Friday, 20th October 1995
LORD JUSTICE HIRST: This is an appeal with the leave of His Honour Judge White by the defendant buyers', Logic Resource Limited, against part of the judgment of District Judge Gerlis sitting as an Assistant Recorder in the Central London County Court in favour of the plaintiff sellers, AEG (UK) Limited, in relation to a contract made in January 1989 for the sale of 49 cathode ray tubes for a total of approximately £14,800 for the use in radar equipment. The goods were in fact exported by the defendants to their customers in Iran. The case raises two points of principle concerning the plaintiffs' printed conditions of sale. Firstly, whether the defendant was bound by those printed Conditions of Sale, ie whether the defendants received sufficient notice of them to result in their incorporation, or at least the incorporation of the relevant parts, into the Contract of Sale. Secondly, if they were so bound, whether the condition on which the plaintiffs particularly rely was reasonable under the Unfair Contract Terms Act 1977 ("UCTA"). The District Judge found in the plaintiff/ respondents' favour on both these points and the defendant/ appellants challenge both those conclusions by their appeal. I shall refer to these two main issues in future respectively as "incorporation" and "UCTA".
The plaintiffs are, of course, a very large and extremely well known multi national company. The defendants are a one man business, as the Judge found. The goods supplied were, as is now common ground, found to be defective when the defendants' customers in Iran discovered that they would not fit into their radar equipment because the pins on the cathode ray tubes were too long. Consequently, it was necessary for them to be returned to the plaintiffs for them to modify them.
They were, therefore, on the defendants' instructions to their customers in Iran, air freighted back to the United Kingdom at a cost of £4,233.33. When the defendants received the plaintiffs' invoice for payment they deducted inter alia the cost of air freighting them back to the United Kingdom (I say inter alia because there were other matters on which the defendants relied and succeeded which are not the subject matter of appeal). The plaintiffs disputed the deduction in reliance of one of the printed conditions in their standard Conditions of Sale, condition number 7.5, which provides, so far as relevant:
"The Purchaser shall return the defective parts at his own expense to the Supplier immediately upon request of the latter." (emphasis added)
I shall refer to the full context of that stipulation shortly. It is here that the present bone of contention between the parties lies under the two main issues to which I have referred. There is also a further point raised by the respondents' notice in which they contend that the cost of returning the goods by air from Iran is in any event irrecoverable as it was not within the contemplation of the parties when the contract was made.
It is now convenient to summarise the facts in a little more detail. The order from the defendants' customers in Iran was received by the defendants towards the end of 1988. This was for the supply of 49 cathode ray tubes of a certain defined specification for use in radar equipment. The defendants, in turn, approached the plaintiffs who had taken over the manufacture of these items from their previous manufacturers, a company called MOV. On 13th January 1989, the defendants submitted a purchase order to the plaintiffs for the items (Document 66). The order stated inter alia the delivery requirements. On 19th January 1989, the plaintiffs sent a confirmation of the order (Documents 68/69), which is one of the key documents in the case. Having set out the details of the equipment, it is said at the bottom in small capital letters: "Orders are subject to our conditions of sale for extract see reverse." On the back (Document 69) there are quoted five conditions from the much longer lot to which I shall refer shortly. They are headed "Extracts from our Conditions of Sale". The five extracts are then set out and, at the bottom, is the important statement: "A copy of the full Conditions of Sale is available on request." The printed conditions themselves cover two full foolscap pages and I shall be referring to them in detail shortly.
It was agreed between both parties at the trial, and is fundamental to this appeal, firstly, that the full conditions of sale were never requested by the defendants, nor sent to them, so they never saw them; secondly, that condition 7 generally, and condition 7.5 in particular, was never specifically drawn by the plaintiffs to the defendants' attention. It is also common ground that the effective date of the contract was 19th January 1989, ie the date of the confirmation of order from which I have just quoted.
In evidence, the plaintiffs' former manager stated that he knew, possibly from the beginning, that the goods were destined for export but that he did not know until a later stage that the actual destination was Iran. The goods were dispatched in three tranches between September 1989 and January 1990. The original order had specified delivery at the defendants' offices in England but, as is common ground, as a result of a revised instruction from the defendants to the plaintiffs, all were actually delivered to an air freighting company in England who transported them to Iran.
In February 1990, the defendants received a complaint from their customers that the CRTs did not fit into the base of their radar equipment because the pins were too long. The defendants passed on this complaint to the plaintiffs by telex dated 6th February 1990 (page 86) and the plaintiffs, in turn, referred the matter to their manufacturing branch in Germany on the same date. It appeared that the problem was that the plaintiffs had changed the specification of the CRTs since taking the manufacture over from MOV and that this was the reason why the tubes did not fit. On 21st February, Mr Marks, the sole director of the defendants, sent a telex to the plaintiffs (page 89) stating inter alia: "I assume you will want the tubes returned." In evidence, Mr Marks said that during a telephone conversation either with Mr Maurice, the plaintiffs' then manager, or his assistant it was agreed that the tubes would have to be returned to the plaintiffs so they could deal with the problem.
In response to a letter from the plaintiffs demanding payment for their overdue account, dated 19th March 1990 (page 94), the defendants replied on the following day (page 95) complaining about the tubes, which complaint the plaintiffs again passed on to their branch in Germany. In a handwritten response from the German branch to the plaintiffs' United Kingdom office someone wrote on the document (page 98):
"I have told you this" ie the problem with the equipment "sometime ago but without response."
