic Communications Act 2000.

Basic significance of section 3

Basically, the Unfair Contract Terms Act 1977 deals with attempts to exclude or restrict business liability (s1). However, it does not do so generally but only in relation to certain identified contexts or bases of liability (and subject to certain exceptions - see Schedule 1). Section 2, for example, provides protection against exemption clauses which attempt to exclude or restrict liability for negligence and it is irrelevant whether the injured party deals as consumer. Sections 6 and 7 deal with attempts to exclude or restrict liability for the breach of certain terms implied into contracts under which the possession or ownership of goods passes. For example, under the Unfair Contract Terms Act, s6, liability for breach of the terms implied by the Sale of Goods Act 1979, ss13-15, as to the goods' correspondence with description and sample, and as to their satisfactory quality and reasonable fitness for the buyer's particular purpose, cannot be excluded or restricted if the buyer 'deals as consumer'. In relation to other buyers, liability for breach of those terms can be excluded or restricted but only if the relevant clause satisfies the requirement of reasonableness. However, in many ways, the most generally applicable section of the Unfair Contract Terms Act 1977 is section 3 and it applies a test of reasonableness to an exemption clause⁽²⁾ where the party against whom it is sought to use the clause 'deals as consumer' or on the other party's 'written standard terms of business'. In the light of the reference to 'written standard terms' consideration must be given to the appropriate scope of s3 in the context of contracts made electronically.

'Written standard terms of business'

It will usually be clear that one party is contracting on another's 'standard terms of business' (Macdonald 1999a, pp 104-110). What must be addressed here is the fact that they must be 'written standard terms' and the impact of that requirement in the context of contracts made electronically. The first point to be made is that there is no definition of 'writing' in the Unfair Contract Terms Act 1977 but, in general, it 'includes typing, printing, lithography, photography and other modes of representing words in a visible form' (Interpretation Act 1978, sched 1). Prima facie, electronically conveyed information is a series of electronic impulses which, by their nature, are not 'visible' and so not 'writing'. The point can be made that electronically recorded information is 'visible' on the computer screen (eg Bainbridge 2000, p266) and, more subtly, that 'photography' is specifically included in the definition and it initially makes a record that is only 'visible' after chemical treatment and that by analogy the 'electronic pulses' can be made visible on a computer screen. However, an analogy with something specifically included in a definition does not necessarily provide the strongest argument - specific inclusion may indicate an otherwise borderline case⁽³⁾ - and the most widely taken view seems to be that the 'Interpretation Act definition of "writing" by placing emphasis on visibility, rules out electronic "writing", which is, in essence, a series of electronic impulses' (DTI 1999, par 16). On this latter basis, standard terms in an e-mail or on the Internet will not be 'written'. Of course, the point can be made that the 'master copy' of standard terms may be recorded on paper, in a form traditionally regarded as written, and that, particularly where such standard terms are incorporated into an electronically made contract by reference⁽⁴⁾, it is the terms so recorded which become part of the contract (i.e. as terms in a traditional written form) (Macdonald 1999a, pp 110-111). However, even now, and probably increasingly, the point can be made that the 'master copy' itself may be electronically stored on a floppy disk, CD or hard drive, and the same problem of 'visibility', considered above, then arises in relation to any argument that such terms are 'written'. Prima facie with the increase in electronic contracting, unless s3 is amended, the contracts covered by that section, with its reference to 'written standard terms of business', will become more limited. Prima facie, the small business contracting on the net, or by e-mail, on the standard terms of another business will find itself disadvantaged by the chosen medium of communication and subject to unreasonable exemption clauses which would have been ineffective in a paper transaction⁽⁵⁾. There are two matters which should be considered. Firstly, it has been noted that s3 applies not only where the relevant party contracts on the other's written standard terms of business but also where the relevant party 'deals as consumer'. It is obvious that consumers will also often contract on the other party's standard terms of business. It should be asked whether the overlap between the two categories protected by s3 is such that it is not significant that the scope of one is curtailed in relation to contracts made electronically. Secondly, it must be considered whether the impetus for the need to control exemption clauses in standard form contracts arises where those terms are not 'written' in the traditional sense.

