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Hong Kong Law Reform Commission |
8.1 In this chapter, we discuss exclusion of liability for breaches of
the implied terms under the Recommended Legislation and its control. We first
examine the present position of exclusion of liability for breaches of the
implied terms in contracts of sale of goods and other kinds of supply of goods
in Hong Kong. We also discuss the position in Australia, New Zealand and
England and Wales.
8.2 Chapter 8 of the Consultation Paper made three
recommendations concerning exclusion of liability. We received no comment on
the issues raised, or on the recommendations, and accordingly we confirm our
earlier recommendations without amendment in this chapter. The recommendations
are in respect of –
(a) contracting out the liabilities for breaches of the implied terms under the Recommended Legislation and making it subject to the control of Cap 71 – Recommendation 21;
(b) adding a new sub-section (3A) to section 12 of Cap 71 – Recommendation 22; and
(c) amending section 12 of Cap 71 to cover agreements to transfer property in goods and agreements to bail goods - Recommendation 23.
8.3 Exclusion of liability under Cap 26 in contracts of sale of goods
is allowed under section 57 of Cap 26 which reads as follows:
"(1) Where any right, duty or liability would arise under a contract of sale of goods by implication of law, it may (subject to the Control of Exemption Clauses Ordinance (Cap 71)) be negatived or varied by express agreement, or by the course of dealing between the parties, or by usage if the usage is such as to bind both parties to the contract.
(2) An express condition or warranty does not negative a condition or warranty implied by this Ordinance unless inconsistent therewith."
8.4 The
liability of a seller for breaching the statutory implied terms under Cap 26 can
be excluded or limited by express agreement, the course of dealing between the
parties or usage, but this is subject to the control of Cap 71. Cap 71 is based
on the 1977 Act. The control on exemption clauses of a seller's liability is
provided in section 11 as follows:
"(1) Liability for breach of the obligations arising from section 14 of the Sale of Goods Ordinance (Cap 26) (seller's implied undertakings as to title, etc) cannot be excluded or restricted by reference to any contract term.
(2) As against a person dealing as consumer, liability for breach of the obligations arising from section 15, 16 or 17 of the Sale of Goods Ordinance (Cap 26) (seller's implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose) cannot be excluded or restricted by reference to any contract term.
(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.
(4) The liabilities referred to in this section are not only the business liabilities defined by section 2(2), but include those arising under any contract of sale of goods."
8.5 According
to section 11(1), the liability for breaching the implied undertaking as to
title cannot be excluded or restricted. If a buyer deals as a consumer, the
implied undertakings as to correspondence with description or sample or as to
quality or fitness for purposes cannot be excluded or restricted. But if a
buyer does not deal as a consumer, these implied terms can be excluded or
restricted, provided the exemption clause is reasonable. The test of
"reasonableness" is set out in section 3.
8.6 Apart from the particular provision on contracts of sale of goods
in section 11, section 12 of Cap 71 also provides for other contracts for the
supply of goods. Section 12 reads as follows:
"(1) Where the possession or ownership of goods passes under or in pursuance of a contract not governed by the law of sale of goods, subsection (2) to (4) apply in relation to the effect (if any) that the court or arbitrator is to give to contract terms excluding or restricting liability for breach of obligation arising by implication of law from the nature of the contract.
(2) As against a person dealing as consumer, liability in respect of the goods' correspondence with description or sample, or their quality or fitness for any particular purpose, cannot be excluded or restricted by reference to any such term.
(3) As against a person dealing otherwise than as consumer, that liability can be excluded or restricted by reference to such a term, but only in so far as the term satisfies the requirement of reasonableness.
(4) Liability in respect of –
(a) the right to transfer ownership of the goods, or give possession; or
(b) the assurance of quiet possession to a person taking goods in pursuance of the contract,
cannot be excluded or restricted by reference to any such term except in so far as the term satisfies the requirement of reasonableness."
8.7 According
to section 12(4), the liability for a breach of the obligation as to the right
to transfer ownership or possession of the goods, or the assurance of quiet
possession cannot be excluded or restricted unless the exemption clause is
reasonable. If the person who deals with a supplier is a consumer, the
obligation as to correspondence with description or sample, or as to quality or
fitness for purposes cannot be excluded or restricted. If the person who deals
with a supplier is not a consumer, these obligations can be excluded or
restricted provided the exemption clause is reasonable.
