UK: Excluding Liability For Implied Conditions Under The Sale Of Goods Act: Distinguishing The Mercini Lady

Last Updated: 7 March 2012
Article by Stuart Shepherd and Reema Shour

Air Transworld Limited v. Bombardier Inc [2012] EWHC 243 (Comm)

Under English law, limitation of liability and exclusion clauses are interpreted strictly against the party relying on them. This means that if the clause is ambiguous and/or does not expressly limit or exclude liability for a particular loss or breach of contract, it will be taken not to cover that loss or breach. This is because the English courts will not accept that a party intended to give up valuable rights under a contract which it is entitled to under the law unless it says so expressly in the contract.

An issue which clearly arose in this case (and which has arisen in the past) is whether an exclusion clause covered a breach of condition (contractual or statutory, express or implied), or warranty, each of which has different legal consequences under English law, or both. In simple terms, breach of a condition entitles the innocent party to terminate the contract and claim damages. Breach of a warranty entitles the innocent party to claim damages but not to terminate the contract. Past case-law has tended to the view that, in order to exclude liability for the statutory conditions imposed by the Sale of Goods Act 1979 (as amended) ("the Act") as to the satisfactory quality and/or fitness for purpose of the goods in question, the exclusion clause must expressly state that it applies to "conditions".

The decision in the present case is interesting because the exclusion clause in question did not in fact expressly use the word "conditions". Nonetheless, the judge found that it was sufficiently widely drafted as to effectively exclude the implied terms under the Act. This approach reflects the English courts' view that, when dealing with commercial parties of similar or equal bargaining power, the court should uphold whatever terms they agree in their contract, so long as those terms are sufficiently clear and they are not illegal or contrary to public policy.

The background facts

The facts of the case are immaterial except insofar as to say that the contract in question was an agreement for the purchase of an aircraft. The purchaser subsequently sought to reject the aircraft, alleging that it did not correspond with description, was not of satisfactory quality and was unfit for purpose within the meaning of Sections 13 and 14 of the Act. The seller argued that the terms of the contract excluded any such liability under statute and replaced it with the warranties set out in the purchase contract and that it was not in breach of those warranties.

Article 4 of the agreement stated as follows:

4.1 THE WARRANTY, OBLIGATIONS AND LIABILITIES OF SELLER AND THE RIGHTS AND REMEDIES OF BUYER SET FORTH IN THE AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF AND BUYER HEREBY WAIVES AND RELEASES ALL OTHER WARRANTIES, OBLIGATIONS, REPRESENTATIONS OR LIABILITIES, EXPRESS OR IMPLIED, ARISING BY LAW, IN CONTRACT, CIVIL LIABILITY OR IN TORT, OR OTHERWISE, INCLUDING BUT NOT LIMITED TO A) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE, AND B) ANY OTHER OBLIGATION OR LIABILITY ON THE PART OF SELLER TO ANYONE OF ANY NATURE WHATSOEVER BY REASON OF THE DESIGN, MANUFACTURE, SALE, REPAIR, LEASE OR USE OF THE AIRCRAFT OR RELATED PRODUCTS AND SERVICES DELIVERED OR RENDERED HEREUNDER OR OTHERWISE.

4.2 SELLER SHALL NOT BE LIABLE FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, INCIDENTAL AND/OR PUNITIVE DAMAGES OF ANY KIND OR NATURE UNDER ANY CIRCUMSTANCES OR, WITHOUT LIMITING THE FOREGOING, FOR ANY LOST PROFITS OR ANY OTHER LOSSES OR DAMAGES FOR OR ARISING OUT OF ANY LACK OR LOSS OF USE OF ANYAIRCRAFT, ANY EQUIPMENT, ANY ACCESSORY OF ANY SPARE PART FOR ANY REASON.

