Broad liability exclusions and the dangers of terminating wrongly
LOBSTER PRESS v HEIDELBERG [2009]
This case highlighted several points of potential interest concerning the enforceability of contractual exclusions from, and limitations, upon liability. In particular, the decision featured warranty obligations limited to ‘repair or replacement’ and illustrates the danger of limitation and exclusion clauses that for different reasons could leave the other contracting party with little or no remedy. The case also dealt with a party’s right to withhold payments and the risks inherent in exercising a right of termination for alleged breach.
facts:
- L claimed damages for defects in a printing press. L had hired the press from C, a finance company, who had in turn purchased the printing press from the manufacturer, H. As part of the contractual arrangements L had obtained the benefit of a warranty agreement from H which guaranteed the press against defects for a year. That guarantee was limited to repair or replacement, and any liability in damages for “immediate or consequential loss” was expressly excluded. H’s obligations to remedy defects were stated to be its “sole liability”. To reinforce the point H also excluded liability for “any increased costs or expenses; any loss of profit, business contracts, revenues or anticipated savings; any special, direct or consequential damage”.
- L had also entered into a service agreement with H to remedy any defects arising in the press after the expiry of the year’s warranty/guarantee. The service agreement had corresponding exclusions from liability but then went on to say “H’s liability shall be limited to and shall not exceed the aggregate of payments received by H from the customer under this agreement.”
- Under the hire agreement C had purported to exclude all warranties and conditions relating to the press including those implied by statute and it also stated C would not be liable to L for any loss or damage whatsoever.
decision:
- It was held reasonable for H to exclude a wider liability beyond the express undertaking to replace or repair. However, it was held unreasonable for H to exclude damages for immediate loss or for any increased costs or expenses and direct damage that arose out of defects that it did not adequately repair or replace, as this meant that H’s liability was limited only to replacing or repairing the defective part. At the very least the Judge felt that if H failed to replace or repair, L should be able to recover such costs and damages incurred or suffered in paying others to remedy the defects. The exclusion of these liabilities rendered the clauses unreasonable and in doing so the clauses were unenforceable in their entirety.
- The Unfair Contract Terms Act 1977 (UCTA) cannot be used to challenge the scope of the contractual commitment given to repair or replace.
- Regarding the financial limit on liability, this was held to be potentially reasonable but the burden was on H to establish what the limit was (and its reasonableness). Read strictly, the wording used might mean that H’s liability under the service agreement was zero since no payments were made directly to H. The only payments were the hire charge to C. Although the court did not have to decide the point, there must be a distinct possibility that as a result the limitation would be unenforceable.
- With respect to the hire agreement, the judge said it was unreasonable to exclude the statutory implied condition of satisfactory quality. Since the press was not of satisfactory quality, contrary to the Supply of Goods and Services Act 1982 s.9(2), C was liable in damages to L under the hire agreement. However, this did not entitle L to withhold hire charge payments, as the hire agreement expressly provided that L could not do this. L was therefore in breach by withholding payments.
- The defect in the press was not so serious as to amount to a repudiatory breach and, accordingly, L was in breach by purporting to terminate early and return the press. L was therefore liable in full for the outstanding hire charge payments and sums due on early termination of the hire agreement.
points to note:
- In a business to business context, it is not possible to use UCTA to test the extent of primary contractual obligations which means parties are free to negotiate the nature and degree of contractual commitments and warranties.
- However, UCTA can be used to question limitations on and exclusions from liability should those primary obligations be broken. A successful challenge could mean that the benefit of the clause is lost entirely so care has to be taken to make sure any clause does not go too far.
- Be careful also to ensure that the drafting of any limitation makes sense in the context of the particular arrangement in question. Avoid drafting exclusion clauses too widely. If the wording, interpreted strictly, could mean that the other contracting party is effectively deprived of any remedy, then the clause could be subject to scrutiny.
- Find out whether the right to withhold payments has been expressly excluded, since by withholding payment you may put yourself in breach even if you are the innocent party.
- The same applies to any purported termination. Seeking to terminate prematurely for breach where it is not sufficiently serious and does not go ‘to the heart of the contract’ could entitle the other party to terminate, claim damages and escape liability for its own breach.