By a fax on 23rd April 1990 (page 104) the defendants informed the plaintiffs that, having got the units back from their clients, they intended to return them to the plaintiffs and look to them for the costs of the air freight of £4,233.33. There was a telephone conversation between the two main protagonists on 25th April, but, unfortunately, as both witnesses accepted in evidence, they came to no agreement about the costs of freighting the goods back from Iran. On 7th May, the defendants sent an invoice to the plaintiffs for the freight costs (page 111). This was not acted upon by the defendants and there was a considerable interval thereafter during which period the tubes were either repaired or replaced it is not clear which and does not matter and they were finally delivered piecemeal, starting on 23rd November 1990, with the bulk being delivered on 21st January 1991 and the final tube being delivered on 14th May 1991.
The correspondence then resumed. The defendants paid the plaintiffs' bill but deducted the amount of the disputed freight charges. This led to a letter, dated 7th June 1991, from the plaintiffs demanding payment (page 147) and the defendants' lengthy response, on 17th June 1991 (page 150), setting out in full the reasons why they had deducted the freight charges. Finally, on 28th October 1991, the plaintiffs issued the writ in the present proceedings claiming the outstanding sum.
The printed conditions (pages 50 to 51) cover, as I have indicated, two full foolscap pages of small print, with 14 clauses, each comprising a large number of sub clauses.
It is common ground that they are not standard clauses for the industry, but they were the plaintiffs' standard clauses and they are headed "Conditions of Sale. Domestic Appliances and Standard Products." I have already read condition number 7.5, but it is important to see it in the context of condition 7 as a whole, which provides, under the heading "Warranty", as follows, so far as relevant:
"7.1 The supplier warrants goods to be free from defects caused by faulty materials and bad workmanship. In the case of any goods or parts thereof supplied but not manufactured by the Supplier, the Supplier warrants goods to the purchaser only to the extent of the warranty received by himself from the manufacturer.
..........
7.3 A warranty claim shall not be valid unless the Supplier is notified by the Purchaser within seven days from discovery of any defect, and unless the Purchaser provides proof of purchase and guarantee."
A very important condition:
"7.4 To remedy defects the Purchaser shall allow the Supplier the time and opportunity required as estimated by the Supplier. Should the Purchaser refuse to allow such time and opportunity, the Supplier shall be released from the obligations to remedy the defects.
7.5 The Purchaser shall return the defective parts at his own expense to the Supplier immediately upon request of the latter. The Purchaser shall pay to the Supplier the amount of the cost (as certified by the Supplier) of any tests of goods in respect of which the Supplier does not admit liability under this warranty and the Supplier's liability shall in any event be limited to repairing or issuing credit at his option for any goods which are returned by any Purchaser within the aforesaid period."
Another very important condition:
"7.7 All other warranties or conditions are hereby expressly excluded."
Then a closely associated condition, number 9, under the heading "Liability":
"The Supplier shall not be liable in any event for any consequential loss or damage."
I consider first the incorporation issue. The learned District Judge's conclusion was as follows:
"If one can summarise the approach of the courts to the question of notice of conditions it is as follows: there must be something which puts the purchaser on notice that conditions exist and the purchaser has a reasonable opportunity of considering those conditions (whether he takes that opportunity or not) before concluding the contract. Chitty at paragraph 781 summarises the rule as to notice as follows:
'(1) If the person receiving the document did not know that there was writing or printing on it, he is not bound.
(2) If he knew that the writing or printing contained or referred to conditions, he is bound.
(3) If the party tendering the document did what was reasonably sufficient to give the other party notice of the conditions, and if the other party knew that there was writing or printing on the document, but did not know it contained conditions, then the conditions will become the terms of contract between them.'
Paragraph 2 seems particularly pertinent to this case, notwithstanding that it was not supported by any authority. In this case the Confirmation of the Purchase Order contains these words on the front: 'Subject to our conditions for sale for extracts see reverse'. In the extract, inter alia, are the following words 'A copy of the full Conditions of Sale is available on request'. I am satisfied that these words give the purchaser sufficient notice that terms and conditions exist and are an adequate tender of those conditions. It was commercially imprudent of the Defendant not to request a copy of the full conditions. If they had done so they could have protested at unacceptable clauses and refused to conclude the contract or at least insure themselves against the consequences of the conditions. The Defendant completed the contract by accepting delivery of the goods and, therefore, subject to the question of reasonableness, is bound by all the terms and conditions contained in the document."
The paragraphs which the District Judge quoted from Chitty reappear verbatim in the current 27th edition of the work and are an accurate statement of the law so far as they go. But, most importantly, they need to be read with paragraph 12 013 which comes three paragraphs after the general principles which now appear in 12 011. Paragraph 12 013 states as follows:
"Onerous or unusual terms.
Although the party receiving the document knows it contains conditions, if the particular condition relied on is one which is a particularly onerous or unusual term, or is one which involves the abrogation of a right given by statute, the party tendering the document must show that it has been brought fairly and reasonably to the other's attention. 'Some clauses which I have seen,' said Denning LJ, 'would need to printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.'"
Amongst the cases referred to in the footnote are Thornton v Shoe Lane Parking Limited [1971] 2 QB 163 and Interfoto Picture Library Limited v Stiletto Visual Programmes Limited [1989] QB 433.
