UK: Are Contract Terms Really Binding? Part 2 of 2

Last Updated: 16 April 2007
Article by Jonathan Selby, Barrister
This article is part of a series: Click Are Contract Terms Really Binding? Part 1 of 2 for the previous article.

(5) Section 3 of the Misrepresentation Act 1967

  1. Section 3 of the Misrepresentation Act 1967 ("the MRA 1967"), as substituted by section 8 of UCTA, provides:

    "If a contract contains a term which would exclude or restrict –

    (a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

    (b) any remedy available to another party to the contract by reason of such a misrepresentation.

    that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does."

  2. The terms "any liability" and "any remedy" are wide enough to cover provisions which would exclude or restrict a claim to damages, or the right to rescind, or the right to set up a misrepresentation by way of defence to an action: see Chitty paragraph 6-134.

(6) Onerous clauses requiring a "red hand" to be incorporated

  1. There are certain circumstances in which a clause (typically in a party’s standard terms and conditions) will not be incorporated into a contract because it is so onerous that special notice of it should have been given. This is a common law rule. In J Spurling Ltd v Bradshaw [1956] 1 WLR 461, Denning LJ commented that "some clauses…would need to be 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."

  2. Whether a clause is particularly onerous or unusual is considered by reference to the nature of the transaction in question, the character of the parties to it and whether in all the circumstances it is fair to hold the parties bound by it: Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1987] 1 QB 433.

  3. For a recent consideration of these principles, see Shepherd Homes Limited v Encia Remediation Limited [2007] EWHC 70 (TCC).


(1) Net Contribution Clauses

The nature of net contribution clauses

  1. An example of a net contribution clause is paragraph 8.1B of the ACE Conditions of Contract:

    "Notwithstanding anything to the contrary contained elsewhere in this Agreement, the total liability of the Consulting Engineer under or in connection with this Agreement (other than liability for claims arising out of or in connection with pollution or contamination which is excluded) whether in contract or in tort, in negligence or for breach of statutory duty or otherwise for any claim shall be limited to the lesser of:

    1. the amount stated in the Memorandum of Agreement as the limit of the Consulting Engineer’s total liability, and

    2. such sum as the Consulting Engineer ought reasonably to pay having regard to his responsibility for the total loss or damage suffered on the basis that all Other Consultants and all other parties providing design management or financial services or labour or materials or plant or equipment for incorporation in the Project or the Works or executing the project or the works or any part thereof shall be deemed to have provided contractual undertakings on terms no less onerous than that set out in condition 2.4 hereof to the Client (whether or not they shall have been so provided to the Client) in respect of the provision of their services or labour or materials or plant or equipment in respect of executing the Project or the Works or any part thereof and shall be deemed to have paid to the Client such contribution which it would be just and equitable for them to pay having regard to the extent of their responsibility for any loss or damage."

  1. The purpose of a net contribution clause is to ensure that where two or more parties to a construction project are liable for the same damage, the liability of each party will be limited to the amount which would normally be apportioned to that party. If, for example, an architect and a contractor were each liable for the same defective work (the former being 70% liable and the latter 30% liable), in the absence of a net contribution clause the client could recover 100% of the damages from the architect who would then have to recover from the contractor under the Civil Liability (Contributions) Act 1978. However, the effect of the net contribution clause is that the client can only recover 70% from the architect.

  2. Such clauses clearly have unattractive implications for an employer. In their absence, the risk of insolvency of one or other professionals, contractors or sub-contractors will fall on the solvent professionals, contractors or sub-contractors, from whom the employer may claim 100% of the damages. However, when such clauses are introduced the limitation of their liability entails that the risk falls on the employer.

When will net contribution clauses be unenforceable?

  1. There is no authority on whether such clauses are unenforceable.

  2. Nevertheless, a net contribution clause could fall within the scope of UCTA and so would be subjected to the test of reasonableness in accordance with section 11. Equally, it could fall within the scope of the Regulations. The circumstances of the contracting parties will be looked into to determine whether the cap on liability is reasonable. However, the key issue which needs to be determined is whether the employer or the professional should bear the risk of the contractor’s insolvency. On this issue, a material consideration will be the existence of professional indemnity insurance on the one hand and the availability of appropriate insurance for the employer on the other.

