Liability provisions found unreasonable under UCTA

SAINT GOBAIN BUILDING DISTRIBUTION (t/a INTERNATIONAL DECORATIVE SURFACES) v HILLMEAD [2015]

Certain liability provisions in a supplier’s standard terms and conditions were found to be unreasonable under the Unfair Contract Terms Act 1977 (UCTA). This was the case even though the buyer had a remedy of a replacement of the defective goods or could claim financial compensation up to the invoice value of the goods.

Facts:

International Decorative Surfaces (IDS) supplied Hillmead (H) with some laminate panels which its end customer claimed were unsatisfactory as the surface finish of the panels was inconsistent and had a mottled effect. H was under a contractual duty wherever possible to inspect the goods on delivery but had not done so.
H sued IDS for approximately £46,000 for diversion of staff time in dealing with the issues arising out of the supply of the defective goods and £254,000 for loss of business over six years.
IDS relied on various provisions in its standard terms and conditions to exclude and limit its liability:
- IDS was not to be liable for any damage or defects that would have been apparent on inspection and, in any event, would not to be liable unless a written complaint was sent within three working days of delivery;
- where a defect was complained of, IDS had to be given a reasonable opportunity to inspect the relevant consignment before the goods were used or modified;
- subject to the previous provisions, IDS would replace the damaged goods but would not be liable for any defects or resulting damage;
- IDS excluded all implied statutory conditions (in relation to satisfactory quality and fitness for purpose);
- IDS excluded liability for loss of profit, business, increased costs and indirect or consequential loss; and
- IDS’ overriding cap on liability was the invoice price of the goods concerned.
H claimed these provisions did not satisfy the ‘reasonableness test’ under UCTA and that IDS was in breach of contract.

UCTA:

Any provisions in a supplier's standard terms which seek to exclude or restrict liability are enforceable only to the extent that they satisfy the ‘reasonableness test’ under UCTA. To pass the reasonableness test, a contract term must 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”. UCTA provides various guidelines to assist a Court in making this assessment.

If a clause fails the UCTA reasonableness test, it will have no effect and the Court will effectively strike it through; it will not re-write the offending exclusion or limitation (although it may, in limited cases, strike out individual parts of exclusion and limitation clauses).

Decision:

The Court examined the various factors which UCTA sets out which must be considered whenever applying the reasonableness test:
- the strength of the parties' bargaining positions – IDS was said to be in a significantly stronger bargaining position than Hillmead;
- inducement – there was no particular inducement for H to agree to IDS' terms and conditions;
- knowledge of the terms and conditions – H did know of IDS' terms and conditions;
- whether it was practicable for the buyer to comply with a relevant term – it was practicable for H to inspect the laminate sheets on a sample basis; and
- whether goods were manufactured to a special order – this was not the case here.
The Court then applied the reasonableness test to specific aspects of IDS’ liability provisions:
- Was it reasonable for IDS to exclude the statutory implied terms?
  No - this exclusion did not satisfy the reasonableness test because it was not replaced by any other express warranty as to quality or fitness for purpose.
- Was it reasonable for IDS to exclude liability for H's failure to inspect the goods and/or report a problem?
  No - the key issue resulting in this exclusion not passing the test was the fact that it purported to exclude all liability (the judge’s emphasis) if the buyer failed to comply with the requirement to inspect goods for defects before they were used. This was thought to be, “too draconian a consequence to flow from such a default … A provision which transfers all the risk of liability to the buyer who subsequently fails to inspect and report precisely that which the seller could and should previously have observed for itself does not satisfy the statutory test of reasonableness”.
- Were the remedies to replace the goods or limit liability to the invoice price reasonable?
  No - these provisions also failed the test because when the contracts were made, it was considered to be in the parties’ contemplation that any direct loss to H would be greater than merely the cost of replacing the goods. This was because IDS knew that the laminate sheets were going to be fabricated into bonded panels, and so if there was a defect in the laminate sheets, it was highly likely that H would incur direct loss related to the cost of replacing not just the laminate sheets, but also the bonded panels.
- Was it reasonable to exclude any liability for consequential loss?
  No - this term did not pass the reasonableness test either mainly because:
  - the parties were not of equal bargaining power;
  - the term was not negotiated;
  - the term sought to exclude all liability for consequential loss, rather than seeking just to limit such liability; and
  - the parties understood that any direct loss to H would be more than just the replacement cost of the goods in question.
Despite IDS’ liability provisions failing the reasonableness test, H’s claim was nevertheless ultimately unsuccessful. This was because on the facts it was found that the goods supplied were of satisfactory quality and there was no implied condition of fitness for purpose because H’s particular purpose for the sheets was not made known to IDS, either expressly or by implication.

