The Importance of S3 of the Unfair Contract Terms Act 1977

A Brief Reminder of Section 3 of the Unfair Contract Terms Act 1977 in Light of Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023].

All entities which enter into business-to-business contracts should be aware of the Unfair Contract Terms Act 1977 to ensure that their terms of business are legally binding (‘UCTA 1977’).

Section 3 of UCTA 1977 provides that a party cannot, in their written standard terms of business, exclude or restrict liability for breach of contract unless the contract term doing so is ‘reasonable’. Section 11 of UCTA 1977 sets out the ‘reasonableness test’, which requires that the clause “shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.” (Section 11(1) UCTA 1977)

In the High Court case of Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023], the claimant asserted that an exclusion clause in a contract didn’t cover liability for loss of profit and wasted expenditure, and that the exclusion clause was unreasonable because it failed to pass the ‘reasonableness test’ set out in Section 11(1) UCTA 1977 .

The court held that the exclusion clause did cover liability for loss of profit and wasted expenditure, with the court reading the words of the exclusion clause in the context of the entire exclusion clause, in the context of the entire contract, and in the context of the background and circumstances at the time the contract was made, whilst having regard to relevant legal principles, and with the court taking into account, among other things, the legal principles governing the interpretation of written contracts, the legal principle of freedom of contract, and the “clear and unambiguous” (Smith J) language of the exclusion clause.

The court also followed the Court of Appeal case of African Export-Import Bank & Ors v Shebah Exploration & Production Company Ltd & Ors [2017], in which it was established that in order to determine whether parties are contracting on one of those party’s written standard terms of business, it is relevant to examine whether there have been “more than insubstantial variations” to the contractual terms habitually used by the relevant party and if “substantial variations” have been made to the contractual terms habitually used by the relevant party, it is “unlikely” that the party seeking to rely on Section 3 of UCTA 1977 will be able to show that they are dealing on the other party’s written standard terms of business; this applies even if exclusion clauses in the contract entered into by the parties have not been the subject of negotiations between the parties.

Following consideration of the relevant case law, in Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023], the court ruled that “it cannot be said that the terms [of the contract] were “effectively untouched” or that none of the changes was material or that the changes left the First Reseller Agreement to all intents and purposes unchanged.” It  was held that the parties were not dealing on the defendant’s written standard terms of business and therefore Section 3 of UCTA 1977 did not apply to the contract and so the exclusion clause in the contract was not subject to the ‘reasonableness test’ set out in Section 11 of UCTA 1977 (and this was so even though the exclusion clause was not the subject of negotiations between the parties).

Cases such as Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023] emphasise that when negotiating a business-to-business contract, especially where the starting point is a draft contract based on or with similarities to the other party’s written standard terms of business, all the terms of that draft contract should be considered, and the relevant party should be aware that the ‘protection’ offered by section 3 of UCTA 1977 may not apply to exclusion clauses within the contract which is arrived at, even if those exclusion clauses were derived from the other party’s written standard terms of business, were not the subject of negotiations between the parties and could even otherwise be construed as unreasonable under the ‘reasonableness test’ set out in Section 11 of UCTA 1977.

Clarkslegal’s Corporate and Commercial team can advise on the drafting of commercial contracts, including the meaning and effect of clauses which clients should consider before entering into such contracts.