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Exclusion Clauses Revisited
Our last Briefing contained a detailed analysis of the decision of the commercial Court judge in Last Bus Ltd (trading as Dublin Coach) v Dawsongroup Bus and Coach Ltd which resulted in a welcome and somewhat rare victory for a funder in upholding an exclusion clause in a Hire Purchase Agreement.
When commenting on the decision we did note that “It is particularly striking that the judge was prepared to rule in favour of a Lessor’s exclusion clause on an application for summary judgment”, and this remark turned out to be rather prescient because the judge’s decision has now been reversed by the Court of Appeal ([2023] EWCA Civ 1297) precisely on the ground that a decision on the reasonableness of an exclusion clause should almost always await a full trial and should not be determined on a summary basis.
The case has somewhat unusual facts in that over a period of 20 years Last Bus had acquired about 200 coaches for use in its business, many of them through the funder Dawson. The vehicles now cost about £250K each and it was alleged that recent versions were defective, to the extent that four of them had caught fire.
Last Bus alleged that it had suffered financial losses in the region of £10 Million as a result of this. Dawson disputed this and claimed that any difficulties were due to lack of proper maintenance being carried out by Last Bus.
Last Bus brought proceedings both against Dawson under the Hire Purchase Agreement, and also against the manufacturer of the vehicles Evo Bus on the basis of implied warranties as to satisfactory quality and fitness for purpose in a collateral contract.
It was Dawson who brought the application for summary judgment against Last Bus on the ground that the exclusion clause in the Hire Purchase Agreement meant that Last Bus had no prospect of succeeding against Dawson, though it was common ground that in any event Last Bus’s claim for damages against Evo Bus (together with any indemnity claim by Dawson against Evo Bus) would have to continue to trial.
Clause 5(b) of Dawson’s terms and conditions of hire, in which Dawson was defined as “the Company” and Last Bus as “the Customer”, provided as follows:
“The Customer agrees and acknowledges that it hires the Vehicle for use in its business and that no condition, warranty or representation of any kind is or has been given by or on behalf of the Company in respect of the Vehicle. The Company shall have no liability for selection, inspection or any warranty about the quality, fitness, specifications or description of the Vehicle and the Customer agrees that all such representations, conditions and warranties whether express or implied by law are excluded. Notwithstanding the foregoing provisions of this clause, nothing herein shall afford the Company a wider exclusion of liability for death or personal injury than the Company may effectively exclude having regard to the provisions of the Unfair Contract Terms Act 1977 . The Customer acknowledges that the manufacturer of the Vehicle is not the agent of the Company and the Company shall not be bound by any representation or warranty made by or on behalf of the Vehicle manufacturer.”
As explained in our last Briefing the judge went into detail in analysing the relevant legal authorities, and so did the Court of Appeal but with a rather different emphasis on some of the previous judgments.
Perhaps rather ominously the Court of Appeal focused on the decision of the Court of Appeal in the well-known case of Lease Management Services Ltd v Purnell Secretarial Services Ltd [1994] CCLR 127:
“ I am unable to accept, as a general proposition, that an exclusion clause which would be unreasonable in a contract for sale by a supplier will be reasonable as between a hirer and a finance company because of the latter’s non-inspection of the goods and its non-participation in negotiations proceeding the transaction. If there were such a general proposition, acquisition by hire from a finance company rather than by purchase from a supplier would become a trap. A customer would not expect his rights regarding defects to differ according to which of these two acquisition routes he chooses to follow.
I have in mind that by imposing a reasonableness test Parliament envisaged that a condition such as [the exclusion clause] is not necessarily unreasonable. There may be circumstances where it is reasonable. But where the condition excludes all liability for breach of any representation or warranty, express or implied, the burden of proving reasonableness will not be lightly discharged …”
After then analysing some later precedents the Court of Appeal concluded as follows:
“Exclusion clauses in contracts based on one party’s written standard terms of business … and also those in hire purchase contracts … are subject to the test of reasonableness, the burden being on the party relying on the term to show that the test is met. The rationale underlying these provisions is obvious: customers contracting with a business on its written standard terms, or with a hire purchase company (also likely to be on the company’s standard terms) are considered, on the face of it, not to be of equal bargaining power, at least in relation to the terms of business which have not been individually negotiated, but may have been no more than “small print” on the back of the primary contractual documents. Parliament has decided that businesses seeking to rely on those terms to exclude what would otherwise be their liability under the contract must prove the reasonableness of those terms.
Even where the parties are large commercial concerns and of equal bargaining strength as regards the price to be paid under the contract, that does not mean that they are of equal bargaining strength in respect of the terms . A supplier may be willing to negotiate the unit price, but will only supply on its standard terms, a position taken by all other suppliers in the market. That crucial distinction must, in my judgment, be borne in mind when considering the reasonableness of standard terms and, to a large extent, epitomises the rationale for controlling standard terms of business by statute.
