Limitation of liability equivalent to ‘price paid’ held unreasonable
B A Kitchen Components v Jowat (High Court) [2021]
This case, once again, places a large number of liability limitation clauses in serious doubt regarding their enforceability and is something of a departure from recent decisions on this topic. The existence of insurance has again been elevated to be a key factor in determining the reasonableness of a limitation clause
Facts:
Kitchen Components, a manufacturer of kitchen doors, contracted Jowat to supply adhesive for use in connection with the manufacturing process. At a previous hearing, the court decided that Jowat was liable for supplying unsuitable adhesive. This hearing concerned an assessment of damages claimed based on the cost of replacing the defective doors and the impact, if any, of a limitation clause contained within its standard terms and conditions in the following terms:-
“Where any claim based on any defect in the quality or condition of the goods or the failure to meet specification is notified to the seller, the sellers will be entitled to replace the goods free of charge or at the seller’s sole discretion refund the price of the goods (or a proportionate part of the price) but the seller shall have no further liability to the buyer” (clause 8.4).
The court considered, among other things, whether clause 8.4 failed to satisfy the reasonableness requirement in the Unfair Contract Terms Act 1977 (“UCTA”). This applies to exclusion or limitation clauses in contracts based on a supplier’s standard terms and conditions and to any exclusion or limitation clause relating to liability for negligence.
Decision:
Jowat was found to be a substantial manufacturer and supplier of adhesives. There had been a specific sales effort to get the claimant (‘KC’) to switch to Jowat’s adhesive. Jowat representatives had carried out inspections of KC’s materials and processes. Various, quite extensive, tests of the adhesive were arranged by Jowat aimed at demonstrating its suitability.
Jowat’s standard conditions of sale were found to have been validly incorporated into the contracts of sale. In this respect, the ‘battle of the forms’ which took place was interesting. KC placed an initial order for adhesive using its standard purchase order (‘offer’). This was the first of a total of 40 orders placed. Jowat acknowledged the order by fax. In the acknowledgement it said “We supply according to our general sales conditions”. At the foot of the acknowledgement it said “Any sale is made on the basis of our conditions of sale”. The conditions of sale were on the reverse, but although the judge found that Jowat intended to contract on their standard terms, the terms themselves were not originally supplied. This was regarded by the court as a form of counter-offer. Subsequently, the delivery note and the invoice raised contained the same two references. The court however found that although the delivery notes were supplied to the carrier, there was no evidence the delivery notes were provided by the carrier to KC. This might have been a real problem for Jowat but evidence suggested that the first invoice issued by Jowat did contain the full set of terms and that this had been received prior to KC placing its second order.
The court said that it has to determine what each party was reasonably entitled to conclude from the acts and words of the other. Through the combination of the various documents issued by Jowat, either just referencing their terms or appending them in full, the court was satisfied that Jowat had done enough to validly incorporate them into all orders (at the very least after the first). The court said that once KC had notice of the application of the Jowat conditions it could, before accepting the delivery have “reasonably have been expected to ascertain the nature of the conditions of sale and reject them if they were not considered acceptable”. The court went on, “Jowat was entitled to assume that by accepting the [initial] delivery with notice of [Jowat’s] conditions of sale and without objection, the plaintiff was accepting the conditions”.
The judge concluded “I do not find the defendant’s conditions of sale to be particularly onerous or unusual”. This should have helped their enforceability.
Under section 11(4) of UCTA which establishes the statutory basis for judging whether clauses which limit liability to specific financial sums are reasonable and therefore enforceable, there are certain factors which the court is obliged to have regard to in particular, but these are not exhaustive.
These include:-
- Resources of the supplier available to meet the liability;
- Relative strength of bargaining positions;
- Whether the customer had the opportunity to enter into a similar contract with a third party without having to accept the term;
- Whether the customer knew or ought to have known of the existence of the term;
- Whether the goods were manufactured to the customer’s special order;
- [Crucially,] how far it was open to the supplier to cover himself by insurance.
