Are exclusion and limitation of liability clauses binding?

How do you know if this type of clause is reasonable?

Clauses in standard terms and conditions which seek to limit or exclude liability for loss are extremely common within the construction industry. However, disputes frequently arise as to whether such clauses are enforceable. Two recent cases have considered the enforceability of limitation clauses, with markedly different results.

Allen Fabrications Ltd v ASD Ltd

Allen was engaged by a main contractor to provide steel grating and fixings for the construction of a platform to be used to move boats into a workshop. Allen purchased the grating and the fixings from ASD for £705.

Unfortunately, when the platform was in use, a piece of steel grating gave way, causing an employee of the boat workshop to fall several metres and suffer extremely serious head injuries. The injured employee successfully sued the boat workshop for £7m.

Both the boat workshop and the main contractor sued Allen for a contribution to those damages, alleging that Allen had failed to specify an appropriate method of fixing the steel grating to the platform.

In turn, Allen sued ASD for breach of contract, alleging that ASD had failed to provide sufficient fixings which were fit for purpose. Allen also claimed that ASD had negligently breached its duty of care to provide the correct number of fixings.

In defence of Allen’s claim, ASD relied on various exclusion clauses in its standard terms, namely:

(1) “If the goods are found to be defective in material or workmanship… we will at our option replace the goods or refund the price”.

(2) “We are not liable for any other loss or damage (including direct or consequential loss, financial loss, loss of profits or loss of use) arising from the contract or the supply of goods or their use, even if we are negligent”.

(3) “For all other liabilities not referred to elsewhere in these conditions our liability is limited in damages to the price of the goods.”

Allen attempted to argue that the exclusion clauses set out at (2) and (3) above were not incorporated into the contract between the parties because they were onerous and unusual terms which ASD should have specifically drawn to Allen’s attention.

The court acknowledged that where terms and conditions contain an onerous or unusual clause, a party will not be bound by the clause unless it has been specifically brought to his attention. However, the court also stressed that whether a clause is onerous or unusual depends on the context. If a particular type of clause is in common use, it is less likely to be regarded as onerous as between two commercial parties.

In this case, Allen’s managing director had given evidence to the effect that he knew ASD’s terms would have exclusion clauses in them, as this was common within their industry (indeed, Allen’s own standard terms contained exclusion clauses). With this in mind, the court did not view ASD’s exclusion clauses as onerous or unusual. Accordingly, ASD had no duty to draw those particular clauses to Allen’s attention and they were incorporated into the contract.

The court then considered whether the clauses could be classed as ‘unreasonable’ within the meaning of the Unfair Contract Terms Act 1979 (“UCTA”). UCTA provides that a term included in written standard terms of business cannot limit or exclude liability unless the term satisfies the requirement of reasonableness. The burden of proving that a term is reasonable is on the party seeking to rely on the term (ASD, in this case) and when considering the reasonableness of a term, the following factors are relevant:

• The circumstances known to the parties when the contract was made.
• The strength of the bargaining position of the parties.
• Whether the party arguing the term does not apply knew or ought reasonably to have known of the existence and extent of the term.

The court took the following factors into account:

• Allen had insurance in respect of claims like the one which it was seeking to pass on to ASD. The court considered this to be a critical factor, because insurance is one of the ways Allen protects itself against the risk of dealing on standard terms such as ASD’s, which are intended to exclude as much liability as possible.
• It was highly unlikely that Allen would have been able to negotiate different terms with ASD, at least not without a substantial increase in the price of the goods. This would not have been an option for Allen because their aim had been to procure the goods at the lowest possible price.
• Although Allen did not know the precise wording of ASD’s exclusion clauses, Allen nevertheless knew ASD’s terms contained exclusion clauses of some sort. However, Allen’s managing director had not read the terms because he knew broadly what they would say and was more interested in the price.
• The clauses did not create a blanket exclusion of liability because ASD did offer to refund the price when there were defects. There was also another clause providing for a limit of liability of £1m for property damage and a clause acknowledging that liability for personal injury and death was not limited.
• It was not unreasonable for ASD to limit liability to the price of the goods because in many cases ASD supplied goods of a much higher value than the ones in this case.

In conclusion, the court found that the clauses were reasonable and therefore ASD’s total liability to Allen was limited to the value of the goods – just £705.

The Trustees of the Ampleforth Trust v Turner & Townsend Project Management Limited

In this case, Turner & Townsend (“TTPM”) had failed to arrange the formal execution of a building contract on behalf of its client, the Trust, and was held to be liable to the Trust for damages in the sum of £226,667. However, TTPM’s Appointment contained a clause limiting TTPM’s liability to the total amount of fees payable to TTPM (£111,321).

The Trust argued that the limitation of liability clause was unreasonable according to UCTA. TTPM argued that the terms of the limitation of liability clause were clear and unambiguous, and that as the parties had equal bargaining power they should be allowed to apportion risk as they see fit.

The court decided that even though the limitation clause was plain to read and understand, it was nevertheless unreasonable. This was primarily because TTPM’s appointment required them to maintain £10m professional indemnity insurance (the cost of which TTPM was essentially passing onto the Trust via their fees), but the clause limited TTPM’s liability to just £111,321. This meant that although the parties had agreed on a certain level of insurance against risk, most of the insurance was irrelevant because TTPM’s liability to the Trust was capped at such a low level. Furthermore, given that TTPM had already been engaged by the Trust on 2 previous projects, it was unreasonable for TTMP to introduce an onerous limitation clause on this occasion without specifically drawing it to the Trust’s attention.

Analysis

As these two cases show, whether or not an exclusion/limitation clause is enforceable will often have a very significant impact on the amount of damages that can be recovered. In the Allen case, Allen was effectively unable to claim against ASD, whereas in the Ampleforth case, TTPM’s liability to the Trust was far greater than it had anticipated.

Some important points can be taken from these cases:

• It is essential to ensure that onerous limitation or exclusion clauses are brought to the other party’s attention.
• The reasonableness of clauses will often be judged by what is generally accepted within the relevant industry. This should be borne in mind if you are considering incorporating a clause which is much stricter than usual.
• Insurance is always an important factor in determining the reasonableness of a clause. Both courts considered that the parties’ ability to protect themselves with insurance was key.