One of the most recent cases in which this aspect of the law has been helpfully considered is the decision of this Court in Circle Freight International Limited v Medeast Gulf Exports Limited [1988] 2 Lloyd's Rep 427. Giving the leading judgment Taylor LJ, as he then was, quoted with approval the test propounded by Ackner LJ in Keeton Sons and Co v Carl Prior Limited (Unreported, Court of Appeal, 14th March 1985). Ackner LJ had stated as follows:
"The question in a case of this kind must always be, 'has reasonable notice of the terms been given?' This is essentially a question of fact depending on the circumstances of the case, and in particular on the nature of the business and position of the parties to the transaction."
Having cited other cases, he then returned to Keeton's case, on page 432, and also he referred to the Interfoto case [supra] from which I am about to read. In the light of all those cases, he stated the test as follows:
"...it is not necessary to the incorporation of trading terms into a contract that they should be specifically set out provided that they are conditions in common form or usual terms in the relevant business. It is sufficient if adequate notice is given identifying and relying upon the conditions and they are available on request. Other considerations apply if the conditions or any of them are particularly onerous or unusual."
The District Judge of course, in effect, applied the first two sentences from that quotation. It is the main thrust of the argument for the appellants in the present case that this case falls within the ambit of the third sentence, where, as Taylor LJ said, other considerations apply, and that this, in the light of the Interfoto case, is the basis on which the District Judge should have found in the defendants' favour. O'Connor LJ agreed with Taylor LJ and Bingham LJ, as he then was, delivered a concurring judgment.
The Interfoto case [supra] is a decision of this Court consisting of Dillon and Bingham LJJ. The facts are conveniently stated in the headnote at [1989] QB 433:
"The plaintiffs ran a photographic transparency lending library. Following a telephone inquiry by the defendants, the plaintiffs delivered to them 47 transparencies together with a delivery note containing nine printed conditions. Condition 2 stipulated that all the transparencies had to be returned within 14 days of delivery otherwise a holding fee of £5 a day and value added tax would be charged for each transparency retained thereafter. The defendants, who had not used the plaintiffs' services before, did not read the conditions and returned the transparencies four weeks later whereupon the plaintiffs invoiced the defendants for £3,783.50. The defendants refused to pay and the plaintiffs brought an action to recover the sum. The judge gave judgment in favour of the plaintiffs for the amount claimed."
In allowing the appeal the Court of Appeal held that the condition in question was extremely onerous and unusual and that, since it had not been specifically drawn to the defendants' attention, it was not incorporated in the contract.
In his judgment Dillon LJ stated, at page 437:
"More recently the question has been discussed whether it is enough to look at a set of printed conditions as a whole. When for instance one condition in a set is particularly onerous does something special need to be done to draw customers' attention to that particular condition?"
He then quoted the words of Denning LJ, as he then was, in Spurling v Bradshaw [1956] 2 WLR 461 which are quoted in Chitty and which I have just read.
He then went, at the top of page 619:
"Then in Thornton v Shoe Lane Parking Limited [1971] 2 QB 163 both Lord Denning MR and Megaw LJ held as one of their grounds of decision, as I read their judgments, that where a condition is particularly onerous or unusual the party seeking to enforce it must show that that condition, or an unusual condition of that particular nature, was fairly brought to the notice of the other party. Lord Denning MR, at pp 169H 170D, re stated and applied what he had said in the Spurling case and held that the court should not hold any man bound by such a condition unless it was drawn to his attention in the most explicit way. Megaw LJ deals with the point, at pp 172 173, where he said:
'I agree with Lord Denning MR that the question here is of the particular condition on which the defendants seek to rely, and not of the conditions in general. When the conditions sought to be attached all constitute, in Lord Dunedin's words [in Hood v Anchor Line (Henderson Brothers) Limited] [1918] AC 846, 847, 'the sort of restriction...that is usual,' it may not be necessary for a defendant to prove more than that the intention to attach some conditions has been fairly brought to the notice of other party. But at least where the particular condition relied on involves a sort of restriction that is not shown to be usual in that class of contract, a defendant must show that his intention to attach an unusual condition of that particular nature was fairly brought to the notice of the other party. How much is required as being, in the words of Mellish LJ [in Parker v South Eastern Railway Company] 2 CPD 416, 424, 'reasonably sufficient to give the plaintiff notice of the condition,' depends upon the nature of the restrictive condition.
In the present case what has been sought in answer to the third question is whether the defendant company did what was reasonable fairly to bring to the notice of the plaintiff, at or before the time when the contract was made, the existence of this particular condition. This condition is that part of the clause a few words embedded in a lengthy clause which Lord Denning MR had read, by which, in the midst of provisions as to damage to property, the defendants sought to exempt themselves from liability for any personal injury suffered by the customer while he was on their premises. Be it noted that such a condition is one which involves the abrogation of the right given to a person such as the plaintiff by statute, the Occupiers' Liability Act 1957. True, it is open under that statute for the occupier of property by a contractual term to exclude that liability. In my view, however, before it can be said that a condition of that sort, restrictive of statutory rights, has been fairly brought to the notice of a party to a contract there must be some clear indication which would lead an ordinary sensible person to realise, at or before the time of making the contract, that a term of that sort relating to personal injury, was sought to be included. I certainly would not accept that the position has been reached today in which it is to be assumed as a matter of general knowledge, custom, practice, or whatever is the phrase that is chosen to describe it, that when one is invited to go upon the property of another for such purposes as garaging a car, a contractual term is normally included that if one suffers any injury on those premises as a result of negligence on the part of the occupiers of the premises they shall not be liable.'"