'Deals as consumer'

As has been indicated, it has always been obvious that there would be considerable overlap between the two protected categories under s3 - consumers will often make agreements on the standard terms of the businesses with which they are dealing. However, that overlap became all the greater when the Court of Appeal in R&B Customs Brokers v United Dominion Trust [1988] 1 All ER 847 took a particular approach to a key element in the definition of 'deals as consumer' - the meaning of 'in the course of a business'. According to the definition in s12 of the 1977 Act, someone basically 'deals as consumer' if they do not contract 'in the course of a business' and the other party does contract 'in the course of a business' (and, in the case of contracts for goods, that the goods are of a type ordinarily supplied for private use or consumption). In R&B Customs Brokers one question was whether R&B's acquisition of a car had been such that it had 'dealt as consumer' in the transaction. R&B's business was that of freight forwarding agent and the car was wanted partly for the business use, and partly for the personal use, of its directors. It was the second or third such transaction carried out by R&B and the court took the line that R&B had not acquired it 'in the course of a business' but rather dealing as consumer. They reached that conclusion by applying a test derived from the analysis of the phrase 'in the course of a business' in the context of the Trade Descriptions Act 1968 i.e. that a transaction is 'in the course of a business' if it is either integral, in itself, to the business or, if merely incidental to the business, regularly occurring. In R&B the transaction was not integral to the business, and there was an insufficient pattern of past dealing for it to fall within the alternative category. This is a narrow approach to 'in the course of a business', particularly as the class of transactions which are integral in themselves to the business are limited. A sale of the car hitherto used in his business by a courier, or a taxi operator, will not in itself be integral to the business (Davies v Sumner [1984] 3 All ER 831; Devlin v Hall [1990] RTR 320). It 'is the transaction and not the goods which must be integral to the business' (Stevenson v Rogers [1999] 1 All ER 613, Potter LJ at 626).

What must be emphasised here is that the use of the above approach to the phrase 'in the course of a business' can be seriously criticized (eg Kidner 1987, Macdonald 1999b). The point can be made that the court was adopting a meaning from cases dealing with a statute imposing criminal liability. There may be every reason to take a fairly narrow approach to what amounts to a transaction 'in the course of a business' when what is under consideration is the scope of criminal liability. It may be that a different impetus should drive the meaning of a provision concerned with the scope of protection against unreasonable exemption clauses. Of course, in cases like R&B, the effect of the line taken in that case is expansive of that protection. However, and more significantly, it thereby curtailed that protection in other cases because the phrase 'in the course of a business' occurs twice in the definition of 'deals as consumer' in s12. As has been indicated, in order for someone to 'deal as consumer' they must not contract 'in the course of a business' and the other party must contract 'in the course of a business'. It is this second requirement that emphasises that the R&B Customs Brokers approach unduly narrows the definition. It means that if a freight forwarding agency sells a car it had for use by its directors (having bought and sold two or three such cars in the past), to someone who has no business connections whatsoever, that purchaser will not 'deal as consumer'. He, or she, obviously would not have contracted 'in the course of a business' but, on the basis of the R&B Customs Brokers approach, neither would the seller have done so, and the purchaser then cannot deal as consumer (Macdonald 1999b).

There have been indications of a different approach. The phrase 'in the course of a business' is also used to determine those contracts into which terms as to the satisfactory quality of goods and their reasonable fitness for the buyer's particular purpose may be implied by s14 of the Sale of Goods Act 1979. In that context, in Stevenson v Rogers [1999] 1 All ER 613 the Court of Appeal has recently taken the line that the purpose of the phrase is to 'distinguish between a sale made in the course of a seller's business and purely private sale of goods outside the confines of the business (if any) carried on by the seller'(Potter LJ at 623). It is submitted that this type of approach would be a more appropriate one to take in relation to the definition of 'deals as consumer' under the Unfair Contract Terms Act 1977 and that when the type of situation envisaged above occurs, the courts will adopt it (Macdonald 1999b). This will mean that the protection of 'dealing as consumer', will extend to more people who have no business connection at all, which seems appropriate, but will not often protect a business as it did in R&B Customs Brokers. From the perspective of the small business, such an approach will place a greater emphasis on the other basis on which a party may claim the protection of the Unfair Contract Terms Act 1977, s3 - (currently) that they contracted on the other party's 'written standard terms of business'.

Should protection be limited to standard terms which are 'written'?

