[1996] CLC 265
Court of Appeal
The facts are set out in the judgement of Hirst LJ. The issues before the court were :
1. whether the defendant was bound by the 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;
2. if the defendant was so bound, whether the condition on which the plaintiffs particularly rely was reasonable under the Unfair Contract Terms Act 1977.
Hirst LJ
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 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 [AEG] are, of course, a very large and extremely well-known multi-national company. The defendants [Logic Resource Limited] 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... 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."
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 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.
The printed conditions... 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 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 para 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, [1971] 1 All ER 686 and Interfoto Picture Library Limited v Stiletto Visual Programmes Limited [1989] 1 QB 433, [1988] 1 All ER 348.
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 [1986] BTLC 30. 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...
... first, I fully accept that this condition must be considered in the light of the particular contract in which it appears... 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.
... 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.
[Hirst LJ continued] 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 para 12.013 of Chitty. I, of course, fully accept the authority of the George Mitchell case [1983] 2 AC 803, [1983] 2 All ER 737 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 [1989] 1 QB 433, [1988] 1 All ER 348 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 Sch 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.