Dillon LJ then proceeded, at page 438:
"Condition 2 of these plaintiffs' conditions is in my judgment a very onerous clause. The defendants could not conceivably have known, if their attention was not drawn to the clause, that the plaintiffs were proposing to charge a 'holding fee' for the retention of the transparencies at such a very high and exorbitant rate...It is, in my judgment, a logical development of the common law into modern conditions that it should be held, as it was in Thornton v Shoe Lane Parking Limited [1971] 2 QB 163, that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.
In the present case, nothing whatever was done by the plaintiffs to draw the defendants' attention particularly to condition 2; it was merely one of four columns' width of conditions printed across the foot of the delivery note. Consequently condition 2 never, in my judgment, became part of the contract between the parties."
Bingham LJ in his judgment stated as follows, at page 445:
"The crucial question in the case is whether the plaintiffs can be said fairly and reasonably to have brought condition 2 to the notice of the defendants. The judge made no finding on the point, but I think that it is open to this court to draw an inference from the primary findings which he did make. In my opinion the plaintiffs did not do so."
Then he deals with the contents of the condition and proceeds:
"The defendants are not to be relieved of liability because they did not read the condition, although doubtless they did not; but in my judgment they are to be relieved because the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention."
On behalf of the appellants Mr Lambie's central submission in his able argument is that the present case falls into the Interfoto category, as described in paragraph 12 013 in Chitty, because this term is an extremely onerous and unusual one when read in its context, as he submits it must be. Taking condition 7 as a whole, he submits as follows:
1. Condition 7.7 excludes all other warranties and conditions, including of course all implied conditions and warranties under the Sale of Goods Act 1979, and therefore falls within the principle laid down by Megaw LJ in the Thornton case.
2. The only right available to the defendants in the case of defective goods is that prescribed by clause 7.4, namely to return them to the plaintiffs for the defects to be remedied on the rather narrow criteria laid down in the second sentence of that clause.
3. In these circumstances, to require the defendants to pay the cost of returning the goods in order to avail themselves of this one very curtailed right is extremely onerous and unusual. Put another way, he submits that condition 7 as a whole is extremely onerous and unusual, most especially condition 7.7, again in the light of Megaw's LJ reasoning in the Thornton case, and that, in consequence, condition 7.5, which is part and parcel of condition 7 as a whole, is similarly tainted.
Mr Norris on behalf of the plaintiffs submitted that condition 7.5 must be considered in isolation and that it is wrong to view it in the context of condition 7 as a whole. He urged us to treat the District Judge's conclusion that sufficient notice had been given as a finding of fact which should not be interfered with in this Court unless it was based on an error of principle or plainly wrong: (George Mitchell (Chesterhall) Limited v Finney Lock Seeds [1983] AC 811). He also submitted that in any event condition 7.5 was in fact not unusual in character though he accepted that there was no evidence before the District Judge to support this contention.
He stressed that the condition must be considered in the light of the particular contract, and he advanced the following considerations as material in that context: viz there was no contemplation at the time the contract was made that the goods would be faulty: the plaintiffs were the manufacturers of the goods, or the agents of those manufacturers, selling to a buyer who was going to pass them on to his subcontractor for the subcontractor's use: and both must have contemplated that the buyer would be selling to his customer on his terms and conditions and must also have contemplated that delivery would be to a United Kingdom destination and packaged for a United Kingdom destination, but of course he did also accept, as is common ground, that it was known beforehand to the plaintiffs that the goods were for export, though not specifically for export to Iran.
Dealing with the last points, first, I fully accept that this condition must be considered in the light of the particular contract in which it appears, but I do not think that the considerations advanced by Mr Norris carry the matter very far either way. The crucial question, to my mind, is whether condition 7.5 must be considered in its context or in isolation. In my judgment, it would be entirely wrong and wholly artificial to evaluate it in isolation.
I can illustrate that best by an example given by Hobhouse LJ during argument: let us suppose that a contract for the sale of goods did not exclude the statutory conditions and warranties in the Sale of Goods Act 1979 so that those implied terms remained in full force giving the buyers all their usual rights to recover damages in respect of breaches of contract for defective goods; but that, on top of those statutory conditions and warranties, the buyers were given an extra right, at their option, to return defective goods to the plaintiffs for repair. In those circumstances and in that context, it would, in my judgment, be by no means onerous for the contract to go on to stipulate that if the buyers chose to exercise that extra option the cost of returning the goods for repair should be borne by them. The context, which would be critical in that example, would tell strongly in favour of the sellers and against the buyers.
But in the present case the position is entirely different and, in my judgment, the context tells very strongly against the sellers and in favour the buyers. Here the statutory conditions and warranties are excluded and the option to return the defective goods for repair is imposed by the sellers in condition 7.4, confronting the buyers, in effect, with Hobson's choice, and leaving them with no other recourse in a situation where ex hypothesi the sellers are in breach of contract through delivery of defective goods. In that context, to impose on the buyers the obligation to pay the costs of returning the goods is extremely onerous, in my judgment, and also unusual in the absence of any evidence that it is a standard or common term.