As has been indicated, the question which should now be addressed is whether the protection currently afforded, by s3, to those who contract on the other party's standard terms, is only needed where those terms are 'written'. The basic problems with standard form contracts were summarised by Lord Reid in Suisse Atlantique Societe d'Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361. In an oft quoted dictum he said

It is plain that the 'take it or leave it' element of this could be present whatever the medium of contracting. It could be present even in relation to contracts made orally. However, Lord Reid also raises the issue of 'unfair surprise' as to the effect of terms and that has been seen as of some significance in relation to standard form contracts and the need to police them (Goldberg 1974; Beale 1989), but it is unlikely to be present in relation to the traditional type of non-written term - the oral term. On the rare occasions when they are encountered, such terms are likely to be simple, intelligible and actually known and understood by the party to whom they are stated. However, there is no reason for electronically recorded terms to be any simpler, more intelligible, or more clearly incorporated into a contract than the more traditional written standard terms. That standard terms in electronic form need be no more readily intelligible than their paper counterparts is obvious and the potential for artificial incorporation of standard terms in electronic form is clear. It has long been established that, in the absence of fraud, misrepresentation or non est factum, signature of a contractual document will incorporate its terms whether it has been read or not (L'Estrange v F. Graucob Ltd [1934] 2 KB 394. Macdonald 1999a, pp 5-13 ) and that such incorporation may be very artificial has been recognised (eg McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125, 133). This will not change with the use of electronic contracting and the recognition of 'electronic signatures'. Apart, possibly, from some initial nervousness at the use of the medium, the need to add an electronic signature to an agreement reached electronically will provide no greater impetus for standard form terms to be read than comes from appending a signature in the traditional manner with a pen. In addition, standard terms are often artificially incorporated into traditionally made contracts without even the little impetus to read them which is provided by a request for signature. They may be incorporated merely by the provision of 'reasonably sufficient notice'(Parker v South Eastern Ry Co (1877) 2 CPD 416)⁽⁶⁾. There is no reason to suppose that such incorporation will be less artificial in the electronic sphere even if the relevant party has been faced with a screen containing the relevant standard terms and a warning not to click to proceed with the making of a contract until the terms have been read. (It is easier, and quicker, to click without reading than to read first - just as it is easier, and quicker, to sign without reading). The difficulties which can be occasioned by standard form contracts will be encountered when such terms are recorded electronically rather than merely where they appear in the more traditional written form. There is every reason to extend the scope of the Unfair Contract terms Act 1977 to electronically recorded standard terms, and no significant reason not to. The section could be amended very simply. The reference could simply be to the situation in which one party is contracting on the other party's 'standard terms of business'⁽⁷⁾.

The 1999 Regulations

Brief mention should be made of the Unfair Terms in Consumer Contracts Regulations 1999 (replacing the 1994 Regulations) as, amongst other terms, they also place some restriction upon exemption clauses. There is no restriction of the application of the Regulations to terms in writing. In fact the EC Directive on Unfair Terms in Consumer Contracts, from which the Regulations derive, specifically states that its operation is not so restricted (recital 16). However, whilst the Regulations basically apply to standard form contracts, as they cover non-individually negotiated terms, they only apply to contracts between consumers and sellers or suppliers. The Regulations cannot be used to ameliorate the effects of the standard terms to which s3 of the Unfair Contract Terms Act 1977 applies being confined to 'written' terms. They do, of course, provide some further impetus to the argument that when the policing of standard terms is in question it is not the fact that such terms are written which leads to a need for such control.

The Electronic Communications Act

Within certain confines, section 8(1) of the Act provides for the 'appropriate Minister' to 'modify' by statutory instrument 'any enactment or subordinate legislation ... in such manner as he may think fit for the purpose of authorising or facilitating the use of electronic communications ... for any purposes mentioned in subsection (2)'. In relation to the amendment of the Unfair Contract Terms Act 1977, s3, the difficulty lies with the 'purposes mentioned in subsection (2)'. Of these diverse purposes, that encompassed in s8(2)(a) clearly provides the greatest possibility of encompassing s3 of the 1977 Act⁽⁸⁾. The 'purposes' in s8(2)(a) are

Whilst it is true that this does not merely encompass legislation requiring writing, but extends to legislation under which something 'may be done ... in writing', it would seem that it is, nevertheless, inappropriate to encompass s3 of the 1977 Act. Section 3 is concerned with contracts, but it does not require or allow them to be made on 'written standard terms'. It merely polices them when they are so made. In other words, the 'written standard terms' do not arise under s3 and the provisions of the Electronic Communications Act 2000 seem inappropriate to provide for the amendment of s3.