(2) Entire Agreement Clauses

  1. Entire agreement clauses are frequently relied upon in an attempt to prevent one party from asserting that the written contract is not the sole repository of the terms of the contract and that there is in fact another term of the contract which has been broken by the other party. The aim is thus to prevent liability arising for breach of contract outside of the terms of the written agreement, and has the effect of denuding what would otherwise constitute a collateral warranty of contractual effect. Entire agreements can also be utilized for another purpose, namely the elimination of any possible liability for misrepresentation.

Examples of entire agreement clauses

  1. An entire agreement clause which sought to achieve both of these functions was the subject of dispute in Watford Electronics Ltd v Sanderson CFL Ltd [2001] BLR 143:

    "The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract."

    Alternatively, Article 2.2 of the DOM/1 Articles of Agreement fulfils the first function in that it provides:

    "The documents set out in clause 1 above (or referred to in such documents) contain all the terms and conditions of this Sub-Contract between the parties and nothing contained in any other document shall form a term or condition or otherwise be incorporated into this Sub-Contract."

When will an entire agreement clause be unenforceable?

The Regulations

  1. The effect of the Regulations should be borne in mind in any situation where a consumer (generally a private individual or homeowner) contracts for services with a construction industry professional on standard terms and an entire agreement clause is proposed or included. This is because entire agreement clauses appear as item (n) on the "grey list" of terms.

  2. Furthermore, if the Courts share the view of the Office of Fair Trading, then entire agreement clauses should have no place in consumer contracts. The OFT, in Unfair Contract Terms, Bulletin No.1 (May 1996), states that virtually all entire agreement clauses drawn to its attention were potentially unfair and recommends "that traders consider whether they can do without them."

The MRA 1967/UCTA

  1. Whether an entire agreement clause falls within the scope of section 3 of the MRA 1967 or UCTA will depend on its precise terms.

    1. Where the clause is simply a "no-reliance" clause, it would appear to fall outside the Acts. In Watford Electronics Ltd v Sanderson CFL Ltd [2001] BLR 143, 155 Chadwick LJ stated that such a clause was not an exclusion clause to which section 3 of the MRA 1967 applied because it does not exclude the liability as such; it simply prevents the facts which give rise to the liability from arising. However, note the statement of Bridge LJ in Cremdean Properties Ltd v Nash [1977] 2 EGLR 80, 82:

      "But I would go further and say that if the ingenuity of a draftsman could devise language which would have that effect, I am extremely doubtful whether the court would allow it to operate so as to defeat section 3. Supposing the vendor included a clause which the purchaser was required to, and did, agree to in some such terms as "notwithstanding any statement of fact included in these particulars the vendor shall be conclusively deemed to have made no representation within the meaning of the Misrepresentation Act 1967," I should have thought that that was only a form of words the intended and actual effect of which was to exclude or restrict liability, and I should not have thought that the courts would have been ready to allow such ingenuity in forms of language to defeat the plain purpose at which section 3 is aimed."

    2. However, where the clause expressly excludes liability for misrepresentation, it will fall within the ambit of the Acts: see, for example, Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 and Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 WLR 2333.

  2. Nevertheless, entire agreement clauses are generally enforceable between commercial parties (see, for instance, Watford Electronics Ltd v Sanderson CFL Ltd [2001] BLR 143, 154) because they give certainty to the terms of the contract.

(3) Pay when paid clauses

Examples of pay when paid clause

  1. In Brightside v Hyundai Engineering Construction Co Ltd (High Court of The Republic of Singapore) 41 BLR 110, the following pay when paid clause, based on the 1963 JCT standard form of contract for nominated sub-contractors, was used:

    "Within 5 days of the receipt by the contractor of the sum included in any certificate of the architect the contractor shall notify and pay to the sub-contractor the total value certified therein…"

  2. In Durabella Ltd v J Jarvis & Sons Ltd (2001) 83 Con LR 145, the Defendant’s standard pay when paid clause was used, stating:

    "Our liability for payment to you is limited to such amounts as we ourselves actually receive from the employer in respect of your works under this order."