8.8 "Dealing as
consumer" is defined in section 4. The definition is almost identical to that
in section 2A of Cap 26, which has been discussed in Chapter 7. The test
of "reasonableness" is set out in section 3 as follows:
"(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap 284) is satisfied only if the court or arbitrator determines that the term was 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.
(2) In determining for the purposes of section 11 or 12 whether a contract term satisfies the requirement of reasonableness, the court or arbitrator shall have regard in particular to the matters specified in Schedule 2; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract.
(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Ordinance is satisfied only if the court or arbitrator determines that it would be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.
(4) In determining (under this Ordinance or the Misrepresentation Ordinance (Cap 284)) whether a contract term or notice satisfies the requirement of reasonableness, the court or arbitrator shall have regard in particular (but without prejudice to subsection (2) to whether (and, if so, to what extent) the language in which the term or notice is expressed is a language understood by the person as against whom another person seeks to rely upon the term or notice.
(5) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this Ordinance or the Misrepresentation Ordinance (Cap 284)) whether the term or notice satisfies the requirement of reasonableness, the court or arbitrator shall have regard in particular (but without prejudice to subsection (2) or (4)) to –
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
(6) It is for the person claiming that a contract term or notice satisfies the requirement of reasonableness to prove that it does."
8.9 According
to sub-section (1), an exemption clause is reasonable if the court determines
that it is fair and reasonable, "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." Pursuant to sub-section (2), for
contracts of sale of goods and supply of goods, the court shall have regard in
particular to the following matters specified in Schedule 2:
"The matters to which the court or arbitrator shall have regard in particular for the purposes of sections 11(3) and 12(3) and (4) are any of the fo llowing which appear to be relevant –
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) 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);
(d) 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;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer."
8.10 In Australia, the general rule is that the liability for
breaching the statutory implied terms in Part V Division 2 of the 1974 Act
cannot be excluded or restricted. Section 68(1) provides as follows:
"Any term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) that purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying:
(a) the application of all or any of the provisions of this Division;
(b) the exercise of a right conferred by such a provision;
(c) any liability of the corporation for breach of a condition or warranty implied by such a provision; or
(d) the application of section 75A;
is void."
8.11 The general rule is subject to an
exception in section 68A(1)(a). Where the goods are not of a kind ordinarily
acquired for "personal, domestic or household use or consumption", the liability
of a supplier can be restricted to replacement of, repair of or the costs of
replacing or repairing the goods. Sub-section (1)(a) provides as
follows:
"(1) Subject to this section, a term of a contract for the supply by a corporation of goods or services other than goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption is not void under section 68 by reason only that the term limits the liability of the corporation for a breach of a condition or warranty (other than a condition or warranty implied by section 69) to:
(a) in the case of goods, any one or more of the following:
(i) the replacement of the goods or the supply of equivalent goods;
(ii) the repair of the goods;
(iii) the payment of the cost of replacing the goods or of acquiring equivalent goods;
(iv) the payment of the cost of having the goods repaired."
8.12 According
to sub-section (2), an exemption clause has no effect if a consumer can
establish that it is not fair or reasonable for the supplier to rely on that
clause. In determining the fairness or reasonableness, a court shall have
regard to all the circumstances and in particular the four matters specified in
sub-section (3) which are similar to those specified in Schedule 2 of Cap 71.
Sub-sections (2) and (3) read as follows:
"(2) Subsection (1) does not apply in relation to a term of a contract if the person to whom the goods or services were supplied establishes that it is not fair or reasonable for the corporation to rely on that term of the contract.
(3) In determining for the purposes of subsection (2) whether or not reliance on a term of a contract is fair or reasonable, a court shall have regard to all the circumstances of the case and in particular to the following matters:
(a) the strength of the bargaining positions of the corporation and the person to whom the goods or services were supplied (in this subsection referred to as 'the buyer') relative to each other, taking into account, among other things, the availability of equivalent goods or services and suitable alternative sources of supply;
(b) whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity of acquiring the goods or services or equivalent goods or services from any source of supply under a contract that did not include that term;
(c) whether the buyer 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); and
(d) in the case of the supply of goods, whether the goods were manufactured, processed or adapted to the special order of the buyer."