4.3 THE PARTIES HERETO HEREBY ACKNOWLEDGE AND AGREE THAT THE LIMITED WARRANTIES AND THE LIMITATION OF LIABILITY PROVISIONS CONTAINED HEREIN AND IN THE SPECIFICATION HAVE BEEN EXPRESSLY AGREED TO IN CONSIDERATION OF THE PURCHASE PRICE AND OTHER PROVISIONS OF THIS AGREEMENT. TO THE EXTENT APPLICABLE LAWS DO NOT ALLOW THE LIMITATIONS SET OUT IN THIS ARTICLE 4, SUCH LIMITATIONS SHALL NOT BE APPLIED OR INVOKED."

The warranties referred to in Article 4 were listed separately under the agreement and are not relevant for present purposes.

The Commercial Court decision

The judge reviewed the relevant case-law, including The Mercini Lady [2011] 1 Lloyd's Rep 442. We have previously reported on the Commercial Court and Court of Appeal decisions in that case in our February 2010 and March 2011 Legal Updates respectively. In The Mercini Lady, the exclusion clause stated that the sale contract for gasoil contained "no guarantees, warranties or misrepresentations, express or implied, [of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise...". Both the Commercial Court and Court of Appeal judges held in that case that as "conditions" were not expressly excluded and as the implied terms of the Act were conditions, the exclusion clause did not operate so as to exclude those implied terms.

Lord Justice Rix's view in The Mercini Lady was that the proper construction of the exclusion clause before him was that it did exclude liability for breach of conditions of satisfactory quality and fitness for purpose. He also referred to Section 11(3) of the Act which states that "a stipulation may be a condition, though called a warranty in the contract" and considered that the reference to "guarantees" and "warranties" in the exclusion clause was intended to cover all terms, both those which entitle the innocent party in the case of breach to treat the contract as repudiated and those which only entitle the innocent party to claim damages. Ultimately, though, Lord Justice Rix bowed to what he referred to as "judicial consensus" that the implied obligations under the Act could only be excluded by express language.

Mr Justice Cooke in the present case commented that the effect of the authorities citied to him, including The Mercini Lady, was that liability could not be excluded for a breach of a condition implied by the Act by exclusions which referred merely to "warranty" or "guarantee", even if those words were cross-referenced to statutes or rules of law, which would otherwise give rise to an implication of such terms. Nonetheless, he then proceeded to distinguish all those cases from the present one. He held that the words used in the exclusion clause in this case "do encompass contractual conditions implied by law and to adopt a different construction would amount to a distortion of the words used. There is no ambiguity in the clause. There is only one meaning which can fairly be given to it. It is what the parties agreed and the parties... should be kept to their bargain".

Mr Justice Cooke's reasoning was as follows. Article 4.1 (set out above) makes it clear that the seller's obligations and the purchaser's rights are only those contained in the purchase agreement and its appendix. They are specifically said to be "in lieu" of any other obligations or liabilities which could arise, in other words no resort is to be had to any other obligation or liability of any kind which might otherwise apply. Furthermore, the warranties listed in the purchase agreement are said to be "exclusive" in Article 4.1, which also states that it extends to the seller's obligations and liabilities "of any nature whatsoever". According to the judge, the wording of Article 4.1 was all embracing and plainly intended there to be no room for the operation of any primary or secondary rights or obligations outside the terms of the contract itself.

Another relevant factor, in the judge's opinion, was that Article 4.3 expressly states that the limited warranties and liabilities provided in the purchase agreement and appendix were expressly agreed in the light of the agreed purchase price and other provisions of the agreement, namely the warranties. In other words, the limited obligations and liabilities of the seller were reflected in the price paid by the buyer and other concessions contained within the contract itself.

The judge concluded that the buyer was not entitled to reject the aircraft.

Comment

The exclusion clause in this case made no express reference to the word "condition", yet the judge nonetheless found that the language must necessarily be taken to refer to the implied conditions of the Act because those were obligations and liabilities "implied, arising by law" and, "by necessary inference", the wording of Article 4.1 negatived the application of those conditions. Consequently, any right the buyer might have had to reject the aircraft and recover the purchase price as a result of a breach of the conditions provided for in the Act was excluded. It remains to be seen whether this decision is appealed or whether judges faced with similarly drafted exclusion clauses in the future agree with Mr Justice Cooke that the considerable case-law culminating in the Court of Appeal decision in The Mercini Lady can be distinguished.

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.

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