Most companies have Standard Conditions of business on which they contract. These terms set out clearly, amongst other things, a company’s proposed liabilities should a product, service, advice or misrepresentation by or on behalf of their business be found to have led to a failure or default. Companies may believe that if they exclude all liability for certain events, for example representations by members of staff or provisions that any compensation is limited to the original value of the item and not loss incurred, then these exclusions will protect them in the event that something does go wrong.
However, when drafting Standard Conditions (or seeking to rely on these) companies need to be aware of the Unfair Contract Terms Act 1977 which may render the exclusions or limitations as unreasonable and therefore invalid.
The Unfair Contract Terms Act will apply where one party puts forward its Standard Conditions and a part or parts of these written conditions fail to satisfy the requirement of reasonableness.
The key is the reasonableness test which is set out in Section 11(1) of the Act.
"11 The "reasonableness" test
(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act, section 3 of the Misrepresentation Act 1967 and section 3 of the Misrepresentation Act (Northern Ireland) 1967 is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
(2) In determining for the purposes of section 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract.
(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.
(4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to—
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance.
(5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does."
As stated in this section a contract term shall have been a fair and reasonable one to be included having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of the parties when the contract was made if it is to satisfy the reasonableness test. It is for the party claiming that the term satisfies the requirement of reasonableness to show that it does.
Commercial considerations will also play a part in deciding whether or not a clause is reasonable. The Court will examine, amongst other things the terms on which the parties contracted, including whether the terms were the written standard business terms of the supplier. It will also examine whether there were any arm’s length discussions and agreement, as to the terms. The reliance placed on any representations, expertise of the parties etc.
There have been some decisions under this Act which have relevance to the Construction field as to what is and is not reasonable. For example:
- In Chester Grosvenor Hotel Co v Alfred McAlpine Management (1991) 56 BLR 115 (QBD) the Court held that a clause that limited liability of a management contractor to an employer for delay, to the amount that the management contractor could recover from trade contractors was reasonable;
- Clause 6.2 of the RIBA Standard Form of Agreement 1992 limiting the liability of an architect to his client to a figure was reasonable. It this case it was £250,000. (James Moores v Yakeley Associates [1998] EWHC Technology 288);
- In Rees Hough v Redland Reinforced Plastics Ltd (1980) CILL 84, a clause limiting liability to the replacement only of those pipes which were notified as being defective within a period of three months was held to be unreasonable;
- A clause that excluded the right of set-off in a contract for supply and installation of an overhead conveyor was not reasonable. (Refer Stewart Gill Ltd v Horatio Myer (1992) 2 WLR 721; finally
- In South West Water Services Ltd v International Computers Ltd (1999) Judge Toulmin QC, 5 July 1999 a provision in the standard terms of business for a computer system excluding liability for misrepresentation was held to be unreasonable.
Therefore if a company wishes to be able to rely on its Standard Terms of Business, it needs to be aware of any clauses that could be seen to be unreasonable, and should draw these to the other party’s attention so that an arm’s length discussion may occur. This will strengthen any argument that the terms were reasonable and that the parties contracted on that basis, in full knowledge and awareness that standard terms had duly been incorporated into the bargain between them.
To read further articles and papers from Fenwick Elliott, please visit our website – www.fenwickelliott.co.uk.
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.