Thus, I accept Mr Lambie's first submission and I also consider that his alternative submission is sound, namely that condition 7, taken as a whole, is extremely onerous and unusual, especially in the light of condition 7.7 excluding the statutory terms, and that, in consequence, condition 7.5 is tainted as forming part of condition 7 as a whole.
It follows that, in my judgment, this case does indeed fall within the Interfoto class as described in paragraph 12.013 of Chitty. I, of course, fully accept the authority of the George Mitchell case but, in my judgment, the question here is one of mixed fact and law.
In my judgment, the District Judge erred in two respects as a matter of law: first, by failing to apply the Interfoto test as described by Chitty; and, secondly, by treating condition 7.5 in isolation and not in context, and thus adopting a flawed approach to the proper construction of the condition which is also a question of law. I would add that I would also criticise him in a third respect, namely in relation to his reference to insurance, there being no evidence before him that this would have been an insurable risk at the instance of the defendants.
It follows that the appellants are entitled to succeed in this appeal on the incorporation ground, so that it is not necessary to consider UCTA, save to say that, in my judgment, the respondents, on whom the burden of proof lies under UCTA, must a fortiori fail to satisfy the UCTA reasonableness test. This is because the schedule 2 guidelines, in paragraph (c), require the Court to take into account:
"...whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard among other things to any custom of the trade and any previous course of dealing between the parties.)"
This, of course, applies in circumstances where ex hypothesi the term has been validly incorporated in the contract, and there is therefore an additional burden on the respondent in order to make good that requirement. I would add that this is a case where paragraph (a), namely inequality of bargaining power between of two sides, also applies.
Finally, I turn to the respondent's cross notice. Here it is common ground that the respondents knew the goods were for export, and therefore knew that the expense of returning defective goods from abroad would have to be incurred. Mr Norris queries whether the cost of air freighting from Iran was reasonably foreseeable, though he accepts that there is no evidence that this mode of transport is any more expensive than other modes of transport from the Gulf. In my judgment, particularly bearing in mind that the appellants, as the result of the plaintiffs' breach, were themselves in breach of their contract with their Iranian customers, air freight was an eminently sensible and therefore reasonably foreseeable mode of transport for the appellants to adopt in order minimise delay, and thus to mitigate their damages. Consequently, I would reject the cross notice.
For all these reasons, I will allow this appeal, but would wish to hear counsel in due course as to the appropriate order.
LORD JUSTICE WAITE: I agree that, despite the evidence care given to this case by the Assistant Recorder and the helpful analysis of the facts and conditions set out in his judgment, the appeal should be allowed on the primary ground that condition 7.5 was a particularly onerous or unusual condition which AEG as suppliers were under a duty to draw fairly and reasonably to the attention of Logic as buyers; a duty which was not discharged by the generalised reference in the confirmation of order to the existence of conditions. In that respect, I fully agree with the reasoning of Hirst LJ, to which I do not wish to add anything.
I also concur with Hirst LJ's views on the UCTA criteria and would also dismiss the cross appeal for the reasons that he has given.
LORD JUSTICE HOBHOUSE: I agree that the appeals should be allowed and that the cross appeal should be dismissed. My reasons for my decision to allow the appeal differ to some extent from those of my Lords in that I would not determine the appeal on the question of incorporation although I agree that the Unfair Contract Terms Act does preclude the plaintiffs from relying on clause 7 in this case.
The Judge decided both those points in favour of the plaintiffs. His reasons for so doing were concisely summarised in relation to the Unfair Contract Terms Act on page 11 of his judgment:
"I do not consider this term unreasonable. It does not go to the heart of the contract nor is it an unusual term in commercial contracts. Further, it is a condition that the Defendant ought to have been able to insure against."
The term that he was referring to was clause 7.5. Like my Lords, I consider that it is wrong to view clause 7.5 in isolation. It forms part of a complex clause, clause 7 which, under the heading of "Warranty", effectively excludes the greater part of the seller's obligations under the Sale of Goods Act. It is drafted in a way which one has seen in other standard terms: what it gives with one hand it takes away with the other. The most important part of the clause is 7.7:
"All other warranties or conditions are hereby expressly excluded."
It, therefore, is of the character of an exclusion clause, and the preceding sub clauses give a limited warranty cover. It is, in fact, a very limited warranty cover indeed because it is restricted to defects caused by faulty materials and bad workmanship and the only way in which that warranty can be taken advantage of is circumscribed by conditions. They have been read by my Lord and it is not necessary for me to read them again.
The Judge was persuaded to look at clause 7.5 in isolation and not as part of the totality of clause 7. Indeed, it is clause 7.7 which is the critical obstruction to the Defendants' right to recover in respect of the admitted breach of contract which the plaintiffs committed. The breach was, apparently, some characteristic of the goods which prevented the goods from complying with the relevant specification. Goods were ordered by reference to a standard product number of the plaintiffs, and the goods which were supplied were not usable by the end users because they did not comply with the specification. They had to be returned in mitigation of the buyer's and sub buyer's losses for modification in order for them to be able to be used in accordance with the correct specification.
