This article considers the ambit of s 26 of the Unfair Contract Terms Act 1977 (UCTA). Section 26 imposes a very important, but little considered, exemption to the application of the Act, namely that it has no application at all to international supply contracts. In light of the global and transactional nature of the computer business, the practical significance of this provision will be readily appreciated.
I consider some of the important aspects of the few reported cases which analyse the section.
Section 26
There are three conditions that must be satisfied for the exemption to be made out:
- that the contract is for the sale of goods or ‘one under or in pursuance of which the possession or ownership of goods passes’ (s 26(3)(a)); and
- the contract is made by parties whose places of business (or, if they have none, their habitual residences) are in the territories of different States (s 26(3)(b)); and
- either:
(a) the goods in question are, at the time of the conclusion of the contract, in the course of carriage, or will be carried, from the territory of one State to the territory of another; or
(b) the acts constituting the offer and acceptance have been done in the territories of different States; or
(c) the contract provides for the goods to be delivered to the territory of a State other than that within whose territory those acts were done (s 26(4)).
Section 14 of UCTA provides that ‘goods’ is to have the same meaning as in the Sale of Goods Act 1979. Although s 14 limits that definition to Part 1 of the Act and section 26 falls within Part 3, one can assume that the definition of goods in the Sale of Goods Act 1979 is intended to apply to s 26 too. I do not in this article enter into the debate of whether computer software may be classed as ‘goods’ for the purpose of the Sale of Goods Act 1979. However, it will be readily appreciated by practitioners that, whether or not section 26 applies in the particular context of computer contracts, first requires consideration of whether the subject matter of the contract falls within the definition of goods by reference to authorities such as St Albans City & DC v International Computer Limited [1996] 4 All ER 481.
The Relevant Authorities
In Ocean Chemical Transport Inc v Exnor Craggs Limited [2000] 1 Lloyd’s Rep 446, the Court of Appeal held that the reference to ‘parties’ in s 26(3)(b) was to the principals to the contract in question, and not to the agents who entered into the contract on their behalf.
In the case of Balmoral Group Limited v Borealis [2006] EWHC 1900 (Comm), Mr Justice Christopher Clarke approved the judgment in Ocean Chemical Transport Inc in the face of a submission that it should not apply when the agent incurred personal liability under the contract.
In Balmoral it was also held that ‘the conclusion of the contract’ in s 26(4)(a) was the time when the contract was made. The judge rejected the rather speculative submission that, as the draftsman had not used the language of offer and acceptance which is used in s 26(4)(b), the s 26(4)(a) must be referring to a different (and later) time than the time at which the contract was made.
Section 26 has been subject to the greatest scrutiny in the decision of the Court of Appeal in Amiri Flight Authority v BAE Systems PLC [2003] EWCA Civ 1447. That case firstly made clear that s 26 would apply even where the contract in question contained a service element in addition to the supply of goods. Amiri was the successor to the rights of the Ruler of Dubai’s Private Department which had purchased an aircraft with an associated technical maintenance package for a sum in excess of US$25,000,000. At first instance, Mr Justice Tomlinson rejected the argument that the section was only applicable ‘in so far as the contract provides for the sale of goods’. He accepted that there could be arbitrary results where a supplier of goods entered into two contracts, one for the international supply of goods and one for maintenance or other related services in respect of those goods as UCTA would apply to the latter contract but not the former. However, he considered that the statutory wording was clear. This analysis was approved by the Court of Appeal.
The effect of this aspect of the decision is that if a single contract provides for the supply or sale of goods plus other associated services, UCTA will not apply at all if the contract fulfils the other conditions of s 26. On the other hand, if the supply and services are provided by one supplier pursuant to two separate contracts, s 26 will have no application to the contract for services and, as such, UCTA remains in principle applicable. Providers of hardware and related services should be mindful of this decision in deciding how to package their contracts.
The Court of Appeal also had to decide whether the words ‘the contract provides for the goods to be delivered to the territory of a State other than [the States in which the acts of offer and acceptance were performed]’ in s 26(4)(c) included a contract where the supplier agreed to deliver the goods in the same State where the goods were produced (ie there was no contractual obligation to make delivery across international borders but rather a purely domestic delivery). BAE had manufactured an aircraft in Britain and had agreed to deliver it at its works in the UK. The Court of Appeal departed from the decision at first instance and held that s 26(4)(c) required a provision that the supplier make delivery across international borders. Lord Justice Mance considered that the words used in the sub-section clearly imported ‘movement from elsewhere into that state’. As such s 26(4)(c) will apply where the place of delivery stipulated in the contract is in a different State than the place where the acts of offer and acceptance were done and the obligation is to make delivery across international borders (ie there is ‘international movement of the goods to a state other than that of the contract’ as per Lord Justice Mance in Amiri).