The position under section 113 of the HGCRA 1996

  1. As set out above, section 113 of the HGCRA 1996 outlaws pay when paid clauses in most situations. The strict application of section 113 was confirmed recently in Midland Expressway v Carillion Construction Ltd and others (No 2) (2005) 106 Con LR 154 where, inter alia, an interim payment clause which had the effect that the Claimant was only entitled to payment when the Defendant was paid was held to fall foul of the HGCRA 1996. Jackson J’s application of section 113, at paragraph 71 of his judgment, was uncompromising in that:

    1. The practical effect of the clause was that the Claimant would not be paid until the Defendant had been paid;

    2. The Defendant’s argument that because the clause used the phrase "the amounts… to which the employer is entitled to be paid" and not "the amounts which the employer is paid" it was not a true pay when paid clause was dismissed out of hand;

    3. The parties had used a pay when paid clause because the contract in question was based on a PFI contract form, which is outside the scope of the HGCRA 1996.

    The decision demonstrates that the Courts will look not just at the express words of a clause to determine whether it is a pay when paid clause, but also at its actual effect.

  2. The only situation where the HGCRA 1996 allows a pay when paid clause is in the event of insolvency.

  3. It is, of course, possible to agree payment provisions to ensure that, where the contract is operating properly, payments to a subcontractor need not be made until after the time when payment should have been received. It is just not possible to make payment to a subcontractor dependent on payment to a contractor.

When will a permissible pay when paid clause be unenforceable?

  1. Although section 113 is comprehensive in its application, pay when paid clauses are still allowed in insolvency situations. The question is therefore whether, in such insolvency situations, a pay when paid clause may be unenforceable:

    1. A pay when paid clause is not of itself unreasonable pursuant to UCTA, but will be subjected to the normal test of reasonableness: Durabella Ltd v J Jarvis & Sons Ltd (2001) 83 Con LR 145;

    2. Obviously the Regulations will not apply to contractor/sub-contractor situations;

    3. A pay when paid clause of this type would be unlikely to be onerous, so requiring a "red hand". This is because it would be not be an unusual or unexpected clause between contractors and sub-contractors.

(4) Payment clauses

  1. The HGCRA 1996 is prescriptive as to payment arrangements. In summary (besides a partial ban on pay when paid clauses):

    1. Where a construction contract is for more than 45 days, there is an entitlement to stage payments (section 109);

    2. Every construction contract must specify an adequate mechanism for payment under the contract and that, no later than 5 days after the due date, a notice of the amount to be paid is issued (section 110);

    3. A contractual sum may only be withheld when a withholding notice has been issued, failing which there is a right to suspension for non-payment (section 111 and 112);

  2. Should parties agree payment terms which run contrary to these provisions, they will be unenforceable and the Scheme will apply. Examples of clauses which would not bind include:

    1. Those which expressly deny the right to stage payments in contracts for a duration of over 45 days;

    2. Those which specify a payment mechanism which is not "adequate". To be "adequate", a payment clause should enable parties to work out which sums are due and when. If this is not possible, on the grounds that the clause only partially satisfies the requirements of adequacy or is unclear, the Scheme will apply;

    3. Those which specify that a notice of payment is to be issued later than 5 days after the due date;

    4. Those which allow for the withholding of sums in any event;

  3. It is also arguable that "pay when certified" clauses do not provide an adequate mechanism for payment – or even amount to a pay when paid clause – especially given the terms of Jackson J’s judgment in paragraph 71(5) of Midland Expressway: "Contracting parties cannot escape the operation of section 113 by the use of circumlocution".

  4. The HGCRA 1996 seems comprehensive: if a payment clause is compliant with the HGCRA, it should not otherwise be struck down by virtue of any other provision, for example, in UCTA.

(5) Liquidated damages clauses

  1. The liquidated damages clause in the JCT Standard Form of Building Contract 2005 is in the following terms:

    "As from the Relevant Date, the rate of liquidated damages stated in the Contract Particulars in respect of the Works or Section containing the Relevant Part shall reduce by the same proportion as the value of the Relevant Part bears to the Contract Sum or to the relevant Section Sum, as shown in the Contract Particulars."

  2. A liquidated damages clause generally imposes an obligation upon one party to a contract to pay to the other a sum of money in the event of the first party’s breach. Alternatively, such a clause may enable the aggrieved party to withhold sums which are otherwise owing.