The point on incorporation arose from the words used in what it is accepted are the contractual documents. The defendants placed their order in a standard form of document which did not refer to any conditions. There was no previous course of dealing between the parties. The order appeared simply to be an ordinary order. The plaintiffs gave an acknowledgment of that order, again in a routine document. This was the document which included the words: "Orders are subject to our conditions of sale for extracts see reverse". On the reverse of that document it said: "A copy of the full conditions of sale is available on request". There were also on the reverse of the document various extracts which do not advance the plaintiffs' case. As I will comment later, if anything they were misleading extracts.
The prima facie position is that what the plaintiffs did did comply with the ordinary requirements of English law for the incorporation of contractual conditions. They referred to them in the document; they gave the opposite party the opportunity to see the full copy of the conditions. The "acknowledgment" was a counter offer to the defendants' offer and the defendants are to be taken and it is not in dispute to have accepted the counter offer by continuing with the order. In fact, in the present case, a number of further documents were exchanged, some of which included the same references to the plaintiffs' conditions as those which I have already quoted.
The position then is conveniently summarised in the quotation from the judgment of Taylor LJ in Circle Freight International Limited v Medeast Gulf Exports Limited [1988] 2 Lloyd's Rep 427 at 433, already read by my Lord. It is sufficient if adequate notice is given identifying and relying upon the conditions and they are available on request. Other considerations apply if the conditions, or any of them, are particularly onerous or unusual.
Apart from the argument which is advanced and which has persuaded the other Members of the Court on the Interfoto case, the criteria for incorporation have been satisfied. These criteria follow from the ticket cases, typically Parker v South Eastern Railway Company (1877) 2 CPD 416. The opposite party has been informed that the relevant offer was subject to terms. The opposite party has been given an adequate and reasonable opportunity to inform himself of what precisely those terms are.
The point on which the plaintiffs have to rely therefore is that to be found in the Interfoto case. The judgment of Dillon LJ in the report at [1989] 1 QB 433 sets out the historical background to their decision. It includes references to Parker v South Eastern Railway Company and to the colourful dictum of Denning LJ in Spurling v Bradshaw [1956] 1 WLR 466 where he postulated that in certain circumstances a red hand might have to be used in order to draw a clause sufficiently to the notice of the other party.
The main authority upon which Dillon LJ and Bingham LJ founded was Thornton v Shoe Lane Parking Limited [1971] 2 QB 163, and in particular the judgment of Megaw LJ in the passage which starts at page 172 of the report and has already been extensively read by my Lord and I will not reread. That passage includes the specific elements upon which Dillon LJ chose to found. I will re read two short quotations from what Dillon LJ chose to quote:
"But at least where the particular condition relied on involves a sort of restriction that is not shown to be usual in that class of contract, a defendant must show that his intention to attach an unusual condition of that particular nature was fairly brought to the notice of the other party. How much is required as being, in the words of Mellish LJ, 2 CPD 416, 424, [Parker v South Eastern Railway Company], 'reasonably sufficient to give the plaintiff notice of the condition,' depends upon the nature of the restrictive condition."
Then, having referred to the attempt to exclude liability for personal injuries under the Occupiers Liability Act, the second quote begins:
"In my view, however, before it can be said that a condition of that sort, restrictive of statutory rights, has been fairly brought to the notice of a party to a contract there must be some clear indication which would lead an ordinary sensible person to realise, at or before the time of making the contract, that a term of that sort, relating to personal injury, was sought to be included."
The emphasis in those passages which were quoted was to the "sort" of provision. This was directly germane to the Interfoto picture case where what was fairly described as an extortionate stipulation was introduced which imposed a wholly excessive and unexpected collateral financial obligation upon the hirer in a certain situation. It was a sort of clause that no one would expect to find in the standard terms which were being referred to.
Dillon LJ's judgment then continues at page 438 in these terms:
"Counsel for the plaintiff submits that Thornton v Shoe Lane Parking Limited [1971] 2QB 613 was a case of an exemption clause and that what their Lordships said must be read as limited to exemption clauses and in particular exemption clauses which would deprive the party on whom they are imposed of statutory rights. But what their Lordships said was said by way of interpretation and application of the general statement of the law by Mellish LJ in Parker v South Eastern Railway Co 2 CPD 416, 423 424 and the logic of it is applicable to any particularly onerous clause in a printed set of conditions of the one contracting party which would not be generally known to the other party."
Lower on the same page, he referred to the vice which arose from the use of standard conditions. He referred to the position on ticket cases and the fact that people scarcely ever bother to read the actual printed conditions. He continued:
"That remains the case now. In the intervening years the printed conditions have tended to become more and more complicated and more and more one sided in favour of the party who is imposing them, but other parties, if they notice that they are printed conditions at all, generally still tend to assume that such conditions are only concerned with ancillary matters of form and are not of importance. In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties' attention to the printed conditions or they would not be part of the contract. It is, in my judgment, a logical development of the common law into modern conditions that it should be held, as it was in Thornton v Shoe Lane Parking Limited [1971] 2 QB 163, that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party."
That, in my judgment, is the criterion to be applied.
The clause which we are concerned with here is clause 7. It is a clause which covers a topic which is commonly, and indeed normally, dealt with in the standard conditions of sellers of goods. It is in no way unusual nor is it suggested that it is unusual for standard conditions in some way to qualify the obligations of the sellers under a contract of sale. Nor is it suggested that it is unusual for such clauses to include warranty conditions, which have a limited effect both in time and obligation. In my judgment, the clauses which we find in clause 7 deal with a topic which one would expect to be dealt with in the conditions of sale of a supplier of manufactured goods and they cover the type of points which would commonly be dealt with.