The respective bargaining strengths or resources of the parties were not held to be significant factors in this particular case.
The judge said that he was satisfied that the defendant’s limitation of liability clause is ‘common practice in the industry’. This is something of a double-edged sword. On the one hand it suggests a clause which is not extreme (which should help enforceability), but equally it is perhaps indicative of a lack of options for the buyer (which militates in the opposite direction).
KC knew of the practices of the adhesive industry and the existence of the defendant’s conditions of sale and ought reasonably to have known of the limitation of liability. KC’s own conditions of sale limit any liability on their part to the value of goods supplied but it was said by the court that this ‘cannot be conclusive’ because the claimant may be “hard pressed to defend [its] own conditions of sale from a reasonableness challenge”.
Jowat argued, not unreasonably, that in cases such as this where a supplier is just supplying a component which is to be used to create a more complex and valuable product that potential losses might be wholly disproportionate to the selling price. Crucially, because the defendant was able to and did obtain insurance against the risks that materialised in the present case, it would therefore, said the judge, be more appropriate that the risk of loss from such a defect should fall on the supplier. The court therefore found the limitation clause did not meet the requirement of reasonableness.
The total value of the orders for adhesive placed by the claimant over several years was £251,000. KC claimed just in excess of £1.4 million but was eventually awarded £624,602.
In coming to its judgment, the court considered two previous cases in particular, Goodlife Foods v Hall (2018) and Balmoral Group v Borealis (dating from as long ago as 2006).
Goodlife concerned the supply and installation of a fire suppression system and the clause in question excluded all liability save for the replacement of defective parts, which the English Court of Appeal upheld as reasonable. This was because (i) the parties were of equal bargaining power (ii) the only loss in contemplation was fire, which was a risk that the customer was reasonably expected to insure against and (iii) the clause specifically alerted the customer to the availability of insurance to cover losses excluded by the clause and noted that the supplier could provide insurance to cover the same.
By contrast in Balmoral, where liability in relation to the supply of polyethylene polymer was limited to the exchange of defective products with non-defective products or a refund of the price paid for the defective products, this was found to be incompatible with UCTA. The key reasons for this were (i) the supplier knew the product was for use in the manufacture of oil tanks and that the purchaser was relying on it to supply a polymer suitable for such a use; (ii) it was foreseeable that a latent defect in the polymer would cause large losses to the purchaser because it would have to replace the tanks manufactured using the polymer; and (iii) the supplier had product liability insurance which would respond to the purchaser’s claim.
The position was therefore considered to be more in line with the older Balmoral case than with the more recent Goodlife case.
Points to Note:
Jowat made mistakes in the contracting process but because of the repeated references to their terms they ultimately managed to convince the court they had been validly incorporated. What this underlines is that customers must take active steps to investigate terms and raise objections if necessary. Staying silent and accepting delivery can be risky. Often, the courts will not come to your rescue.
The Court of Appeal in Goodlife had noted a trend toward the courts upholding terms freely agreed where the parties were of equal bargaining power. It remains to be seen whether this is something of an exceptional, isolated case or whether it represents a more significant shift back to the days when limitation clauses were undoubtedly more vulnerable to judicial attack.
There has always been a risk that supply contracts which limit liability to the price of goods supplied may not satisfy the requirement for reasonableness under UCTA. Suppliers should perhaps consider capping liability at a small multiple of the contract price in order to improve the chances of the limitation being upheld although, whether such a difference should make a significant difference to enforceability is perhaps open to question. Is an increase in the limitation to 125% of the price paid (which in this case would have increased the cap by £62,750) really sufficient to render a limitation clause reasonable?
There was absolutely no discussion about the likely impact of the judgment on the availability or cost of insurance. Once again, the mere existence of insurance for the supplier seems to have been the overwhelmingly decisive factor in determining the enforceability of the limitation clause.