A recent case in the High Court decided that various limitations of liability in standard term contracts were unreasonable under The Unfair Contract Terms Act 1977 (UCTA). Whilst all cases involving the UCTA reasonableness test turn on their own facts, this case may give suppliers and their advisors cause to consider the enforceability of certain standard terms.

Reasonable = enforceable

The UCTA reasonableness test applies to determine the enforceability of clauses which seek to restrict or exclude business liability. In the majority of supply contracts, any terms which seek to exclude or restrict liability are likely to be caught by UCTA and they will therefore only stand as enforceable if they are reasonable [1].

In Saint Gobain Building Distribution Limited (t/a International Decorative Services) v Hillmead Joinery (Swindon) Limited [2], the claimant (IDS) sued the defendant (Hillmead) to recover the price of goods sold and delivered. Hillmead served a counterclaim, alleging that certain other products (laminate sheets) supplied to it by IDS were defective, causing Hillmead to suffer even greater loss.  It was for the court to decide whether various provisions within IDS' standard terms were reasonable and therefore enforceable to exclude or limit liability to Hillmead.

Standard limitation/exclusion clauses

The clauses in question were fairly common limitation/exclusion clauses. To paraphrase, they were:

  • An obligation on the customer to inspect the delivered goods and notify IDS of any visible defects, failing which IDS would have no liability for defects apparent on careful inspection. Furthermore, IDS would be under no liability unless a written complaint was delivered to IDS within three working days.
  • In relation to any alleged visual defect, IDS would have no liability unless given a reasonable opportunity to inspect before the goods were modified or used.
  • Subject to the above, IDS would have no liability arising from visual defects other than to replace.
  • Except as above, no other terms would form part of IDS' contract with the customer. (This was IDS' attempt to exclude statutory implied terms of satisfactory quality and fitness for purpose).
  • IDS would not be liable for any loss of profit, loss of business, loss of goodwill, loss of savings, increased costs, claims by third parties, punitive damages, indirect loss or consequential loss suffered by the customer.
  • In no circumstances would IDS' liability to the customer exceed the invoice price of the goods concerned.

Reasons for unreasonableness

The court held that all IDS' limitation/exclusion clauses were unreasonable. The reasons for this finding were:

  • No suitable alternative to the statutory implied terms as to quality and fitness for purpose was given.
  • The parties were not of equal bargaining power.
  • These were IDS' standard terms and conditions – they were not negotiated provisions.
  • The goods were not manufactured to the special order of the customer and there was no agreed specification for the goods.
  • The exclusion of all liability was too draconian a consequence to flow from a failure to inspect and report.
  • In a case where it was in the contemplation of the parties at the time the contract was made that any direct loss to the customer might exceed the cost of merely replacing the goods (here the goods supplied were a decorating component that would ultimately be incorporated into a finished product), an attempt to limit or exclude liability for additional losses is likely to be unfair – and that will especially be the case where the parties have unequal bargaining power.

WM Comment and TopTips

Received wisdom to date has suggested that limitation of liability clauses will generally be found to be reasonable if the customer has at least has some remedy, for example, replacement of the goods or a refund. In addition, it has hitherto been considered a sensible practice for suppliers to limit liability to replacement or refund in exactly those scenarios where foreseeability of additional loss represents a real risk. The Saint Gobain case, however, calls these principles, and indeed some fairly common limitation of liability clauses, into question.

It remains to be seen whether, or how closely, this case will be followed in future, but in the meantime here are our top tips for any business seeking to limit liability in its T&Cs:

  • Remember that rarely will it be possible for a limitation/exclusion of liability clause to be absolutely watertight.
  • So, rather than seeking to exclude all liability in all or any circumstances (and potentially thereby rendering your clause unenforceable altogether), it may be better to accept limited liability in some circumstances to ensure that your clause will stand.  Your legal advisor should be able to review and re-draft your standard terms in light of your particular business needs, so as to get the balance right.
  • Where limitation of liability clauses specify time periods, ensure that a reasonable period is allowed. In Saint Gobain, three working days for delivery of a written complain may have been too short a period.
  • Exclusions of statutory implied conditions of satisfactory quality and fitness for purpose might well be common, but note that they are only likely to be reasonable if adequate alternative warranties are given.
  • Consider capping contractual liability.
  • Investigate insuring against capped contractual liability.
  • There is a fine line between: on the one hand protecting a supplier where the nature of the commercial arrangement or product inherently includes a risk that certain types of additional loss, over and above the cost of replacement or refund, may flow; and, on the other, limiting or excluding liability to an unreasonable extent. The view of a number of commentators is that, in the majority of such cases, capping liability at 125-150% of the contract value or price of goods will be appropriate. However careful consideration should be given to the particular circumstances appertaining to each contract.