A recently published decision from the Birmingham District of the TCC has considered the enforceability under the Unfair Contract Terms Act 1977 of commonly used exclusion clauses in standard form supply contracts. The court’s decision to strike down a number of exclusion and limitation clauses, including for loss of profit, indirect and consequential loss and a limitation to the invoice amount of the goods supplied, is likely to be of wider application to parties who contract with large suppliers on standard terms of business.
International Decorative Surfaces v Hillmead Joinery (Swindon)
Hillmead entered into a commercial contract for the supply of laminated sheets by IDS on IDS’s standard terms and conditions. The sheets were to be used as a decorative surface on panels within Primark stores, but once fitted they were found to be defective. IDS sought to rely on various exclusions and limitations of liability within the contract to protect its position.
Unfair Contract Terms Act 1977 (“UCTA”)
Section 3 of UCTA provides that, where commercial parties contract on one party’s standard terms of business, that party cannot exclude or restrict any liability when it is itself in breach, except to the extent that the term is deemed to be reasonable.
The test of reasonableness is contained in section 11 and schedule 2 of UCTA and comprises of a list of factors which the Court can consider, for example the relative bargaining powers of the parties and whether there was an inducement to enter into the contract.
The Four Limitations and Exclusions
The Court considered four sets of exclusions and limitations, and found that each failed to meet the reasonableness test under UCTA, and therefore could not be relied upon by IDS.
The first clause sought to exclude terms which had been implied under the Sale of Goods Act 1979 in relation to the quality of goods and their fitness for purpose. The Court found that this exclusion was not reasonable for the following reasons:
- The exclusion was not replaced by any other warranty as to quality.
- The parties did not have equal bargaining power. IDS’ turnover was considerably higher than Hillmead’s and there was limited contractual negotiation.
- The goods were not manufactured to the special order of Hillmead.
- There was no agreed specification for the goods.
- Hillmead did not make known to IDS the purpose for which the goods were intended.
The second clause sought to exclude liability if Hillmead failed to inspect the goods on delivery and report any shortages, damage or visual defects to IDS within 3 working days. The Court considered that it was not reasonable to transfer all of the risk to Hillmead in such circumstances. This was too draconian a consequence to flow from such a failure and IDS could not rely on this exclusion.
The third clause sought to limit the remedies available to Hillmead to replacement of the goods supplied, and to limit IDS’s financial liability to the invoice price of the goods. This was also found to be unreasonable as, at the time that the Contract was made, both parties were aware that the laminated sheets were to be fabricated into bonded panels. Therefore, in the event of a defect, it was likely and anticipated that the loss incurred by Hillmead would be the cost of replacing both the panels and the sheets, not just the cost of the sheets alone. This, coupled with the imbalance of bargaining power between the parties, made the clause unreasonable.
The final clause considered was a blanket exclusion for loss of profit, increased costs, third party claims, and any indirect or consequential loss. This was unreasonable for similar reasons to the clause attempting to limit liability to the invoice price of the goods.
Conclusions and Implications
This decision highlights the risk for commercial parties who choose to contract on their own standard terms and serves as a warning that the court may not be willing to uphold express exclusions and limitations found within those terms. The decision will be of particular relevance to SME’s such as Hillmead who find themselves contracting with large suppliers on standard terms and suggests that suppliers may find it difficult to exclude liability in such circumstances for those losses which might be expected to arise in the event defects are discovered.
Suppliers and distributors would be well advised to review their standard terms in light of this decision and ensure that appropriate qualifications are introduced to any clauses which might be considered to operate unreasonably. Suppliers might also seek to link such clauses to the availability of liability insurance or attempt to introduce tiered exclusion clauses aimed at providing alternative levels of protection in the event that any primary exclusions are found to be unreasonable.
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