The recent decision by the High Court in Balmoral Group Limited -v- Borealis (UK) Limited & Others (2006) is noteworthy not so much for its outcome but for the “obiter dicta” comments (comments not crucial to the decision made in the case but nevertheless informative as to the law) of Mr Justice Christopher Clarke in relation to exclusion and limitation of liability clauses.

The decision of Justice Clarke represents a reminder that any clause, in any type of business to business contract, that seeks to exclude or limit liability for breach of the warranties implied by section 14 the Sale of Goods Act 1979 (as amended) (“SOGA”) (namely, that the goods be of satisfactory quality and fit for purpose) needs to satisfy the reasonableness requirements of the Unfair Contract Terms Act 1977 (“UCTA”).

The claim

Balmoral manufactured, amongst other things, oil storage tanks using a polymer supplied by Borealis, borecene. It was subsequently discovered that oil tanks manufactured by Balmoral using this polymer suffered a higher than normal failure rate.

Balmoral sought considerable damages from Borealis for breach of contract, misrepresentation and negligence. Balmoral's claim required them to establish that the borecene was not reasonably fit for the purpose of manufacturing oil tanks for rotomoulding under section 14(3) SOGA.

They were unable to do so. In dismissing Balmoral's claim Justice Clarke accepted the evidence of Borealis' expert witnesses that borecene was fit for the purpose of manufacturing oil storage tanks and that the failure of Balmoral's tanks was due to inconsistencies in Balmoral's manufacturing process.

When is an exclusion or limitation of liability clause unreasonable?

Having determined the claim in favour of Borealis, Justice Clarke went on to consider, although he did not need to do so, whether the exclusion and limitation of liability clauses in Borealis' standard terms satisfied the requirement of reasonableness imposed by section 6 of UCTA.

In the contract, Borealis' purported to exclude "all conditions and warranties whether express or implied by statute, common law or otherwise" as to the quality or fitness for any purpose of the goods or their correspondence with description "to the fullest extent permitted by law".

Borealis did provide a limited warranty that goods supplied would "comply with [Borealis'] standard specification for the Goods at the date of the contract" and provided a buyer with limited redress should goods be supplied in breach of this warranty in the form of a replacement of the defective goods or a refund of the purchase price. However, Borealis further sought to exclude liability for any "loss or damage (whether direct, indirect or consequential) howsoever arising which may be suffered by the Buyer by reason of any defect of whatsoever kind in the goods".

Had Balmoral been able to establish that borecene was not fit for purpose under s.14(3) SOGA, Borealis would have sought to rely on these provisions to exclude liability for Balmoral's loss or, as a minimum, limit Balmoral's redress to a replacement of the borecene supplied or a refund of the price originally paid by Balmoral for the relevant supplies of borecene.

With this scenario in mind, Justice Clarke addressed the question of whether these provisions were reasonable under UCTA. Noting that the onus of proving that the exclusion clause was reasonable was on Borealis, Justice Clarke concluded that they could not satisfy him that their exclusion and limitation of liability provisions were reasonable. When the contracts were made Borealis knew that Balmoral was buying borecene for the purpose of making oil tanks and that it was relying on Borealis to supply a polymer capable of being used to make consistently satisfactory tanks. The supply of a product which, because of a latent defect, made the manufacture of consistently satisfactory tanks impossible would confound those assumptions and in those circumstances the blanket exclusion of any liability was prima facie unreasonable.

Justice Clarke further noted that the determination of the reasonableness of a contractual exclusion required consideration of whether the allocation of risk affected by the exclusion was appropriate. Again, Justice Clarke was not persuaded that requiring Balmoral to bear the entire risk of a latent defect in Borealis' product was an appropriate allocation of risk. Recognising that commercial parties habitually make agreements amongst themselves that allocate risk, Clarke distinguished this case from Watford Electronic Limited -v- Sanderson CFL Limited (2001) in which there was a serious negotiation as to the incidence of risk between the parties. In this instance Borealis' terms were presented on a take-it-or-leave-it basis and Balmoral's scope for going elsewhere on better terms was very limited.

What should you do?

If you are contracting with another business, it is possible to exclude or limit liability for breach of section 14 of SOGA, but Justice Clarke's decision in Balmoral v Borealis is a reminder that any exclusion or limitation of this implied term will only be valid in so far as it is reasonable to do so. You should remember however that it is never possible to exclude liability for this implied term when you are dealing with a consumer.

The same approach and rules will apply to sections 13 and 15 of SOGA, which relate to sale by description or sample respectively. In other words, they, or any liability arising from them, can be limited or excluded in any business to business contract - but such limitations or exclusions must be reasonable ones. The obiter dicta comments are also informative with regard to the reasonableness test generally. As such, if you are contracting on standard written terms, where any limitation or exclusion of liability must be reasonable (and not just those in relation to Sections 13-15 of SOGA), it would be wise to bear in mind the judge’s rationale.

Exclusion or limitation of liability clauses in your contracts should be reviewed to ensure that they comply with Schedule 2 of UCTA which sets out guidelines for the application of the reasonableness test, including:

  • the strength of the bargaining position of the buyer relative to the seller;
  • whether a buyer receives an inducement to agree to the clause;
  • whether a buyer knows or reasonably ought to know of the existence and extent of the clause;
  • whether goods are manufactured, processed or adapted to the special order of the buyer; and
  • the allocation of risk effected by the clause.