Points to note:

As always, this case turned on its specific facts but it provides a useful demonstration of how the UCTA reasonableness test can be applied. It confirms once again that very rarely is a limitation or exclusion of liability clause completely watertight.
We expect suppliers will typically continue to include wording requiring customers to inspect goods upon receipt. We are surprised this qualification was not upheld (on its wording the clause did not seem to exclude all liability as the judge suggested), although the three day period to complain was probably on the dangerously short side. A slightly longer period might have stood more chance of being successful. Incidentally, the Court specifically acknowledged that a ‘reckless’ failure by the buyer to inspect the goods before using them may well have broken the so-called ‘chain of causation’ (ie being able to show that the breach in question actually caused the damage suffered) and therefore prevented any claim for resulting damages (although, apparently, just a simple ‘unreasonable’ failure to inspect would not have broken the chain).
Suppliers should ensure that its customers always have the possibility of a substantive remedy and that any cap on liability is set at an appropriate level – more and more this is set at higher than just the contract value or price of the goods, especially in long-term agreements (such as a limit of 125% of the annual contract value). Increasing a limit does not necessarily increase the risk and can be used as a positive selling point. In very many situations customers will suffer loss over and above the invoice price. This decision is notable in that it is a bit of a throwback to some of the first cases on limitations of liability from 20+ years ago. Assessing reasonableness based on the fact that likely losses will be greater than the cap specified ignores the fact that that is precisely why suppliers limit their liability in the first place, particularly when the possibility of knock-on losses exists.
The statutory implied conditions of satisfactory quality and fitness for purpose are routinely excluded by many suppliers but this is another demonstration that such an exclusion is only likely to be considered to be reasonable if an adequate express warranty is given instead. This was an obvious error made by IDS.
With regard to the exclusion of consequential loss, the reasoning of the judge seems muddled. It is almost as if ‘consequential loss’ was being equated to the ordinary everyday meaning of the word ‘consequential’, which is not generally the way Courts construe this language - it is usually interpreted as something akin to ‘indirect loss’. Interestingly, the Court did not analyse any of the specific exclusions contained within the clause in question but only assessed the reasonableness with regard to the exclusion of consequential loss.
In many ways this decision may well be a bit of an ‘aberration’ and it may not be wise to place too much reliance upon it for the future. However once again, it does highlight the potential vulnerability of exclusion and limitation clauses.
It is worth noting that even if IDS had been found to be in breach, the Court concluded that H was incapable of proving the losses it was suing IDS for:

in terms of the amount claimed for diversion of staff time, H was unable to provide sufficient evidence as to how this sum was calculated so this claim would have been dismissed in any event. It is well-established that the cost of diverted staff time is a valid type of loss to claim but that the extent of the diversion has to be “properly established and, if in that regard evidence which it would have been reasonable for the [party claiming] to adduce is not adduced, he is at risk of a finding that [it has] not been established" (Aerospace Publishing v Thames Water Utilities [2007]). As the judge aptly put it, “Surmise is one thing; proof - on the balance of probabilities - is another thing” and H had failed to establish the necessary proof;
regarding the claim for loss of business, H again could not put forward adequate evidence to establish the damage it alleged it had suffered. To be able to claim a particular head of loss successfully, you must be able to adduce persuasive evidence to substantiate your claim.

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