The Amiri case also addresses the purpose of s 26(4)(a) and its difficult relationship with s 26(4)(c). At first blush, it might be considered odd to think of contracts of sale which do not provide for a delivery obligation as is envisaged by s 26(4)(a). However, such contracts are very common in international trade. Lord Justice Mance observed (at [32]):
‘Section 26(4)(a) does not therefore require the seller to have undertaken any obligation to deliver to any other state. Without going into its precise limits, one classical example within s 26(4)(a) would be the sale of goods on CIF or FOB terms. The supplier thereby undertakes to ship goods, or to give the receiver the benefit of a shipping contract, without undertaking that the goods will actually be delivered by the carrier to their overseas destination…. So far as the relationship between s 26(4)(a) and (c) is concerned, the latter is, in contrast to the former, concerned on its face solely with circumstances in which the supplier does undertake a delivery obligation’
Although, the Mance LJ makes clear that the point of distinction between s 26(4)(a) and (4)(c) is that the latter, but not the former, requires there to be a delivery obligation in the contract, it may be hard to think of a contract where there is a contractual provision providing for delivery across international borders within sub-section 4(c) which does not also fall within sub-section (4)(a) in that the goods ‘will be carried from one State to another’ within the meaning of sub-section (4)(a) as a result of the express contractual provision to that effect. Although Bridge has sought to identify in The International Sale of Goods (2nd ed at p. 58) two situations where a different result might be reached, the only one which seems to survive the decision in Amiri is where a seller has taken personal responsibility for delivering the goods to the buyer and does not make use of independent contractors. However, even this situation may fall within sub-section (4)(a) if it is not narrowly construed.
Two cases have sought to grapple with the specific application of s 26(4)(a) following the decision in Amiri.
Mr Justice Clarke in the Balmoral case (at [447]) made clear that it was inappropriate to take an overly technical or literal approach to the question of whether ‘the goods supplied under [the contract] were still in the course of carriage from the territory of one State to the territory of another’, which is the question he identifies as being required to be determined by s 26(4)(a).
Finally and most recently, Mr Justice Aikens in Trident Turboprop (Dublin) Limited v First Flight Couriers Limited [2008] EWHC 1686 (Comm) considered two lease agreements for aircraft which were concluded on 5 September 2005. On 24 May 2006 one of the aircraft was delivered to the lessee in Sweden and on 16 October 2006 the other at Southend airport. It appears that delivery under the leases was made on these respective dates.
The claimant lessor submitted that s 26 applied to the lease agreements. The basis for this, identified at [52] of the judgment, was s 26(4)(a). In particular, it was submitted that the aircraft were carried from the State where they were delivered, namely Sweden and the UK, to India. Although it was conceded on behalf of the lessor that this was not done at the time of the contracts, it was submitted that it was contemplated at that time that the aircraft would be carried from the State where they were delivered to another, namely India. It appears that the basis for this submission was that it was common ground between lessor and lessee that the purpose of the transaction was to enable the lessee to employ the aircraft in cargo operations in India.
The defendant lessee submitted that the sub-section applied only where the goods were to be delivered under the terms of the contract or sale of hire and that there was no such contractual obligation.
Although Mr Justice Aikens unsurprisingly rejected the defendant’s submission in the light of Amiri, his analysis of the application of s 26(4)(a) to the facts of that case is unsatisfactory. In my view, the relevant question for the court was: where were the aircraft at the time of the conclusion of the contracts and where was it understood that they would be delivered? This question was not addressed at all. If the aircraft were carried across national borders to Sweden and to the UK by the seller to make delivery under the leases, one can readily understand why s 26 applies. However, if the goods were manufactured in Sweden and the UK (or were already located there at the time of the contracts), it is rather hard to see why the fact that the lessee subsequently chose to transport the aircraft itself across national borders after delivery meant that section 26 should apply, even where the lessor was aware that it was likely that the lessee would do the same at the time of the contracts. However, this appears to be the basis for Mr Justice Aikens’ decision that s 26 applies. In my view, the defendant’s submission that the situation where a person buys goods in country A and then decides to take them for use in country B would fall outside s 26 must be correct, subject to the further proviso that the goods were also delivered to him in country A. Section 26(4)(a) must be directed at the movement of the goods performed (or envisaged) as arising out of the contract, even if there is no contractual obligation as to the place of delivery or indeed to make delivery of the goods, and not at any subsequent movements by the buyer after delivery under the contract has been performed. In view of the lack of reasoning given by Mr Justice Aikens in support of his conclusion, this point seems ripe for reconsideration.
Conclusion
Section 26 of UCTA is a very potent weapon for a supplier who provides goods alone or goods and services and who does not operate purely domestically. If s 26 can be invoked, the court will not have to decide any questions arising as to the application of UCTA to any exclusion or limitation clauses or the like. The wording of the statute is not entirely clear, in particular sub-sections (4)(a) and (4)(b), and there may be difficulties in its application in individual cases but the general sense of the conditions is readily apparent. However, careful consideration will be required by practitioners of the authorities mentioned above to determine whether or not s 26 applies in any given case and suppliers would be well advised to package up the supply of goods and services into a single contract so as to have complete exemption from UCTA.
Paul Toms is a Barrister at Quadrant Chambers, London specialising in all aspects of Commercial Law, including IT disputes. www.quadrantchambers.com
