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Ally Tow,
SENIOR ASSOCIATE - CHARTERED LEGAL EXECUTIVE
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Limitation of liability clauses – unreasonable?
26 June 2015

The High Court has recently ruled that various limitation of liability clauses in standard term contracts were, in principle, unreasonable by virtue of the provisions of the Unfair Contract Terms Act 1977 (“UCTA”), notwithstanding the fact that the contract was between commercial parties.

Facts

The case, Saint Gobain Building Distribution Ltd v Hillmead Joinery (Swindon) Ltd (2015) related to a claim for unpaid invoices in respect of goods sold and delivered. Whilst the defendant admitted the claim, it served a counterclaim alleging that certain products supplied were defective, as a result of which it had suffered loss amounting to £367,408.69. Such losses comprised partly staff costs whose time was diverted to deal with issues arising out of the alleged defective goods, but mainly the value of lost business.

The parties had traded subject to the claimant’s standard terms of business which included various clauses, which, if effective, would have excluded or limited the claimant’s liability under the contract. Accordingly, the court considered the question of whether the terms operated to limit the claimant’s liability before considering the question whether, as a matter of fact, the claimant had failed to discharge that liability.

Claimant’s Terms

The claimant’s clauses sought to exclude any liability for alleged “visual” defects in goods if the defendant had not notified them of any visible defects within 3 working days of delivery of the goods.

The terms further provided that even if such visual defects were notified to the claimant, it would have no liability as regards the goods unless it had been given a reasonable opportunity to inspect the same before the goods were modified or used, the goods in question being laminate sheets.

Subject to the above, whilst the claimant’s terms provided for the collection and replacement of any such goods, all other liability was excluded including, in particular, implied terms as regards satisfactory quality and fitness for purpose of the goods as set out in Section 14 of the Sale of Goods Act 1979. Liability for all consequential loss, direct or indirect, was also excluded.

UCTA

UCTA applies to clauses which seek to restrict or exclude liability. By virtue of the provisions of Schedule 2 of UCTA all such clauses will be subject to the test of reasonableness.

Decision

Attempt to exclude statutory implied terms

The court held that the attempt to exclude the statutory implied terms of satisfactory quality and fitness for purpose was unreasonable because, inter alia, this was not replaced in the terms by any other term or alternative warranty.

Attempt to exclude all liability of seller if buyer fails to allow inspection and report

The court held that this clause failed the reasonableness test because it purported to exclude all liability. The Judge considered this was too draconian a consequence to flow from such a default.

Attempt to limit liability to replacement of goods

When considering whether the clause satisfied the test of reasonableness, the court found that it had been in the contemplation of the parties at the time the contract was made that any direct loss to the defendant would be greater than merely the cost of replacing the goods. The court held that this was a key issue as was the parties’ bargaining power as regards the negotiation of the contract. In this respect, the court found that the parties were not of equal bargaining power.

In considering the parties’ positions the court had regard to the fact that the claimant’s turnover was substantially more than the defendant - £111m compared to £2m. The court also took account of the fact that there was no evidence of there having been any attempt to negotiate the terms in this particular case or the nature of any amendment to the terms which the claimant had agreed on other occasions. Consequently, the term was found to be unreasonable.

Attempt to exclude liability for all consequential loss

The court also found this clause failed the test of reasonableness.  The key grounds for such a finding were as follows:

  1. The court repeated its findings that the parties had not been of equal bargaining power and that it had been in the contemplation of the parties that any direct loss to the defendant would be greater than the cost of replacing the goods

  2. The term had not been negotiated

  3. The term sought to exclude all liability rather than limiting such liability

Order

Having found that the claimant’s terms failed to satisfy the test of reasonableness and that there were implied terms in the contract as regards satisfactory quality and fitness for purpose, the court went on to consider the quality of and fitness of the goods.

Following a detailed review of expert and other evidence, the court found that the goods were of satisfactory quality - the defendant’s complaints did not relate to the performance or quality of the goods but simply to their appearance.

As to fitness for purpose, the court found the defendant did not make known to the claimant the particular purpose for which the goods were to be used so there was no liability under that term. As a result the defendant’s counterclaim failed and judgment was granted in the claimant’s favour.

Conclusion

Although turning very much on its own facts and only being a High Court decision, the case is noteworthy in view of the reasoning behind the conclusions and the fact that it was a commercial contract. To date it has usually been considered that limitation of liability clauses would have good prospects of being upheld in circumstances where the buyer has at least some remedy, e.g replacement of the goods or a refund. Sellers may well wish to undertake a review of their standard terms of business in the light of this decision.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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