Dramatic victory for liability limitation

Benkert v Paint Dispensing (Rexson) (Court of Sessions) [2022]

Financial caps on liability are a key part of many commercial contracts, not least because in many cases, breaches of contract can cause financial loss which is out of all proportion to the value of the contract. Such caps on liability are one of the few provisions under English law which are, by virtue of statute, subject to judicial scrutiny and a test of ‘reasonableness’. Historically, the courts seemed to take a fairly aggressive approach to limitation clauses. In more recent times, the approach seems to be more accepting of the commercial justification behind such clauses and this is a very good example. 

Facts:

A fire occurred at Benkert's factory, where it manufactured printed paper, resulting in losses of £29.6 million. The printing process involved the use of two ink dispensers. which mixed highly flammable solvent-based ink. Of the two ink dispensers, one had originally been installed as long ago as 1997. The other in 2002. Both ink dispensers were now maintained by Rexson. 

The judge concluded that the fire occurred as a consequence of the supplier's breach of contract in failing to recommend that hoses and clips attached to one of the dispensers be replaced with alternative hoses and fittings that would be less likely to fail.

The supplier sought to rely on clause 5.3 of the maintenance contract. Clause 5.3 was prefaced by the following wording printed in capital letters and underlined "THE CUSTOMER’S ATTENTION IS SPECIFICALLY DRAWN TO THE PROVISIONS SET OUT BELOW:"

It then went on to say, “the Company's total liability in contract, tort, misrepresentation or otherwise arising in connection with the performance or contemplated performance of the Services shall be limited to the Basic Charge”.

The Basic Charge, i.e. the annual maintenance charge, payable at the relevant time was just £3,225. As the supplier explained, indemnifying against the full extent of potential liability would have materially increased the cost of the service provided to customers.

Benkert never considered trying to find an alternative company to carry out the maintenance (as it traditionally stuck with the original equipment suppliers) although it was apparently the case that alternative providers were available. No attempt had been made to negotiate the contract terms. Evidence was given that Benkert had other contracts in place with providers who similarly sought to limit their liability ‘to the amount of income from the contract’.

At the relevant time Benkert “had its own insurance in place” although the judgment does not record the precise nature of that insurance. So far as Rexson was concerned, in 2009 when the relevant maintenance contract was concluded, they produced a ‘to whom it may concern’ letter which listed Rexson’s insurance policies including ‘public/ product liability coverage with an indemnity limit of £5million per any one occurrence’. Benkert argued that it was reasonable to infer that Rexson's insurance costs would be passed on to its customers who could then benefit to the full extent of the cover.

Benkert argued that clause 5.3 did not meet the requirements of the reasonable test in the Unfair Contract Terms Act 1977.

Although this case was litigated before the Scottish Courts, the contract itself was subject to English law.

Decision:

No argument was made as to whether clause 5.3 had been validly incorporated into the contract but, the judge said, had the point been raised , it would have been rejected. The judge said "Clauses limiting a supplier’s liability to the contract price are not regarded by the courts as especially onerous or unusual. In any event the clause was given sufficient prominence in the maintenance agreement [by being] prefaced by a warning in underlined capital letters."

Clause 5.3 was upheld as being reasonable and enforceable and was effective to limit the supplier's liability to only £3,225 of the total £29.6 million losses claimed, starkly illustrating the benefits of careful drafting.

One of the factors expressly to be considered by the judge was how far it was open to the supplier to cover itself by insurance. In relation to insurance the judge said:

  • There was no evidence as to whether Rexson could have covered itself for the full amount of the claim or, if it had done so, what the consequences would have been for the price charged to customers;
  • The availability of insurance to the customer as an important factor even though that is not one of the specific factors referenced in the Unfair Contract Terms Act as having to be taken into account;
  • Benkert were regarded as being in a much better position than the supplier to assess the size of the potential claim for losses [resulting from] partial or total destruction of the factory and lengthy business interruption. Rexson was, in essence, permitted to say to its customer “we will not accept liability for losses which for us are impossible to quantify; it is up to you to make whatever insurance arrangements you think necessary”;
  • The judge said he did not see any reason why there should be a match between the limitation of liability and the limit of Rexson's public liability cover.

    • Assumed customer awareness of the limitation clause, influenced in part by the capitalised wording, was held to favour the reasonableness of the clause being upheld. The bargaining power of the two parties was held to be a neutral factor.

    Rexson was therefore adjudged to have sufficiently discharged the onus of demonstrating that the limitation of liability was fair and reasonable 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 entered into.

    Points to Note:

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