Summary

Parties to construction and engineering contracts frequently attempt to either exclude or limit their liability for breach of contract by seeking to incorporate within their contract an exclusion or limitation clause. Disputes frequently arise which require the court to consider whether such a term has been incorporated as part of the agreement between the parties, the scope and effect of the exclusion/limitation provision, whether the terms of the Unfair Contract Terms Act 1999 ("UCTA") apply and, if so, whether the clause satisfies the requirements of reasonableness. In this case the Court was asked to consider (i) whether a limitation clause was incorporated where the negotiations between the parties involved a "battle of the forms", (ii) whether the contract was concluded on a party's standard terms (so that the provisions of UCTA applied) when the contract that was concluded incorporated only part of that party's usual standard terms and conditions, and (iii) whether, if the limitation clause had been incorporated into the contract, it was reasonable.

The facts

The sub contractor was engaged to carry out ground compaction and piling works. When submitting its tender the sub contractor had referred to its own standard terms and conditions (a copy of which accompanied the tender). These terms and conditions included a limitation of liability clause which provided (in clause 12(d)) that all claims under or in connection with the sub contract must, in order to be considered as valid, "… be notified to us in writing within 28 days of the appearance of any alleged defect or of the occurrence (or non occurrence as the case may be) of the event complained of, and shall in any event be deemed to be waived and absolutely barred unless so notified within one calendar year of the date of completion of the works".

A letter of intent was issued and the sub contractor carried out and completed its works. The letter of intent made no mention of any terms and conditions but merely stated that the sub-contract would be on the basis of the DOM/2 form of agreement. Following completion of the works the contractor sent a purchase order for the works to the sub contractor. That document provided (at clause 14) that they would "override the sub contractor's terms" and went on to state that the sub contractor was to provide an indemnity in respect of liabilities arising from the performance of the sub contract. The sub contractor signed the order subject to two amendments, including an amendment to clause 14 to the effect that the contractor's terms would override its own only "where applicable", otherwise the sub-contractor's conditions were to apply. The contractor countersigned the order.

Nine years after completion defects in the sub contractor's work were identified. The Claimant, who was the beneficiary of a warranty given by the sub contractor, made a claim against both the contractor and sub contractor alleging that the sub contractor's works were deffective. The sub contractor relied upon the limitation clause barring the notification of all claims within 28 days of the appearance of the defect and in any event within a year of completion.

Decision

The Court held:

  1. That the limitation clause had not been incorporated into the sub contract. The contractor had seen the sub contractor's amendment to the purchase order and had accepted them. In other words, the contractor's terms and conditions would override the sub contractor's terms where they were "applicable". Accordingly, the issue to be determined was whether the indemnity clause contained in the purchase order and the limitation clause contained in the sub contractor's tender overlapped. The Court held that they did. The limitation clause applied to claims including claims for an indemnity. On that basis the indemnity clause was "applicable" and overrode the limitation clause contained in the sub-contractor's terms and conditions.

  2. Whilst this did not strictly fall to be decided in the light of the first decision, the Court held that the parties would have been dealing with each other on the sub contractor's standard written terms of business even though those terms had not been incorporated in their entirety. A party will be found to have contracted on their usual terms of business where the contract includes any fixed terms and conditions that have not been the subject of material amendment from their application in similar contracts.

  3. (Obiter) The limitation clause did not satisfy the test of reasonableness. Defects in ground compaction work would not generally be capable of being identified within 28 days of completion. The existence of such defects would not normally manifest themselves until months, if not years, following the completion of the works. In those circumstances, the parties would not reasonably have expected that the conditions of the limitation clause would be achievable.

Conclusions

The Court's consideration of whether a limitation clause was incorporated into a contract following a "battle of the forms" case is useful and highlights the pitfalls for those seeking to conclude contracts that do not involve the execution of a single document. It needs to be remembered, (as the court pointed out in Transformers and Rectifiers v Needs Ltd [2015] EWHC 269) that reasonable notice of a party's standard terms must be given before they are incorporated and that may, depending upon the circumstances, require the party seeking to incorporate terms that are not known within a particular industry to provide the other party with a copy of those terms. Mere reference to terms and conditions may not suffice.

This decision is also a useful reminder that a party seeking to rely upon their limitation or exclusion clause cannot avoid the conclusion that a contract has been concluded on their standard terms of business simply because the contract was not based entirely upon a standard form of contract that they have prepared or where the term in question has been the subject of minor amendment. It will suffice that the term relied upon was frequently incorporated in previous contracts of a similar nature without material alteration.

Finally, in Persimmon Homes Limited v Ove Arup & Partners Limited [2015] EWHC 3573 (TCC), the Court held that where a limitation or exclusion clause was clear and unambiguous and had been freely negotiated by capable businessmen who had decided how risks in the performance of the works were to be allocated, the Court should be slow to interfere with those contracts. However, the decision in Commercial Management (Investments) Limited v Mitchell Design and Construct Limited reminds us that the court will ultimately have regard to the nature of the liabilities that are sought to be excluded when considering the question of whether exclusion or limitation of such a liability is reasonable. The court will not ignore commercial common sense.