Corporate Focus - February 2010
Exclusion clauses feel the pinch
Disputes between suppliers and consumers are relatively common
in the commercial world. Where one party suffers a loss, the other
party will usually seek to rely on a clause contained in their
relevant agreement which purports to limit or exclude their
liability for whatever breach they are accused of.
Where it applies to the contract terms in question The Unfair
Contract Terms Act 1977 (“UCTA”), provides that an exclusion clause
is only enforceable in so far as it satisfies the reasonableness
test contained within the Act. If the dispute is brought before the
courts, they will generally uphold those parts of the clause which
they deem to be reasonable, but where it is possible to separate
such provisions, any unreasonable provisions may be severed from
the agreement. However, a recent decision in the High Court has
cast doubt on the effectiveness and severability of such
clauses.
Lobster Group Ltd v Heidelberg Graphic Equipment Ltd
& Another [2009] EWHC 1919 - The Facts
The case revolved around the hire of a printing press by Lobster
Group Ltd (“LG”) from Close Asset Finance Limited (“CAF”). The
terms of hire were contained in a hire agreement between the
parties. The printing press had been bought by CAF from a company
called Heidelberg Graphic Equipment Ltd (“H”) who manufactured the
press. Subsequently, upon hiring the press from CAF, LG entered
into both a warranty agreement and a service agreement with H. Each
of the three agreements contained numerous exclusion clauses which
aimed to limit the liability of CAF and H in the event of a breach
of contract. The printing press proved to be defective and LG
refused payment claiming breach of contract. Both CAF and H sought
to rely on their respective exclusion clauses having admitted that
the press was defective. The High Court was called upon to decide
upon the reasonableness of those clauses.
Hire Agreement
The hire agreement excluded liability for breach of any express
or implied term, warranty or stipulation. It also excluded
liability for loss, howsoever caused.
Looking at the sub-clauses, the judge felt that the attempt by
CAF to exclude the operation of any implied terms was unreasonable
under UCTA 1977. It felt that to do so would exclude the operation
of the Supply of Goods and Services Act 1982, which implied into
the contract that the press would be of satisfactory quality and
fit for purpose. This would basically allow CAF to supply
sub-standard goods. The judge then looked at CAF’s attempt to
exclude liability for all losses. It was held that it was
reasonable to exclude the consequential losses of LG, as they are
of the type that LG could insure against. However, the exclusion of
all losses could not be seen as being reasonable because due to
effect of a similar provision in the warranty agreement, LG would
be left with no remedy. LG should have a right to recover the
expenses which are of a direct consequence of the defective
press.
Warranty Agreement
The warranty agreement contained a 12 month guarantee which
limited H’s liability to the repair and the replacement of faulty
components. It excluded H’s liability with regards to fitness for
purpose, satisfactory quality or merchantability of goods. Finally,
it excluded liability for any increased costs and expenses, losses
or damages suffered by LG as a result of a defect.
Having looked at the exclusion clauses contain in the agreement,
the judge felt that H’s attempts to limit its obligations to repair
and replacement were entirely reasonable as this provision is
generally acceptable in this type of agreement. However, the
attempt to exclude liability for fitness for purpose, satisfactory
quality or merchantability was held to be unreasonable as it would
have left LG with no remedy at all in the event that H failed to
repair or replace the defective components. Furthermore, exclusion
all loss was deemed to be unreasonable for the same reason given in
respect of the hire agreement.
Service Agreement
The service agreement stated that while H must exercise
reasonable care and skill in its maintenance duties, it would not
be accountable for any increased costs and expenses, damages or
losses arising from the maintenance. H’s liability would also be
limited to the aggregate of payments received from LG under this
agreement.
The judge felt that it was reasonable for H to limit its
liability to the aggregate of payments received, but it was not
reasonable to exclude liability for increased costs or expenses,
where, for example H failed to remedy the defect.
Conclusion
Having considered all of the exclusion clauses in turn, and
applying the UCTA reasonableness test, the Judge was of the opinion
that the exclusion of immediate loss, and of increased costs or
expenses and direct damaged would, effectively render those
sub-clauses unreasonable. He then went on to confirm that “in doing
so the unreasonableness goes to the whole provision”. This case
therefore goes against previous authority whereby courts will,
where possible, sever the unreasonable section of an exclusion
clause leaving the remainder intact and enforceable.
If the courts follow this decision in future cases, there is a
risk that we may see entire exclusion clauses being declared void
and unenforceable where previously only certain sections may
otherwise have been struck out on the grounds of unreasonableness.
Therefore, it is important when drafting exclusion provisions to be
even more cautious and mindful as to whether each type of loss to
be excluded would meet the reasonableness test and to perhaps
exercise a degree of caution where the desire may otherwise have
been to take the exclusion to the extreme, especially where the
result would be the exclusion of all liability, in particular in
respect of direct loss and damage.
If you would like any further information on exclusion
clauses or are concerned as to the effectiveness of clauses
contained within your standard terms and conditions, please contact
Lynne Rathbone, Associate in our Corporate Team on 0151 243 9833
or lynne.rathbone@weightmans.com