Reasonableness of Exclusion Clauses in Hire Purchase Contracts Under Fire

In a ruling of particular importance to the motor sales industry, the reasonableness of exclusion clauses in hire purchase contracts which seek to avoid liability in respect of goods that are not of satisfactory quality has been thrown into doubt by a Court of Appeal decision.

A tour company entered into five hire purchase agreements with a finance house by which it hired a fleet of 30 coaches worth £7.5 million. The contracts each contained clauses which purported to exclude the term that would ordinarily be implied into them by Section 10(2) of the Supply of Goods (Implied Terms) Act 1973 that the goods hired would be of satisfactory quality.

The company subsequently launched proceedings against the finance house and the coaches' original supplier, asserting that they were liable to – and in four cases did – catch fire due to defects which required the company to employ a far more rigorous and expensive maintenance regime than would otherwise have been required. The company valued its claim at in excess of 10 million euros.

Following a hearing, however, a judge summarily dismissed the company's claim on the basis that it was caught by the exclusion clauses. Given that both parties to the bargain were commercially sophisticated and in an equal bargaining position, he found that the company had no real prospect of establishing that the clauses were unreasonable within the meaning of the Unfair Contract Terms Act 1977 (UCTA) and thus unenforceable.

Upholding the company's challenge to that outcome, the Court observed that the terms of the UCTA are not confined to regulating consumer contracts. It noted, however, that experienced parties, enjoying equal bargaining power, who enter into commercial contracts are generally entitled to apportion risk as they see fit, without judicial intervention. The bargain agreed between them will usually prevail.

However, it is possible for a party to have equal bargaining strength when it comes to agreeing a price for goods but to be in a weaker position when negotiating the terms of a contract. That is particularly so where an exclusion clause appears in the small print on the back of a contract and is included as a non-negotiable standard term. In such circumstances, negotiating parties may not truly be on an equal footing.

When it came to considering the reasonableness of the exclusion clauses, the judge erred in his approach and took no account of key factors, including the insurance position of the parties, about which he heard no evidence. Reinstating the company's claim against the finance house, the Court found that a full trial was required to resolve the question of whether the exclusion clauses were reasonable.