UK: High Court Rules On Reasonableness Of Exclusion Clauses - Lobster Group v Heidelberg, High Court...

Last Updated: 8 October 2009
Article by Paul Gershlick

The High Court has ruled on the reasonableness of exclusion clauses included in various agreements relating to the hire of a printing press. Lobster Group originally entered into a contract with Heidelberg for the purchase of a printing press, but the contract was never performed. Lobster Group subsequently entered into an agreement for the hire of a printing press from Close Asset Finance ('Hire Agreement') and two separate agreements with Heidelberg - a warranty agreement ('Warranty Agreement') and a service agreement ('Service Agreement') - for the printing press. Each of the agreements contained exclusion clauses:

  • The Hire Agreement contained a provision excluding any express or implied term, condition, warranty or stipulation. It also excluded liability for any loss or damage suffered by Lobster Group whether or not caused by the negligence of Close Asset Finance.

  • Under the Warranty Agreement, Heidelberg guaranteed the printing press for 12 months from the date of installation. The guarantee was limited to replacement or repair at Heidelberg's option of the defective part and the repair of any damage to the equipment arising from the failure of that part. The Warranty Agreement excluded liability regarding fitness and purpose, satisfactory quality or merchantability of the goods and for any increased costs and expenses, losses or damages suffered as a result of the supply of goods and services by Heidelberg.

  • The Service Agreement for the maintenance of the printing press required Heidelberg to exercise reasonable care and skill in providing the maintenance services but excluded liability for any increased costs and expenses, losses or damages arising from the provision of the services and limited Heidelberg's liability to the aggregate of payments received from Lobster Group under the Service Agreement.

All three parties accepted that the printing press was defective. Lobster Group stopped paying the hire charges to Close Asset Finance and claimed damages for its losses suffered arising out of the defect. Close Asset Finance counterclaimed for the outstanding hire charges and sum due on early termination of the hire. Close Asset Finance and Heidelberg sought to rely on their exclusion clauses to avoid liability for the defect.

The High Court ruled that Close Asset Finance could not, in the Hire Agreement, exclude its liability under the term as to satisfactory quality implied by the Supply of Goods and Services Act. To do so would be unreasonable as Lobster Group would be left without the obligations which would have been implied into a contract for the sale of the printing press pursuant to the Sale of Goods Act. Furthermore, the Warranty Agreement and the Service Agreement only provided a limited remedy in circumstances where the printing press contained components which were not of satisfactory quality rather than the press as a whole. The High Court also found that a complete exclusion by Close Asset Finance of all loss or damage suffered by Lobster Group was unreasonable in the situation where the press failed to perform properly because it was not of satisfactory quality. The High Court did, however, acknowledge that an exclusion limited to loss of profits and consequential losses would have been reasonable, because these were losses which Lobster Group could have insured against.

The High Court found that the combined effect of the provisions contained in the Warranty Agreement was to exclude all liability for damage. The High Court found that given Heidelberg's obligations were limited to replace or repair, the exclusion of any other liability was reasonable. The High Court took into account the following factors: Lobster Group and Heidelberg were both reasonably substantial commercial entities experienced in the printing industry; they had both previously been involved in the provision of the printing press; if the Warranty Agreement did not exist, Heidelberg would not be contractually liable for defects; and Lobster Group would be best placed to know what losses it might suffer in the event of problems with the printing press. However, the High Court found that Heidelberg's exclusion of liability for damages for direct loss was unreasonable because if Heidelberg failed to replace or repair a defective part then at the very least Lobster Group should be able to recover damages for breach of contract to cover such losses. Whilst the High Court did not consider the limitation of liability in the Service Agreement to be unreasonable, it did find that the exclusion of liability for increased costs and expenses was unreasonable in circumstances where Heidelberg failed to remedy defects.

Samantha Lloyd, assistant editor of Upload IT, comments: 'The decision of the High Court is a reminder that exclusion clauses should be carefully drafted. A party seeking to include an exclusion clause in a contract should consider each head of loss separately to ensure that the clause meets the test of reasonableness.'

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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