8.13 In New Zealand, according to section 43(1) of the 1993 Act,
"the provisions of this Act shall have effect notwithstanding any provision
to the contrary in any agreement." Pursuant to sub-section (2)(a), this
prohibition on contracting out does not apply where a consumer acquires or holds
himself out as acquiring the goods for business provided the agreement is in
writing. Sub-section (2)(a) reads as follows:
"(2) Nothing in subsection (1) of this section shall apply to an agreement made between a supplier and a consumer who acquires, or holds himself or herself out as acquiring, under the agreement, goods or services for the purposes of a business provided either –
(a) That the agreement is in writing ...."
8.14 According
to sub-section (6), parties may agree in writing to impose a stricter duty on a
supplier than that imposed by the Act or provide a more advantageous remedy to a
consumer. In addition, a consumer may also agree to settle or compromise a
claim under the Act (sub-section (7)).
8.15 Exemption clauses are allowed in hire purchase agreements under
section 12 of the 1973 Act, and in contracts for the transfer of property
in goods and contracts of hire under section 11 of the 1982 Act. Sections 12
and 11 provide as follows respectively:
"12 Exclusion of implied terms
An express term does not negative a term implied by this Act unless inconsistent with it."
"11 Exclusion of implied terms, etc
(1) Where a right, duty or liability would arise under a contract for the transfer of goods or a contract for the hire of goods by implication of law, it may (subject to subsection (2) below and the 1977 Act) be negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both parties to the contract.
(2) An express condition or warranty does not negative a condition or warranty implied by the preceding provisions of this Act unless inconsistent with it.
(3) Nothing in the preceding provisions of this Act prejudices the operation of any other enactment or any rule of law whereby any condition or warranty (other than one relating to quality or fitness) is to be implied in a contract for the transfer of goods or a contract for the hire of goods."
8.16 Exemption
clauses are also subject to the control of sections 6 and 7 of the 1977 Act.
Exemption clauses in contracts of sale of goods and hire purchase agreements are
governed by section 6, while exemption clauses in contracts for the transfer of
property in goods and contracts of hire are governed by section 7. Sections 6
and 7 read as follows:
"6 Sale and hire-purchase
(1) Liability for breach of the obligations arising from –
(a) section 12 of the Sale of Goods Act 1979 (seller's implied undertakings as to title, etc);
(b) section 8 of the Supply of Goods (Implied Terms) Act 1973 (the corresponding thing in relation to hire-purchase),
cannot be excluded or restricted by reference to any contract term.
(2) As against a person dealing as consumer, liability for breach of the obligations arising from –
(a) section 13, 14 or 15 of the 1979 Act (seller's implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose);
(b) section 9, 10 or 11 of the 1973 Act (the corresponding things in relation to hire-purchase),
cannot be excluded or restricted by reference to any contract term.
(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.
(4) The liabilities referred to in this section are not only the business liabilities defined by section 1(3), but include those arising under any contract of sale of goods or hire-purchase agreement.
7 Miscellaneous contracts under which goods pass
(1) Where the possession or ownership of goods passes under or in pursuance of a contract not governed by the law of sale of goods or hire-purchase, subsections (2) to (4) below apply as regards the effect (if any) to be given to contract terms excluding or restricting liability for breach of obligation arising by implication of law from the nature of the contract.
(2) As against a person dealing as consumer, liability in respect of the goods' correspondence with description or sample, or their quality or fitness for any particular purpose, cannot be excluded or restricted by reference to any such term.
(3) As against a person dealing otherwise than as consumer, that liability can be excluded or restricted by reference to such a term, but only in so far as the term satisfies the requirement of reasonableness.
(3A) Liability for breach of the obligations arising under section 2 of the Supply of Goods and Services Act 1982 (implied terms about title etc in certain contracts for the transfer of the property in goods) cannot be excluded or restricted by references to any such term.
(4) Liability in respect of –
(a) the right to transfer ownership of the goods, or give possession; or
(b) the assurance of quiet possession to a person taking goods in pursuance of the contract,
cannot (in a case to which subsection (3A) above does not apply) be excluded or restricted by reference to any such term except in so far as the term satisfies the requirement of reasonableness."