The problem in the present case arises from the fact that these clauses have been unreasonably drafted. As is almost inevitable in printed standard terms, they are not related to the particular circumstances of the case and, furthermore, they stipulate for a greater protection of the seller than is reasonable, or anyway is reasonable without some special justification. In my judgment, and this is where I part company from my Lords, it is necessary before excluding the incorporation of a clause in limine to consider the type of clause it is. Is it a clause of the type which you would expect to find in the printed conditions? If it is, then it is only in the most exceptional circumstances that a party will be able to say that it was not adequately brought to his notice by standard words of incorporation. If a party wishes to find out precisely how a clause of a normal sort has been worded, he should ask for the actual text of the clause. This case is not analogous to either of the two cases upon which the appellant founds. The Interfoto case involved an extortionate clause which did not relate directly to the expected rights and obligations of the parties. In the Shoe Lane Parking case, it related to personal injuries and the state of the premises and not to the subject matter of the car parking contract, which would, in the view of the Court of Appeal, have been concerned with damage to property.
Therefore, in my judgment, it is necessary to consider the type of clause, and only if it is a type of clause which it is not to be expected will be found in the printed conditions referred to then to go on to question its incorporation. These conditions do include clauses which, in my judgment, do fall foul of the Interfoto principle, but I do not consider that clause 7 comes into that category. In my judgment, it is desirable as a matter of principle to keep what was said in the Interfoto case within its proper bounds. A wide range of clauses are commonly incorporated into contracts by general words. If it is to be the policy of English law that in every case those clauses are to be gone through with, in effect, a toothcomb to see whether they were entirely usual and entirely desirable in the particular contract, then one is completely distorting the contractual relationship between the parties and the ordinary mechanisms of making contracts. It will introduce uncertainty into the law of contract.
In the past there may have been a tendency to introduce more strict criteria but this is no longer necessary in view of the Unfair Contract Terms Act. The reasonableness of clauses is the subject matter of the Unfair Contract Terms Act and it is under the provisions of that Act that problems of unreasonable clauses should be addressed and the solution found. In the present case, it is my opinion that the Act provides the answer to the question which has been raised.
Before leaving the first part of this case, I would add the comment that the plaintiffs in this present case, AEG (UK) Limited, appear to adopt contractual practices which do not pay adequate regard to the formation of contracts and the incorporation of terms. On any view, some
of the conditions which they have sought to include in their printed conditions fall foul of the Interfoto principle. The extracts which they have chosen to print on the back of their acceptance document are at best highly selective and perhaps more fairly described as misleading. If they are going to quote clauses, then they must recognise that selective and misleading quotes may detract from the incorporation which they are seeking to achieve. There are simple procedures which can be followed to ensure that those problems do not arise. The most usual is to ensure that full copies of the conditions, including the latest edition of any conditions, is always sent as a matter of routine to any person with whom they are seeking to do business. Finally, and this leads on to next point, the conditions appear to have been drafted without any regard to the terms of the Unfair Contract Terms Act.
I now turn to that Act. I repeat that this must be assessed having regard to clause 7 viewed as a whole and it is not right to take any particular part of clause 7 in isolation. If must also be viewed against the breach of contract which is the subject matter of the present case. The defendants are entitled to rely upon sections 3, section 6(3) and section 11 and Schedule 2 of the Act. These provisions deal specifically with the type of problems which are liable to arise from such standard terms. They address among other things the lack of actual consent and actual reality of the supposed bargain that may arise from such situations. In particular, section 3 addresses the problem of where one party contracts on the other's written standard terms of business. This, as Dillon LJ pointed out in Interfoto, is notoriously a situation where the contract may include a fictional element of consent which has nevertheless to be accepted by contract law in the interests of having a coherent objective scheme.
Section 6, likewise, deals with derogation from the statutory liabilities under the Sale of Goods Act and provides by sub section (3): :
"As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by a reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness."
Therefore, and it is not in dispute, the plaintiffs have to show that the clauses upon which they rely are reasonable clauses. Section 11(5) provides:
"It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does."
When an issue under the Unfair Contract Terms Act arises in litigation it will normally be necessary that the party seeking to uphold the reasonableness of the relevant clause or clauses plead his case on reasonableness. There may be some cases where it is so obvious that the Act does not apply or the arguments on reasonableness can be advanced purely by reference to the terms of the documents themselves that no such pleading is required, or, in any event, it need not be particularised if it is pleaded.
In a case such as the present it is really necessary that a party who is seeking to justify clauses such as those that are found in clause 7 as being reasonable pleads his case. That did not occur in the present case nor was any specific evidence adduced in an attempt to justify the reasonableness of this clause. Under those circumstances, the Judge should not have made the findings which he did. This has already been illustrated by the fact that he referred to insurance when there was no evidence that such insurance was available. Elsewhere in his judgment he treated the matter as if the burden of proof was on the defendants not on the plaintiffs. If a party wishes to rely upon clauses, which are caught by the Act and in respect of which he has to discharge a burden of proof of reasonableness, he has to make a positive case and prove whatever is necessary by way of factual background and other commercial considerations that he says suffice to establish the reasonableness of the clause. That was not done in the present case. In my judgment, it is clear on the almost non existent evidence adduced on this issue that the plaintiffs had to fail. They did not begin to discharge the burden of proof which lay upon them.