  3. Liquidated damages clauses are therefore subject to the penalty doctrine.

  4. In determining whether a liquidated damages provision amounts to a genuine pre-estimate of damages and thus binds, a Court will apply the penalty principles set out above. As the most recent authority Alfred McAlpine Capital Projects Limited v Tilebox Limited [2005] BLR 271 shows, the Courts will generally adopt a lenient approach, upholding the parties’ freedom of contract, but each case will be considered on its own facts. By way of illustration:

    1. In Alfred McAlpine Capital Projects Limited v Tilebox Limited [2005] BLR 271 Jackson J found that the maximum foreseeable loss was £35,000 to £40,000 per week, so that even at its highest Tilebox’s foreseeable losses would not equate to the liquidated damages of £45,000 per week. Even so, the sum was a genuine pre-estimate because:

      1. £45,000 was at or just above the top of the range of foreseeable losses;

      2. It is relevant that a genuine attempt was made to calculate the losses which would occur;

      3. The difficulties associated with estimating future loss made it sensible for the parties to have agreed a rate;

      4. The Courts are predisposed to uphold liquidated damages clauses;

      5. During pre-contract negotiations, the level of liquidated damages was the subject of specific debate.

    2. On the other hand, in Jeancharm Ltd (t/a Beaver International) v Barnet Football Club Ltd [2003] EWCA Civ 58 it was held that an increased rate of interest might constitute a valid clause where such an increase represents a genuine pre-estimate of damage. Here, an interest rate of 5% per week (amounting to an annual interest rate of 260%) was clearly a penalty.

  1. For completeness, where a liquidated damages clause is a genuine pre-estimate of loss, it is not to be classified as an exemption clause within the meaning of UCTA: see Suisse Atlantique v N V Rotterdamsche Kolen Centrale [1967] 1 AC 361 at 395, 411, 420, 436.

(6) Adjudication clauses

  1. There are circumstances in which a contractual obligation to adjudicate is unenforceable. The cases in which an adjudication clause has not had contractual effect fall into two categories:

    1. Those which are contrary to the HGCRA 1996;

    2. Those which are contrary to the Regulations and/or onerous (i.e. in contracts between residential occupiers and construction professionals).

Adjudication clauses which are contrary to the HGCRA 1996

  1. In two cases so far the Courts have found that adjudication clauses which are contrary to Section 108(2) of the HGCRA 1996 will be replaced wholesale by the Scheme:

    1. Epping Electrical Company Limited v Briggs and Forrester (Plumbing Services) Limited [2007] EWHC 4 (TCC). Here, a contract which incorporated the CIC procedure was found to be at odds with sections 108(2)(c) and (d) of the HGCRA 1996, because clause 25 provided that an adjudicator’s decision would still be effective even if reached outside the 28-day time limit.

    2. Aveat Heating Limited v Jerram Falkus Construction Limited [2007] EWHC 131 (TCC). Again, an adjudication clause allowed an adjudicator’s decision to be valid even if issued after the specified time. HHJ Havery confirmed his earlier decision, finding that the whole adjudication mechanism was tainted and was to be replaced by the Scheme. In particular, he rejected the Claimant’s argument that because the terms were drawn up by the employer, and because the contractor initiated adjudication, it cannot be right that the employer can say that the procedure he stipulated is not in accordance with the Act.

  2. HHJ Havery’s approach in both of these cases suggests that the Courts will replace the adjudication provisions in a contract where any part of them fails to comply with section 108(2) of the HGCRA 1996.

Adjudication clauses which are contrary to the Regulations and/or onerous

  1. The application of the Regulations to contracts between residential occupiers and construction professionals has been considered in a number of cases. Although it is clear that the Regulations will only strike down such clauses if the circumstances of the case allow, it is nonetheless interesting to see which factors militate towards a finding of unfairness.

    1. Picardi v Cuniberti and Cuniberti [2003] 1 BLR 487 HHJ Toulmin made a number of obiter comments as to the effects of the Regulations on a RIBA standard adjudication clause, and also explored their relationship with Lord Denning’s "red hand" common law principle. In particular:

      1. The requirement that an onerous term be brought to the other contracting party’s attention provides wider protection than the Regulations, which only provide a remedy where the terms of the contract cause a significant imbalance in the parties’ rights. As the HGCRA1996 does not apply to residential occupiers by virtue of section 106, an adjudication clause is an unusual provision;

      2. The "red hand" principle itself relates to the principle that it is unfair to impose on another party terms which are onerous and have not been agreed (i.e. protecting freedom of contract). With the Regulations, the parties have contracted on these terms, but there remains the question of whether there is an imbalance;

