The parties to contract will often seek to exclude or restrict
their liability to one another in the event of default. Such
exclusions can take a number of forms, with some clauses seeking to
exclude liability altogether. Others put a limit on liability,
perhaps by capping the amount payable in damages on a breach,
restricting the types of loss recoverable or the remedies available
or imposing a short time limit for claims. In these circumstances,
the general principle of freedom of contract must be balanced
against concerns that a party who freely undertakes a binding
contractual obligation should not be equally free to absolve itself
from its duty to perform. To help strike this balance, English law
has developed a mix of statutory rules and case law which must be
taken account of when drafting, negotiating or reviewing these
clauses. Two recent cases have considered the enforceability of
such limitation clauses, with markedly different results.
The case of Allen Fabrications Limited -v- ASD Limited [2012]
EWHC 2213 (TCC) involved a rigid steel platform for boats
which incorporated a grating, part of which had been supplied by
ASD to Allen. The grating collapsed and an employee suffered
debilitating head injuries as a result. Allen claimed that the
fixings supplied by ASD for the grating did not comply with their
description, were too few in number, were not of satisfactory
quality or fit for their purpose and that ASD had also breached a
duty of care in tort. In defence of Allen's claim, ASD sought
to rely on the exclusion and limitation clauses in its standard
terms, whilst Allen attempted to argue that the exclusion clauses
in ASD's standard terms were not incorporated into the contract
between the parties because they were onerous and unusual and,
therefore, terms which ASD should have specifically drawn to
Allen's attention.
The court acknowledged that where terms and conditions contain an
onerous or unusual clause, a party will not be bound by the clause
unless it has been specifically brought to its attention. However,
the court also stressed that whether a clause is onerous or unusual
depends on the context since if a particular type of clause is in
common use, it is less likely to be regarded as onerous as between
two commercial parties. In this case, Allen's managing director
gave evidence that he knew ASD's terms would have exclusion
clauses in them, as this was common practice within their industry.
In this context, the court did not view ASD's exclusion clauses
as onerous or unusual and accordingly ASD had no duty to draw those
particular clauses to Allen's attention and they were
incorporated into the contract. It was also relevant that Allen had
already previously dealt with ASD on numerous occassions.
The court then considered whether the clauses could be classed as
"unreasonable" within the meaning of the Unfair Contract
Terms Act 1979 ("UCTA"). UCTA provides
that a term included in written standard terms of business cannot
limit or exclude liability unless the term satisfies the
requirement of reasonableness. The burden of proving that a term is
reasonable is on the party seeking to rely on the term (ASD, in
this instance) and when considering the reasonableness of a term,
the following factors are relevant: (i) the circumstances known to
the parties when the contract was made; (ii) the strength of the
bargaining position of the parties; and (iii) whether the party
arguing the term does not apply knew or ought reasonably to have
known of the existence and extent of the term.
The fact that Allen had appropriate insurance cover in place was
critical to the finding that ASD's limitation clause was fair
and reasonable as the court held that the insurance cover was one
of the ways in which Allen protected itself against the recognised
risk of buying goods from suppliers who include limitation clauses
in their standard terms and conditions. It would have been highly
unlikely that Allen would be able to negotiate different terms with
ASD, at least not without a substantial increase in the price of
the goods. The clauses did not create a blanket exclusion of
liability because ASD did offer to refund the purchase price when
there were defects. It was not unreasonable for ASD to limit
liability to the price of the goods because in many cases ASD
supplied goods of a much higher value than the ones in this case
and the court found that the exclusion and limitation clauses were
reasonable.
In Trustees of Ampleforth Abbey Trust v Turner and Townsend
Project Management Limited 2012 EWHC 2137 (TCC), Turner &
Townsend Project Management (TTPM) were employed as project manager
by the Trust on a project to provide new boarding accommodation for
the Ampleforth College. TTPM's Appointment contained a clause
limiting its liability to the amount of fees payable to TTPM
(£111,321). The Trust argued that the limitation of liability
clause was unreasonable under UCTA, whilst TTPM argued that the
terms of the limitation of liability clause were clear and
unambiguous, and that as the parties had equal bargaining power
they should be allowed to apportion risk between themselves as they
see fit.
The court decided that even though the limitation clause was plain
to read and understand, it was nevertheless unreasonable. The
reasoning in this case was based primarily on the fact that the
terms of TTPM's Appointment required it to maintain
professional indemnity insurance cover of £10 million with
the costs of obtaining the insurance cover presumably being passed
onto the Trust. It was unreasonable to deny the Trust of the
benefit of £9 million of that cover. The court also reasoned
it was wrong for TTPM, after having built up a relationship of
trust over two previous projects, to seek to introduce such a
draconian term without specific notice or any discussion.
As these cases demonstrate, whether or not an exclusion/limitation
clause is enforceable will often have a very significant impact on
the amount of damages that can be recovered. In Allen, it was
effectively unable to claim against ASD, whereas in the Turner
& Townsend case, TTPM's liability to the Trust was far
greater than it had anticipated. There are some important lessons
to remember here: (i) it is essential to ensure that onerous
limitation or exclusion clauses are brought to the other
party's attention; (ii) the reasonableness of clauses will
often be judged by what is generally accepted within the relevant
industry, a fact which should be borne in mind if you are
considering incorporating a clause which is much stricter than
usual; and (iii) insurance is always an important factor in
determining the reasonableness of a clause, since both courts in
these cases considered that the parties' ability to protect
themselves with insurance was key.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.