It is further desirable to draw specific attention to the fact that Schedule 2, paragraphs (a) and (c), and the reference in section 3 to standard terms to which an opposite party is required to adhere, raises a consideration of the reality of the consent of the contracting party. As I have said in the first part of my judgment, it is a necessary incident of a law of contract that in various commercial and other situations parties must objectively be taken to have agreed to clauses even though they have not actually applied their mind to those clauses, and indeed may never have taken steps to inform themselves of their content.
What the Unfair Contract Terms Act is concerned with, and in particular Schedule 2 paragraphs (a) and (c), is, among other aspects of reasonableness, the actuality or the reality of the consent of the party that it is sought to bind by the particular clause. Paragraph (c), "whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard to, among other things, any custom of the trade and any previous course of dealing between the parties)", presupposes that the clause has already been incorporated in the contract; otherwise the point does not arise. It is necessary in order to assess reasonableness to consider to what extent the party has actually consented to the clause.
The Judge dismissed this point in a single sentence:
"Guideline 'c' does not apply because, for the reasons stated above, the Defendants were fixed with notice of the Plaintiffs' conditions. It is only guideline 'a' which stands to be considered."
That is, in my judgment, a badly mistaken approach. It is essential in any question of reasonableness that the reality of the consent of the party sought to be bound by the relevant clause is considered. This also raises considerations of inequality of bargaining power which, in the present case, militate strongly in favour of the case of the defendants.
Therefore, it follows, in my judgment, that the plaintiffs did not discharge the burden of proof. Furthermore, having regard to the circumstances of this case and the effect of the provisions upon which the plaintiffs seek to rely, it is clear that on any view clause 7 must be held to be unreasonable. It therefore follows that although, in my judgment, the clause was incorporated, it is not one upon which the plaintiffs can rely. It is for this reason that I allow the appeal.
Very briefly, the point raised on the respondents' notice or cross appeal is essentially a question which was concluded by the evidence. On the necessary hypothesis, the situation is that the plaintiffs have delivered goods which did not comply with the contract, as a result of which the defendants suffered damage for which the plaintiffs were liable to indemnify them. The goods in question were in another country. The evidence of the plaintiffs' managing director was: "Discussions took place. We would have discussed need for the items to come back for rework.
Conversations did take place. Do not remember the exact date. I did not say we would pay for return. Usually recipient examines tubes. It was clear the tubes had to come back. Cheaper for AEG to rework them. Of mutual benefit. Asked D to get the goods back". What there is described is a classic exercise in the mitigation of the defendants' loss. No adequate case has been made out that it was unreasonable mitigation, and indeed the effect of that evidence through the mouth of the plaintiffs' witness was that the mitigation was reasonable.
Consequently, there is nothing in the point that the plaintiffs have sought to raise in answer to this appeal. I agree that this appeal should be allowed.
LORD JUSTICE HIRST: Mr Lambie?
MR LAMBIE: My Lord, yes, I have a draft order which is agreed with my learned friend. Shall I read it or hand it up?
LORD JUSTICE HIRST: Please do. Hand it up, if you would not mind.
MR LAMBIE: I do not have a copy.
LORD JUSTICE HIRST: Then you had better read it and I will have it up here afterwards.
MR LAMBIE: Firstly, that the Defendant's appeal be allowed. Secondly, that there be judgment for the defendant in the sum of £2,096.56 together with interest of £907.81 calculated to today amounting to £3,004.37. Thirdly, that the Plaintiff do pay the Defendant's costs of the action on County Court Scale II, such costs to be taxed if not agreed. Fourthly, that the Plaintiff do pay the Defendant's costs of this appeal, such costs to be taxed if not agreed. Fifthly, that there be payment out forthwith to the Defendant's solicitors of the sum of £3,000 in court together with interest thereon. That was for security. Sixthly, my friend is going to make an application for leave to appeal.
LORD JUSTICE HIRST: Thank you very much indeed, Mr Lambie. Mr Norris, as far as that goes I know you have another application you are happy with that order, are you?
MR NORRIS: Yes, my Lord, I am. It has been signed by myself and my friend.
LORD JUSTICE HIRST: I like to keep a record of the orders. Do you have a copy of this?
MR LAMBIE: We do not need it, my Lord. We have taken our note of it.
LORD JUSTICE HIRST: Thank you very much indeed. Yes, Mr Norris?
MR NORRIS: My Lord, I am instructed to ask for leave to appeal. My Lord, leave can be granted either by your Lordships or, if refused, then by the House of Lords. I ask your Lordships first. Your Lordships know what the issues are here. I am instructed that my client would like to consider whether to take the matter further. In those circumstances, I ask your Lordships for leave.
LORD JUSTICE HIRST: Thank you very much indeed. (Their Lordships confer) Mr Norris, you have made your application with your usual charm and persuasiveness, but we think you will have to go to Appeal Committee of the Lords. We refuse leave to appeal.
MR LAMBIE: Number 6 then on the draft allowed for both possibilities.
LORD JUSTICE HIRST: I am much obliged to you. Thank you both very much indeed for your very clear and helpful arguments yesterday. I am afraid the judgment has lasted almost as long as the argument, but that is the way of the world.
ORDER: Appeal allowed with costs.
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