The classical principle of contract freedom, followed by the economic and political
philosophy of “Laissez-faire,” is a fundamental concept in the field of contract law. The term,
as it has evolved over the centuries in capitalist governments, refers to the policy of allowing
events to take their own course, with the idea that government intervention in society and the
economy should be kept to a minimum. This idea also pertains to contract law, because
contract of freedom allows for the freedom of business interactions. Absolute contract
freedom, on the other hand, is hard to achieve since it could lead to uncontrolled
consequences in both the legal and practical environments. When two parties sign a contract,
they are indicating their intent to develop legal relations and to assume legal rights and
obligations. They must observe certain standards about the content and terms of the contract
in order to comply with these rights and obligations. The twentieth century was defined by
statutory control, which reflected Parliament's and courts' unwillingness to enforce unfair
contracts. By rendering some terms ineffective and submitting others to the reasonableness
test, the UCTA allowed courts to control unfair exclusion and limitation clauses. Common
law principles have been restricted to a great extent by the provisions of this act.
While the principle of freedom of contract remained fundamental, the common law allowed
for the revocation of agreements where a party entered into a contract based on
misrepresentation, undue influence, duress, mistake, or unconscionable conduct. Courts were
able to protect weaker parties from the repercussions of unfair or harsh contract provisions.
The need to prove each of the components that constituted "unfairness" with respect to the
applicable cause of action limited and curtailed the protections. As a result, the court
concentrated on the problem of consensus, and while it had the jurisdiction to dissolve the
agreement in its entirety, it lacked the authority to set aside any unfair terms.
A fundamental principle of contract law is that only those terms which have been effectively
incorporated into a contract can be relied upon by one of the parties to that contract. When a
person signs a written contract, the conditions of the contract are incorporated into it, and the
person is bound by them regardless of whether he has read the contract. However, even a
signed document can be rendered wholly or partly ineffective if the other party has made a
misrepresentation as to its effect. In Curtis v Chemical Cleaning Company case, it was held
that the dress cleaners could not use the exemption clause to avoid liability for damage to the
material of the dress because the scope of the exemption clause had been misrepresented by
the defendant's assistant. When there is no written contract but a reference to the terms of a
contract is made by notice, the terms of the contract are incorporated into the contract if the
notice given to the contracting party (in the present context, the consumer) was reasonable. It
is not necessary for the party depending on the terms in question to bring them to the
consumer's attention, as long as reasonable efforts have been made to do so. As a result, it is
not critical that the buyer read and comprehended the term. Such notice must be given before
or at the time of concluding the contract and it will not be effective if it is given after the
contract has been made. In the famous case, Olley v Marlborough Court Hotel, the exclusion
clause had not been successfully incorporated into the contract because the contract was
concluded at reception, and the notice purporting to exclude liability was not visible until
after the contract was formed, when the guest entered into the bedroom. Furthermore, the
more onerous or unexpected a term is, the greater the degree of notice required. This was
confirmed in the well-known decision in Thornton v Shoe Lane Parking, which stated that
exceptionally onerous conditions, i.e., terms that a reasonable person would not expect in a
particular contract, must be brought to the customer's attention.
Even if a phrase has been validly incorporated, it is still feasible to use construction principles
to render an unfair term, such as an exclusion clause, ineffective or at least less potential. The
“contra proferentem rule”, which gives a meaning to an ambiguous expression that is least
favourable to the person who drafted it, is the most important rule here. This approach has its
limits, however, where a term is phrased in sufficiently clear language. Even if such clauses
are severely unfair, they can be relied on at common law if they are legally incorporated. The
controls over unfair terms offered by the common law are therefore not particularly
extensive, and can be evaded by careful drafting.
In 1977, legislation was adopted to address specific types of unfair terms in addition to the
common law rules. In Sri Lanaka it was established in 1997. UCTA, contrary to its name,
does not provide a comprehensive mechanism for policing all forms of unfair contract terms.
It is mostly concerned with exclusion and limiting clauses. UCTA does not apply only to
consumer contracts, it also covers business-to-business and, in some cases, private contracts
between two individuals. However, this act does not apply to standard form contracts such as
insurance contracts, the sale of land, contracts relating to intellectual property, companies and
partnerships, and the sale of shares as mentioned in schedule 1 of the act.
The principle sections of the 1997 Act only apply to “business liability”, defined in section 13
as arising ‘from things done by a person in the course of a business or from the occupation of
business premises. However, there is an exception is section 7 where the Act also applies to
private contracts. The aim of this act is to protect the interest of the weaker party namely, the
consumer. Section 13(2) gives the definition for whom “deals as a consumer” as the person
who does not contract in the course of a business while the other party does contract in the
course of a business; and if it is a contract for the supply of goods, that are of a type
ordinarily supplied for private use or consumption. Hence, “retail sellers” are not included in
this consumer category under this act.
Though this is a short act, the main provisions of this act help us to understand the contractual
obligations of the parties to commercial contracts. Section 3 of this act deals with the
exemption of liability for negligence breach of any obligation, arising from the express or
implied terms of a contract, to take reasonable care or exercise reasonable skill in the
performance of the contract or breach of any common law duty to take reasonable care or
exercise reasonable skill. In simple terms the negligence means what a reasonable prudent
person would not do in the circumstances or failure to do what a reasonable prudent would do
in the circumstances. Under section 3(1) no one can exclude or restrict his liability in
negligence for death or personal injury by means of a term in a contract or by way of notice.