Conclusion

There are innumerable instances of legislative references to writing which must be addressed if the growth of e-commerce is not to be impeded. The Electronic Communications Act 2000 will allow many of them to be suitably amended. However, in order for the law to be 'technology neutral' the type of issue raised here in relation to s3 of the Unfair Contract Terms Act 1977 will have to be dealt with. If e-commerce is to flourish, those trading in cyber space need to feel as secure as when using more traditional means. If the power to amend s3 of the Unfair Contract Terms Act 1977 is not provided by the Electronic Communications Act 2000, it will require separate legislation. If purposive, and purposeful, interpretation could bring s3 within the scope of that Act, then it should not be forgotten by the 'appropriate Minister' in dealing with more obvious cases where writing is required.

Bibliography

Bainbridge, D (2000) Introduction to Computer Law (Longman (Pearson Education): Harlow)

Beale, H (1989) 'Unfair Contracts in Britain and Europe' Current Legal Problems 197

Department of Trade and Industry (1999) Consultation Document Building Confidence in Electronic Commerce. URN 99/642.

Goldberg, V (1974) 'Institutional change and the quasi invisible hand' 17 Journal of Law & Economics 461

Kidner, R (1987) 'The Unfair Contract Terms Act 1977 - Who Deals as Consumer' 38 Northern Ireland Legal Quarterly 46

Macdonald, E (1999a) Exemption Clauses and Unfair Terms (London : Butterworths)

Macdonald, E (1999b) '"In the course of a business" - a fresh examination' [1999] 3 Web JCLI http://webjcli.ncl.ac.uk/1999/issue3/macdonald3.html

(1) This reflects the approach also being taken in the broader international arena as well as that being taken by individual states. For example, the 1996 Uncitral Model Law on Electronic Commerce promotes the principle of 'medium neutrality'. In Article 5 it states:

Similar provisions can also be found in the EC Directive on Electronic Commerce. Article 9(1) states:

In Australia the same principle although described as 'functional equivalence' was expressed by the Electronic Commerce Expert Group in its report on legislative proposals to the Attorney General:

Wherever possible and subject to the differences in the environments, business engaged in electronic commerce should be subject to arrangements equivalent to those affecting business engaged in physical commerce.

(2) Section 3 applies the test of reasonableness not only to clauses in the form of exclusions or restrictions of liability (s3(2)(a)), but also to terms under which the relevant party claims to be entitled to render a contractual performance substantially different from what was reasonably expected or, in whole, or part, to render no performance at all (s3(2)(b)). Section 3 is one of the sections which prevents the form of a clause being used too easily to evade the operation of the Act. (See Macdonald 1999a, pp 113-118)

(3) It can be suggested that the perceived need for separate treatment of 'electronic pulses' may gain strength from the transitory nature of the visible production of the electronic pulses on a computer screen.

(4) i.e. where the terms themselves are not included in the document (or, now, in the electronic information) present in the transaction but that document (or electronic information) refers to them as terms of the particular contract which are recorded elsewhere. On incorporation by reference generally see Macdonald 1999a, pp 24-25

(5) Obviously s3 basically only applies to contracts governed by English Law (but see s29). This article is particularly concerned with the protection the section may afford small business. When such businesses contract with businesses in other jurisdictions they may lose the protection of s3 thereby, and it may well be that such extra jurisdictional transactions will be far more common because of e-commerce, but the issue raised is not itself created by the advent of e-commerce and is beyond the bounds of this article.

(6) Incorporation can also occur through a course of dealing. On incorporation by notice see Macdonald 1999a, pp 14-26. On incorporation by a course of dealing see Macdonald 1999a, pp 26-33.

(7) Support for this might be thought to be found in s17(1) of the Scottish part of the Unfair Contract Terms Act 1977 (part II), but the whole of s17 must be considered. Section 17 is the equivalent of s3 in part I, the part of the Act applicable in England and Wales. Under s17(1), it applies to `Any term of a contract which is a consumer contract or a standard form contract...'. At first sight, this might be seen as providing support for the argument in the text. However, whilst this applies to `standard form contracts' and makes no reference to writing, in cases where the party seeking protection is not a `consumer', he, or she, must be a `customer' and under s17(2), `"Customer" means a party to a standard form contract who deals on the basis of written standard terms of business of the other party to the contract who himself deals in the course of business'. Thus, if the non-consumer is to receive protection, the `standard form contract' must be the `written standard terms of business' of the other party (emphasis added).

United Kingdom Journals

A particular problem for e-commerce: Section 3 of the Unfair Contract Terms Act 1977.

Elizabeth Macdonald

and

David Poyton