8.17 Sections
6 and 7 of the 1977 Act are similar to sections 11 and 12 of Cap 71 in Hong Kong
except that section 6 also governs exemption clauses in hire purchase agreements
and the 1982 Act inserted a new sub-section (3A) in section 7. The effect of
the new sub-section (3A) is that any exemption clause relating to implied terms
as to title in contracts for the transfer of property in goods shall be void.
This is in line with the existing similar provision in section 6(1) in respect
of contracts of sale of goods and hire purchase agreements.
8.18 The
definition of "dealing as consumer" in section 12 and the reasonableness test in
section 11 and Schedule 2 of the 1977 Act are almost identical to those in
section 4, and section 3 and Schedule 2 of Cap 71
respectively.
8.19 In all the jurisdictions discussed above, there are provisions to
control the operation of exemption clauses in the context of supply of goods
other than sale. The extent of the control varies. In Australia, where the
goods are not of a kind ordinarily acquired for "personal, domestic or household
use or consumption", the liability of a supplier can be restricted to
replacement of, repair of or the costs of replacing or repairing the goods. In
New Zealand, the prohibition on contracting out does not apply where a consumer
acquires or holds himself out as acquiring the goods for business, provided the
agreement between the supplier and the consumer is in writing. The 1974 Act and
the 1993 Act only apply to consumer transactions. Thus, exemption clauses on
the statutory implied terms of these two Acts are of limited
application.
8.20 The control of exemption clauses in respect of supply of goods
other than sale in England and Wales is similar to that in Hong Kong in respect
of sale of goods (section 57 of Cap 26 and section 11 of Cap 71) and indeed
other kinds of supply of goods (section 12 of Cap 71). With the enactment of
the Recommended Legislation on implied terms on supply of goods other than sale,
there should also be control on exemption clauses. Unless there is a good
reason to deviate from the present control in section 12 of Cap 71 in respect of
the terms implied by common law, the status quo should be maintained. We
therefore recommend that there should be a provision similar to section 57 of
Cap 26 in the Recommended Legislation in order to allow contracting out of any
right, duty and liability, subject to the control of Cap 71.
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Recommendation 21
We recommend that there should be a provision similar to section 57 of
Cap 26 in the Recommended Legislation in order to allow contracting out of any
right, duty or liability, subject to the control of Cap 71.
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8.21 A new sub-section (3A) was added to section 7 of the 1977 Act.
As discussed above, the effect of the new sub-section (3A) is to make any
exemption clause on the implied terms about title in contracts for the transfer
of property in goods void. There is no equivalent provision in Hong Kong.
Similarly, any exemption clause on implied terms about title in contracts of
sale of goods and hire purchase agreements will also be void because of
section 6(1) (similar to section 11(1) of Cap 71).
8.22 On the other
hand, exemption clauses relating to the statutory implied undertakings as to a
right to transfer possession and an assurance of quiet possession in contracts
of hire in the 1982 Act will still be governed by section 7(4) of the 1977 Act
(similar to section 12(4) of Cap 71). The effect is that the exemption clause
will not be void straightaway but will be subject to a "reasonableness"
test.
8.23 Professor N E Palmer has observed that the provisions which
deal with the protection of hirers' right of possession are markedly inferior to
those governing transactions where property passes. He writes:
"it remains open to the bailor under section 7 of the Unfair Contract Terms Act 1977 (as amended) to exclude liability for breach of this condition, even in the case of a consumer hiring, provided that he can demonstrate that the exclusion clause satisfies the statutory requirement of reasonableness. Such an exclusion is not now possible [because of the new section 7(3A)] ... in relation to the equivalent term as to title implied into contracts for the transfer of goods .... The same differentiation against hirers applies to the implied assurance of quiet possession ... [H]ere again, the lessor can in theory exclude liability for breach of the term [provided the exemption clause is reasonable]; the transferor in equivalent circumstances cannot [because of section 7(3A), unless his liability is non-business liability] ...."[390]
8.24 The
Law Commission in England and Wales has considered why exemption clauses
relating to the statutory implied undertakings as to a right to transfer
possession and an assurance of quiet possession in contracts of hire are not
void straightaway but subject to a "reasonableness" test. The Law Commission
stated:
"The reason for the difference is that section 12 of the Sale of Goods Act 1893 was divided into two parts when it was amended by the Supply of Goods (Implied Terms) Act 1973 so as to allow the parties to provide either for the transfer of full title (the ordinary case) or for the transfer of such title as the seller or some third party may have. Thus, the seller can contract out of the obligation to transfer full title by stipulating for sale with a restricted title; but section 6 of the Unfair Contract Terms Act 1977 prevents him from excluding or restricting his obligations as to title in any other way. However, that Act could not make similar provision for other contracts of supply, because the common law, which governed such contracts, did not, it seemed, allow the supplier to choose between supplying the goods on the basis that he had full title to the goods or on the basis that he had only restricted title. Instead, the approach of the common law was thought to be to imply undertakings as to title on the part of the supplier in contracts of supply but to allow the parties to contract out of them. This approach was reflected in the Unfair Contract Terms Act 1977 in that the Act permits continued reliance on exemption clauses affecting implied terms as to title in contracts of supply but, as part of its scheme of protection from unfair terms, it also subjects such clauses to a test of reasonableness."[391]
8.25 In
England and Wales, a transferor and a bailor can transfer "only such title as he
or a third person may have" in a contract for transfer of property in goods
under section 2(3) of the 1982 Act and in a hire purchase agreement under
section 8(2) of the 1973 Act respectively. However, there is no equivalent
provision in the 1982 Act in respect of contracts of hire. This explanation by
the Law Commission appears to have answered the question raised by Professor
Palmer.
8.26 With the enactment of the Recommended Legislation, there
will be statutory implied terms about title in contracts for the transfer of
property in goods and hire purchase agreements. In Hong Kong, a transferor and
a bailor will be able to transfer "only such title as he or a third person may
have" in a contract for transfer of property in goods and in a hire purchase
agreement respectively under the Recommended Legislation. There is no
equivalent provision in the Recommended Legislation in respect of contracts of
hire.
8.27 In addition, there is a similar provision in section 11(1) of
Cap 71 in respect of sale of goods which makes any exemption clause relating to
the implied terms about title void. To make contracts for the transfer of
property in goods and hire purchase agreements in line with this, a new
sub-section (3A) should be added to section 12 of Cap 71. For the reasons
mentioned above, there is no need, however, for such a sub-section to apply to
contracts of hire. This new sub-section (3A) is needed in section 12 of
Cap 71 in respect of contracts for the transfer of property in goods and
hire purchase agreements and we so recommend.
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Recommendation 22
We recommend that a new sub-section (3A) should be added to
section 12 of Cap 71 to make any exemption clause relating to the implied
terms as to title in contracts for the transfer of property in goods and hire
purchase agreements void. There is no need for such a sub-section to apply to
contracts of hire.
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8.28 The Law Commission recommended a consequential amendment to
section 7 of the 1977 Act in order to cover agreements to transfer property in
goods and agreements to bail. The Law Commission stated:
"[W]e do recommend one other minor amendment to section 7 of the Unfair Contract Terms Act 1977. The provisions of the Sale of Goods Act model apply to all contracts of sale, and this expression includes both sales (where the property is transferred) and agreements to sell (where the property is to be transferred). The provisions of section 6 of the Unfair Contract Terms Act 1977 apply to clauses excluding or restricting liability in agreements to sell as well as sales. However, section 7 of the Unfair Contract Terms Act 1977 only refers to contracts under which 'possession or ownership of goods passes', and we recommend that it should be amended to include contracts under which possession or ownership are to pass, since contracts under which the property in goods is to be transferred are included in the scope of our proposals."[392]
8.29 This
recommendation has not been reflected in the amended section 7 of the 1977
Act. In this Report, the Recommended Legislation covers agreements to transfer
property in goods (in contracts for transfer of property in goods) and
agreements to bail goods (in contracts of hire). In addition, section 11 of
Cap 71 applies to exemption clauses in agreements to sell and also sales.
We are therefore of the view that the above recommendation of the Law Commission
is appropriate and we so recommend.
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Recommendation 23
We recommend that section 12 of Cap 71 should be amended to cover
agreements to transfer property in goods and agreements to bail goods (in
contracts of hire).
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[390] N E Palmer,"The Supply of Goods and Services Act 1982", (1983) 46 MLR 619, at 624.
[391] Law Commission, Report
on Implied Terms in Contracts for the Supply of Goods, Law Com No 95,
1979, at para 70.
[392] Law
Com No 95, 1979, at para 73.