For instance, suppose an owner of the bus displays a notice in the bus saying that he does not
hold himself liable for any negligent act or omission of the bus driver or conductor. However,
if a passenger gets injured due to negligence of the bus driver or conductor, bus owner would
not able to shelter behind the notice that displays in the bus according to this section 3(1)
since master is always liable for his servants’ negligent act which is defined as vicarious
liabilities.
Section 3(2) states the liability for negligence for any other kind of loss or damage can be
excluded provided the term or notice satisfies the requirement of reasonableness. For
instance, if a passenger lost his or her money, due to some negligent act of conductor, but the
person did not get injured, it is considered as damage to a property. However, if there is a
notice hanging on the bus or if any term regarding those issues is included in the contract, the
respective parties can shelter behind it or in other words, limit their liabilities.
Section 4 includes the exemption of liability for breach of contract where one-party deals as a
consumer or on the other party's written standard terms of business, then the other party
cannot exclude or restrict his liability for breach of contract, non-performance of the contract
or different performance of the contract unless the exemption clause satisfies the requirement
of reasonableness. However wide the exemption clause may be, Lord Denning made an effort
to declare the contract is null and void if there is a breach. However, this section 4 of the
UCTA, provides a solid answer for those kinds of issues by introducing a ‘reasonableness’ to
the term included in the contract. Therefore, if the opinion of the judge is reasonable, then the
innocent party will be able to rely on the exemption clause and exclude his liability.
Section 7 includes the exemption of implied terms in contracts of sale and hire purchases
where there is no sale until the payment of the last installment and would be able to get the
discretion of paying a nominal price after the last installment and buy the item. Section 7(1)
includes contracts for the sale of goods and hire purchases, where the implied terms as to title
cannot be excluded or restricted by a contract term. According to the section 13(a) of the Sale
of Goods Ordinance, there is an implied condition on the part of the seller that in the case of a
sale he has a right to sell the goods, and that, in the case of an agreement to sell, he will have
a right to sell the goods at the time when the property is to pass. Therefore, according to this,
if the seller does not have a right to sell, the buyer will also not have a right to buy or in other
words will not get a good title. Prior to enactment of these statutes Caveat Emptor maxim
which warns the consumer that unless if they are careful, they will not get any remedies from
the law, was applied. However, that implied terms in Sale of Goods Ordinance cannot be
excluded or restricted by a contract term according to section 7(1) of UCTA.
Generally, consumers will buy goods by three ways; by description, by samples or by
description and samples. Section 7(2) defines the implied terms as to correspondence with
description or sample, fitness for purpose and satisfactory quality cannot be excluded or
restricted by any contract term against a person dealing as a consumer. Section 7(3) defines
when the person is not dealing as a consumer for instance retail sellers, such liability can only
be excluded or restricted in so far as the term is reasonable.
The requirement of reasonableness is defined under section 10(1) such as "the term 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 10(2) provides criteria for determining whether the clause is a reasonable one for the
purposes of section 7. It includes guidelines of Schedule 2 of the Act, which are as follows.
Schedule 2(1), defines that the bargaining strengths of the parties are relative to each other and
also the availability of alternative supplies. For instance, bargaining power of a retail fish seller
is less than that of a whole sale fish seller but a little bit higher than a buyer. In practice, this
has often been significant factor, with courts being more reluctant to intervene when there is
no clear imbalance between the parties. However, there is a line of caselaw going all the way
back to the House of Lords decision in George Mitchell v Finney Lock Seeds (1983) in which
the courts have intervened primarily even where there was no clear imbalance, because the
clause in question was deemed to be exceptionally harmful to the interests of the opposing
party.
Schedule 2(2) of the section 10(2), examines whether the customer received an inducement to
agree to the exclusion term. For instance, mobile phone seller may charge a higher price and
offer a warranty. However, seller will offer no warranty for lesser price. Section 2(3) examines
whether the customer knew or ought reasonably to have known of the existence and extent of
the term through previous course of dealings. Though there is insufficient notice an exclusion
clause may be incorporated where there has been a previous consistent course of dealing
between the parties on the same terms. In the famous Spurling v Bradshaw case, it was held
that although the defendants did not receive the document containing the exclusion clause until
after the contract was signed, the clause was incorporated into the contract as a result of the
parties' regular course of dealings. The defendant had previously received similar documents
and was now bound by their terms contained in them.
According to schedule 2(4) where the term excludes or restricts any relevant liability if some
condition is not complied with, whether it was reasonable at the time of the contract to expect
that compliance with that condition would be practicable and finally schedule 2(3) examines
whether the goods were manufactured, processed or adapted to the special order of the
customer. For instance, when we go to a tailor for sewing a dress, we specifically give our
measurements and get our work done. In such cases also, we have to consider the reasonability
of exemption clauses if there are any. All these five sections of schedule 2 of the UCTA
examines the criteria for reasonability of the exemption clauses.