It follows from the above, in my judgment, that the Judge was wrong to approach the question of reasonableness of clause 5(b) on the basis that the parties were of equal bargaining strength and the “marked reluctance to interfere” was engaged. The prior question was whether, where Last Bus was contracting on Dawson’s standard terms of business, the parties were on an equal footing as regards those terms. Given that it was plain that Dawson would not have contracted without the exclusion clause and given the Judge’s finding that no materially different terms were available in the market, the conclusion (at least arguably) should have been that the parties were not of equal bargaining strength as regards clause 5(b). On that basis, the Judge adopted the wrong approach, which was a major factor in his conclusion…
The proper starting point, in my judgment, was that clause 5(b), contained in standard terms of business of a hire purchase company, purported to exclude any and all liability for the quality of the coaches supplied to Last Bus, leaving Last Bus without a remedy even if it received no value at all whilst having to pay for the hire. Purnell makes it clear that such clauses are prima facie unreasonable under UCTA , … and which the Judge should have followed in this case.
It follows from the above matters that I also consider that the Judge was wrong to state in para 39 that there was only one factor that pointed away from the reasonableness of the term (the fact that hire purchase on different terms was not available). Whilst that was indeed a powerful factor, the Judge appears to have left out of account the direct legal and practical effect of the clause, potentially leaving Last Bus without any remedy if the coaches for which it paid £7.5m proved entirely worthless. That factor might have been minimised if Last Bus had had insurance … but there was no evidence of that. Neither could the Judge have discounted that factor on the basis that Last Bus had a good contractual claim against EvoBus given that EvoBus denied any contract and, in the alternative, relied on its own exclusion clause.
A third error on the part of the Judge was, in my judgment, to hold that a trial was not necessary to determine the question of reasonableness. Apart from the general point that such a fact-sensitive issue would ordinarily require a trial (although I do not say that the issue could never be determined on a summary basis), in this case there were obvious matters that required investigation. The reasonableness of clause 5(b) fell to be considered in the full context of the tripartite arrangement with EvoBus, whereby Dawson purchased from EvoBus on terms unknown. As … Dawson conceded in argument, if Dawson had the right to an indemnity from EvoBus, that would potentially be relevant to the reasonableness of its own exclusion clause…
Further, there was no evidence of the insurance position of any of the three parties. If EvoBus had product liability insurance, or Dawson had liability insurance, that might well have affected the reasonableness of exclusion clauses in any of the contracts in the tripartite arrangement. It seems unlikely that Last Bus would have had insurance against increased maintenance costs, and it is not suggested that it did.
It will be apparent from the above that I consider that the Judge adopted the wrong approach to the question of reasonableness, did not take into account key factors and should have refused the application for summary judgment, directing that the matter proceeds to a trial in which all three parties would participate. I should make it plain that I express no view, even on a provisional basis, as to the reasonableness of clause 5(b). That will be a matter for the trial Judge.
I should add that the warning that this court should be slow to interfere with a first instance judge’s assessment of the reasonableness of a contract term plainly applies where the assessment was made at trial on the basis of all the evidence, including oral testimony. I do not consider that it applies with the same force where there has been a summary determination, where this court has all the materials which were before the Judge, and is asked to review a decision that it is not arguable that a contract term is unreasonable. But in any event, my view that the Judge adopted the wrong approach and starting point and did not take into account crucial factors would have justified interfering even after a trial”.
Comment
In fairness the decision of the Court of Appeal comes as no surprise, the key factor being that questions as to the interpretation of reasonableness when applying the statutory control on exclusion clauses is very fact specific and depends on all the circumstances of the case.
The Court of Appeal made the point that counsel on both sides had been unable to refer to any previous case in which this critical issue had been determined on an application for summary judgment rather than after a full trial.
It makes sense that all the facts involving all the relationships between the three parties involved should be carefully examined by the court and subject to the disclosure of documents, witness evidence and cross-examination of witnesses, before the court is in an informed position to make a judgment about reasonableness.
One factor which we have always weighed heavily in advising funders in these situations is the availability of remedies against the supplier of equipment, both to the hirer on the basis of a collateral contract, and to the funder on the basis of its contract of purchase from the supplier. Here these matters were simply unknown at the summary judgment stage, though there is some suggestion that the supplier Evo Bus had imposed exclusion clauses in its contracts of sale, and the court emphasised that this is the very sort of issue which will weigh heavily in a judge’s decision on reasonableness since a result leaving the hirer with no effective remedy against anyone is highly unattractive and likely to be a last resort.
Having said this, the only effect of the Court of Appeal overturning the judge’s decision is that the matter will have to be decided at a full trial, and there remains a real possibility that after hearing all the evidence the court will conclude that the exclusion clause relied upon by Dawson does satisfy the requirement of reasonableness.