A recent TCC decision has considered the application of the Unfair Contract Terms Act 1977 (“UCTA”) to clauses within a construction sub-contract imposing a requirement that claims be notified with a specified time. The court’s decision provides useful guidance as to how the reasonableness of such clauses will be assessed and the extent to which UCTA applies where standard terms and conditions have not been fully incorporated into a contract.
Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd
Mitchell was engaged as the head contractor to design and build a warehouse in Kent. Mitchell subsequently entered into a sub-contract with a ground works contractor, Regorco Ltd, for certain ground treatment works. These works were completed in March 2002 with the warehouse achieving Practical Completion in December 2002.
In November 2011, a tenant of the warehouse complained of settlement of the slab beneath the production area. A claim was brought against both Mitchell and Regorco (who had provided a warranty to the claimant). Regorco asserted that the limitation of liability clause contained in its standard terms and conditions prevented any such claim from being brought unless it was notified within 28 days of the appearance of the defect or, at latest, within a year of the completion of the works (which the claimant’s claim was not). This point gave rise to a dispute between the two defendants as to whether and to what extent Regorco’s standard terms applied, as opposed to Mitchell’s standard terms, both of which had been exchanged during negotiations in a classic “battle of the forms”.
The Court found that Regorco’s terms were agreed to apply only to the extent that they were not inconsistent with Mitchell’s terms (rather than in their entirety). Regorco’s limitation clause had not therefore been successfully incorporated as it was found to be inconsistent with an indemnity clause in Mitchell’s terms. Nevertheless, on the assumption that Regorco’s limitation did apply, the Court went on to consider:
- Whether the incorporation of Regorco’s terms only to the extent not inconsistent with Mitchell’s terms was sufficient to mean that Mitchel had dealt on Regorco’s “written standard terms of business” and thereby bring Regorco’s limitation clause within the scope of UCTA; and
- If so, whether the limitation clause satisfied the test for “reasonableness” imposed by UCTA.
Written standard terms of business
In considering the first question, Mr Justice Edwards-Stuart agreed with observations made in the earlier TCC decision of Pegler v Wang and decided that it was not necessary for Regorco’s terms to be incorporated in their entirety. Rather, the judge held that to the extent that the terms and conditions contained certain clauses that were non-negotiable, those clauses would be considered “standard terms and conditions”. This was not affected by the inclusion, in the terms and conditions, of certain clauses that were negotiable or, as in this case, not incorporated. Accordingly, if Regorco’s limitation clause had been incorporated, it would have constituted a “standard term” and UCTA would have applied.
Turning to the second question, Mr Justice Edwards-Stuart applied the following guidelines for determining reasonableness drawn from Schedule 2 of UCTA:
- The strength of the parties’ respective bargaining positions;
- Whether the customer would have had an opportunity to enter into a similar contract with another party, without having to accept the disputed term, or whether the customer received an inducement to accept the term;
- Whether the customer knew, or ought to have known, of the existence and extent of the term;
- Where the term excludes or restricts liability if a condition is not complied with, whether it was reasonable at the time of contract to expect that compliance with the condition would be practicable; and
- Whether the goods in question were made to the special order of the customer.
Although the court acknowledged the importance of allowing commercial parties to decide how they allocate risk, it found that Regorco’s limitation of liability clause was not reasonable for the purposes of UCTA. The factor that appeared most persuasive to the judge was that, bearing in mind the nature of the works and the likely time lag in the appearance of any defects, and the fact that Mitchell would have limited opportunities as a contractor (rather than a user of the property) to identify any issues in the works, it was not reasonable to expect Mitchell to comply with the 28 day time limit in the Regorco limitation clause.
Conclusion and implications
This decision provides important guidance for any parties seeking the protection of standard form exclusion clauses and limitations of liability. Firstly, it is not essential for a set of standard terms to be accepted in their entirety for a contract to fall within the scope of UCTA. Secondly, careful consideration must be given at the time the contract is entered into as to whether it will be possible or practical for the relevant party to comply with any condition imposed by an exclusion or limitation of liability clause. In construction works, where it is often the case that sections of the works are covered up and defects can be difficult to identify or may not be apparent for a significant period of time, clauses that require notification of a claim within an unduly short period of time, or in circumstances where the grounds for any claim may not be known, are unlikely to be reasonable.