Unreasonable under UCTA – the limits on limiting liability

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Posted in:Banking and Finance, Corporate and Commercial, Litigation|June 24, 2015 | Join the mailing list

The Unfair Contract Terms Act 1977 (“UCTA”) restricts the extent to which a party (usually a supplier) can restrict or limit their liability should they breach any terms of a contact to which they are a party.

If both parties to the contract are businesses contracting on one party’s standard terms, then generally speaking any term seeking to restrict or exclude liability (including liability from breaching an implied term under the Sale of Goods Act 1979 (“SOGA”)
e.g. fitness for purpose, satisfactory quality etc.) are only enforceable if it meets the “reasonableness test” as per sections 3 and 6 of UCTA.

A recent High Court case, Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd, decided ‘various limitations of liability in standard term contracts were, in principle, unreasonable under UCTA’.

Having found that the terms of International Decorative Surfaces’ (“IDS”) standard term contract were properly incorporated, the Court had to decide whether IDS’ attempts to exclude:

(i)    the implied term of satisfactory quality (implied by SOGA);
(ii)    the attempt to exclude all liability if the buyer fails to inspect and report any defaults to the goods;

(iii)    the attempt to limit liability for replacing goods or paying their invoice value; and

(iv)    the attempt to exclude all liability for consequential loss

were unreasonable.

It was held that all attempts to exclude and restrict liability in the supplier’s standard term contracts were unreasonable.

Following the numbering set out above, the Court’s reasoning was that:
(i)    excluding the SOGA term was unreasonable due to (amongst other things) it not being replaced by any other alternative term, the goods were not manufactured to the specific order of the buyer and there was no agreed specification of the goods;

(ii)    excluding liability if the buyer fails to inspect and report was unreasonable as it attempted to exclude “all liability”;
(iii)    excluding the liability to provide replacement goods was unreasonable due to the parties having unequal bargaining power;
(iv)    excluding consequential loss was unreasonable as the parties had unequal bargaining power, the term was not negotiated, and as the provision with less serious consequences to the buyer was unreasonable then the provision with more serious consequences
to the buyer would also be unreasonable.

In the case, Judge David Grant made it clear that denying the buyer a remedy in only certain circumstances, even if the same clause provided a remedy in other circumstances, was still found to be unreasonable.

Careful consideration should be given when negotiating and agreeing terms when carrying out business B2B. It is essential that commercial legal advice is taken in order to ensure all clauses within an agreement are enforceable.

Should you have any queries regarding the subject matter of this article, or need any assistance in connection with commercial contracts, please contact
Stephen Foster, Partner in the Corporate and Commercial Department at
stephenf@berg.co.uk or telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice.  No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees.  Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.

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