      3. The terms in the Regulations "grey list" are useful examples of unfair terms, but the terms in question must still be looked at to see if they cause a significant imbalance in the parties’ rights;

      4. An adjudication procedure may hinder the consumer’s right to legal action because of the expense involved;

      5. In any event, the RIBA guidance clearly requires these members to individually negotiate these clauses.

    2. Lovell Projects Limited v Legg and Carver [2003] 1 BLR 452

      It was held that:

      1. The adjudication terms did not cause an imbalance because there was no limit on the disputes which could be the subject of an adjudication under the contract;

      2. The requirement of good faith had not been breached because the terms were clearly and openly set out;

      3. There was no question of unfair dealing or of exploitation of the consumer’s lack of knowledge. In fact, the consumer had engaged an architect, had insisted on this standard form and had consulted their solicitors;

      4. It was not difficult to distinguish from decisions such as Picardi v Cuniberti because the Regulations must necessarily be applied on a case by case basis.

    3. Bryen & Langley Ltd v Boston [2005] 1 BLR 510 (see also [2005] 1 BLR 28 for first instance decision)

      In agreeing with the judge at first instance that the dispute resolution clause was not unfair within the meaning of the Regulations, the Court of Appeal found it to be relevant that the consumer had invited tenders on these standard terms, so that it was impossible to say that the contractor had shown bad faith or had dealt unfairly.

      Although the Court of Appeal did not look at this point, the first instance judge found that the mere exclusion of residential occupiers from the HGCRA 1996 did not have any bearing on the question of unfairness, and that the adjudication procedure which was impartial and approved by Parliament could not be said to be inherently unfair.

    4. Allen Wilson Shopfitters v Anthony Buckingham [2005] EWHC 1165 (TCC) Again, it was the fact that the consumer had proffered the allegedly unfair term which was decisive (note the reference to an earlier case decided on the same basis, Westminster Building Company Limited v Beckingham [2004] BLR 163).

Other possible grounds for adjudication clauses being unenforceable

  1. Besides the above, the only other (untested) means by which an adjudication clause might not bind would be by way of UCTA. As with arbitration agreements, it is possible that an adjudication clause might equate to an exemption clause if it barred a claim which was not brought within a certain time (see below).

(7) Arbitration agreements

When will an arbitration clause be unenforceable?

  1. Note that section 13(2) of UCTA provides that: "an agreement in writing to submit present or future differences to arbitration is not to be treated under this Part of this Act as excluding or restricting any liability."

  2. Arbitration clauses should be carefully scrutinised whenever a consumer is concerned and the contract is on the construction professional’s or organisation’s standard terms. In such a case, the Regulations will apply, as extended by section 89 of the Arbitration Act 1996. Section 91(1) of the Arbitration Act 1996, in combination with the Unfair Arbitration Agreements (Specified Amount) Order 1999, provides that where an arbitration agreement is made for the resolution of a dispute where the pecuniary remedy does not exceed £5,000, it will automatically be unfair.

  3. It is not the case that where an arbitration agreement relates to a claim for more than £5,000 it is automatically fair. Arbitration clauses appear on the "grey list" at Schedule 2, para 1(q) of the Regulations, and will therefore be subjected to the test of fairness.

  4. In Zealander & Zealander v Laing Homes Ltd (1999) CILL 1510, HHJ Havery found that the effect of an arbitration clause in the NHBC Buildmark warranty did exclude or hinder the purchasers’ right to take legal action in these circumstances and so was contrary to the Regulations. He reasoned as follows:

    1. The Claimant housebuyers were consumers even though they had been represented by a solicitor, and the fact that they received legal advice did not reduce the Defendants’ obligations to them as consumers. In any event, the solicitor only acted as a conveyancer;

    2. An arbitration agreement may cause a significant imbalance in the parties’ rights, although the "grey list" was only an indicative list and did not create rebuttable presumptions of unfairness;

    3. The arbitration clause only concerned matters covered by the NHBC agreement so that the purchasers would have to pursue two sets of proceedings to have all their complaints heard;

    4. There was no evidence of inequitable dealing by the seller, but the agreement had not been negotiated and was effectively imposed on the Claimants.

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

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This article is part of a series: Click Are Contract Terms Really Binding? Part 1 of 2 for the previous article.
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