Lessor’s Exclusion Clause Upheld

A recent case in the Commercial Court has provided a welcome and rare illustration of a court ruling in favour of the reasonableness of a Lessor’s exclusion clause in a Hire Purchase Agreement.

This case is particularly interesting because there has been a dearth of authorities in recent years on this issue. Even the most rigorous exclusion clause in a business finance agreement operates subject to the statutory “requirement of reasonableness” imposed by the Unfair Contract Terms Act 1977 (“UCTA”), and the inherent uncertainty in litigating this issue means that in practice very few contested cases reach the courts on this issue, and even fewer result in reported judgments.

We will therefore take a deep dive into the judgment in this case since although every case turns on its own individual facts, the judgment contains a useful summary of the legal position faced by Lessors seeking to enforce exclusion clauses in all types of asset finance agreement.

In Last Bus Limited (trading as Dublin Coach) v Dawsongroup Bus and Coach Limited (formerly Dawson Rentals Bus and Coach Limited) Evobus (UK) Limited [2022] EWHC 2971 (Comm) the Lessee was a substantial operator which took 30 coaches on Hire Purchase each with a value of £250 K supplied by Evobus, a subsidiary of Daimler AG and financed by the Lessor Dawson Group, which was itself a specialist operator in this area.

The Lessee was the instigator of proceedings alleging that the coaches were in breach of the statutory implied term as to satisfactory quality, and the Lessor brought an application for summary judgment to dismiss the claim against it on the basis of its exclusion clause, which provided:

“The Customer agrees and acknowledges that it hires the Vehicle for use in its business and that no condition, warranty or representation of any kind is or has been given by or on behalf of the Company in respect of the Vehicle. The Company shall have no liability for selection, inspection or any warranty about the quality, fitness, specifications or description of the Vehicle and the Customer agrees that all such representations, conditions and warranties whether express or implied by law are excluded. Notwithstanding the foregoing provisions of this clause, nothing herein shall afford the Company a wider exclusion of liability for death or personal injury than the Company may effectively exclude having regard to the provisions of the Unfair Contract Terms Act 1977 . The Customer acknowledges that the manufacturer of the Vehicle is not the agent of the Company and the Company shall not be bound by any representation or warranty made by or on behalf of the Vehicle manufacturer.”

The requirement of reasonableness imposed by UCTA is that “ 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” ( s.11(1) of UCTA ).

The judge considered in some detail all the recent relevant reported decisions on exclusion clauses:

“The more recent authorities on UCTA in the Court of Appeal show a marked reluctance to interfere, by concluding that an exclusion clause has not been shown to satisfy the requirement of reasonableness, in substantial commercial transactions entered into by parties of equal bargaining strength. Thus, for example, it has been said that:

• (i)  “ In circumstances in which parties of equal bargaining power negotiate a price for the supply of product under an agreement which provides for the person on whom the risk of loss will fall, … the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and reasonable one. Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view, be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered – the court should not interfere. “ ( per Chadwick LJ in Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, at [54]-[55] ).
• (ii)  “ The 1977 Act obviously plays a very important role in protecting vulnerable consumers from the effects of draconian contract terms. But I am less enthusiastic about its intrusion into contracts between commercial parties of equal bargaining strength, who should generally be considered capable of being able to make contracts of their choosing and expect to be bound by their terms. “ ( per Tuckey LJ in Granville Oil & Chemicals Ltd v Davis Turner & Co Ltd [2003] EWCA Civ 570, at [31] ).
• (iii)  “ … the trend in the UCTA cases decided in recent years has been towards upholding terms freely agreed, particularly if the other party could have contracted elsewhere and has, or was warned to obtain, effective insurance cover “ ( per Coulson LJ in Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371, at [93] ; see also at [60]-[63] and [88]-[93] generally).
• (iv)  “ … even where UCTA is applicable, at least in the case of commercial contracts between parties of broadly equal bargaining power, considerations of party autonomy and freedom of contract remain potent. “ ( per Gross LJ in Goodlife Foods, supra , at [103], citing Watford Electronics, supra)”.

After then considering some of the arguments traditionally brought by each side in Hire Purchase cases, the judge set out his view as follows:

“…if in the individual case an exclusion by the manufacturer/supplier would have been reasonable for a direct sale, then other things being equal the equivalent exclusion by the hire purchase finance house will be reasonable. Absent some feature on the facts justifying a distinction in the particular case, … the purchaser/hirer would not expect their basic rights regarding quality defects to differ. If the nature and circumstances of the transaction are such that any implied term of satisfactory quality could be validly excluded under a cash sale, then the purchaser/hirer can be taken to expect that any such implied term could be validly excluded in a hire purchase arrangement used instead to enable them to finance their acquisition of the goods”.

The judge then went on to deal with the specific matters set out in Schedule 2 to UCTA and concluded as follows:

• “(i)  There was no inequality of bargaining power between Last Bus and Dawson, and Last Bus’s requirements could have been met by other means than contracting with Dawson (Schedule 2, paragraph (a)).
• (ii)  I could not say that Last Bus received any inducement to agree to Clause 5(b), or that in accepting Dawson’s terms it had an opportunity of entering into a similar contract with another that would not contain an equivalent exclusion (Schedule 2, paragraph (b)). I proceed on the basis that any hire purchase terms available in the market would have come with a materially similar exclusion.
• (iii)  Last Bus ought reasonably to have known very well of the existence and extent of Clause 5(b), given the parties’ extensive course of dealing (Schedule 2, paragraph (c)).
• (iv)  Schedule 2, paragraph (d) does not arise (” where the term excludes any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable “).
• (v)  I could not say that the Tourismos were manufactured or adapted to the special order of Last Bus to any extent that might be relevant (Schedule 2, paragraph (e)). There is some evidence that at the request of Last Bus some minor extras were fitted to at least some of the Tourismos (additional USB ports at the seats), but I do not regard that as relevant to the reasonableness of a total exclusion of liability for the quality of the buses, and anyway it is not clear to me whether that was really a ‘special order’ matter or just a selection of an option offered by EvoBus”.

After reviewing the factual background in some detail the judge came to the conclusion that there was no real prospect of the Lessee being able to satisfy the court at trial that the exclusion clause failed to satisfy the statutory requirement of reasonableness, and he therefore entered summary judgment for the Lessor in effect dismissing the claim against it.

Comment

This is a very welcome decision because it sets out a very careful analysis of previous authorities on exclusion clauses and applies them to the facts of the Hire Purchase transactions involved. It is fair to say that a central feature of the judge’s decision arose from the fact that the parties were of roughly equal bargaining power, which of course is not always the case in asset finance, but this does not mean that inequality of bargaining power in itself would have resulted in the decision going the other way.

Although not expressly stated in the judgment, it seems likely that the fact that the Lessee had a worthwhile claim against the supplier of the equipment which would continue to trial factored into the court’s decision absolving the Lessor of responsibility for the performance of the vehicles.

It is particularly striking that the judge was prepared to rule in favour of Lessor’s exclusion clause on an application for summary judgment, since Lessees have usually been able to persuade a court at this stage of proceedings that they at least have an argument on reasonableness that should be ventilated at trial. A successful application for summary judgment removes the costs jeopardy of a contested trial and is a particularly valuable tool in a Lessor’s weaponry which is likely to be used more often in the light of this decision.