Limitation of Liability Clauses: Valid and Reasonable under the UCTA?

Resolve Opinion: Benkert UK LTD v Paint Dispensing LTD [2022]

Citation: CSIH 55 A632/14                         

Authors:  Hiba Irshaid  and  Dan Hughes

Abstracts

Introduction

A recent decision by the Scottish Inner House of the Court of Session rejected a pursuer’s reclaiming motion in the enforcement of a clause purporting a limit of liability to a fixed amount in a maintenance contract under the Unfair Contract Terms Act 1977, aligning itself with other jurisdictions across the United Kingdom.

The Facts

In 2002, Benkert UK Limited (the “Reclaimers”) engaged Paint Dispensing Limited (the “Respondents”) for a programmed maintenance of two ink dispensing machines on a biannual basis at the Reclaimers’ printing factory pursuant to a maintenance contract (the “Maintenance Contract”), to which English Law applied. 

In 2009, a fire occurred at the industrial premises causing substantial damage amounting to £29.6 million. The Respondents’ insurers had therefore submitted a subrogated claim for the catastrophic consequences and the losses incurred.

The Lord Ordinary concluded that the fire was caused by a clip connecting a hose to the ink, where the solvent drums came loose, and a spark ignited flammable solvent vapour at an ink dispensing machine. The Outer House was in the position that the fire was as a result of the Respondents’ negligent failure, through breach of the Maintenance Contract between the parties. 

Nevertheless, the Respondent sought to rely on clause 5.3 of the maintenance contract which stated that its total liability in connection with performance of the services was limited to the amount of the annual maintenance charge payable, which at the time was a fixed amount of £3,225.06, which is approximately 0.01% of the damages incurred. This 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”.

Accordingly, the Reclaimers appealed the Outer Court’s decision in limiting the liability, stating that such limitation clause was unfair and ineffective failing to satisfy the “reasonableness” test pursuant to the Unfair Contract Terms Act 1977 (the “UCTA”).

The Reclaimers corroborated their reclaiming motion based on the following:

• The Reclaimers were not aware of the risks involved as a result of the negligent failure in servicing the machines, which demonstrated that the bargaining positions of the parties were not equal.
• The Respondents held public liability insurance with an indemnity limit of £5 million. This was inconsistent with the Respondents having effectively limited the liability, which inferred that they did not consider the limitation clause to be effective. The level of the insurance cover rendered the limitation clause as unreasonable, given the modest sum provided within the Maintenance Contract, which undermined the central obligation of the Respondents to use reasonable care and maintain the equipment.

Judgement

Whilst the Inner House allowed a cross-appeal, the reclaiming motion was rejected and held that the limitation of liability clause was fair and reasonable.

The court’s judgement, unanimously, was based on the following:

1. Whether the Respondents are liable under the contract and at common law for the Reclaimers’ losses; and
2. if they are, whether the limitation clause meets the reasonableness test set out in UCTA and has accordingly limited the Respondents’ liability. 

The UCTA provides that the onus of proving that it was fair and reasonable to incorporate a term in a contract lies on the party so contending.

The court held that while the provisions set out within the UCTA are not binding in Scotland, guidelines can be derived from previous case law. The Inner House entertained a whole range of considerations by performing a balancing exercise to determine whether the clause is fair and reasonable, reaffirming that the Scottish statutory provisions are similar in nature to other jurisdictions in the United Kingdom. Hence, the court considers that a similar approach should be taken by the appellate courts in Scotland when implementing the reasonableness test.

At the outset, the Inner House stated that the Respondents were in breach of their contractual and common law duty in failing to recommend to the Reclaimers during their maintenance visits of the risks and the potential catastrophic consequences of the use of such clips.

The court later considered the size, scale and resources of the contracting parties and assessed the strengths of their bargaining positions relative to one another. The court further considered whether the Reclaimants’ ought to have reasonably known of the risks and pitfalls in incorporating such limitation clause. It was concluded that the Reclaimants had sufficient bargaining strength to negotiate the terms, given their awareness and familiarity of contracts. The limitation clause was clear and concise, however, the Reclaimers did not at any stage attempt to negotiate the contract terms with the Respondents. Further, in considering the customer awareness element of the reasonableness test, Lord Tyre noted that the supplier "took steps to give the clause prominence in an agreement that was neither lengthy nor difficult to read".

Accordingly, given that the commercial parties are generally the best judges of what is fair and reasonable for them, the court “should be reluctant to interfere with a bargain made by a commercial party” and “should not lightly make a finding that a large commercial concern with access to legal and contractual expertise entered into an unreasonable agreement or agreed terms in a contract there were not fair and reasonable”.

The Inner House therefore rejected the Reclaimants’ arguments and held that Clause 5.3 was reasonable and enforceable, and limited the supplier's liability to only £3,225 of the total £29.6 million losses. The court was satisfied that the decision made by the Outer House in assessing the reasonableness of the limitation clause was not on the basis of an erroneous principle. Thus, the Inner House did not interfere with the Lord Ordinary’s conclusion and held that the limitation clause was in fact, fair and reasonable.  

Resolve Opinion

There are several useful practice points which can be drawn from this case. It provides a practical reminder of the importance of a well drafted limitation clause and the need to bring it another contracting party’s attention before it can be relied upon.

Clauses that limit or exclude liability are commonly alleged to be onerous because there are well-established routes to challenge the enforceability of onerous contractual terms by asserting that the terms: (i) have not been validly incorporated into the parties' agreement; and/or (ii) fail the "reasonableness test" in the UCTA. Despite that the Maintenance Contract is safety-critical, this case highlights the robust approach in rendering limitation of liability clauses as fair and reasonable, pursuant to the provisions stipulated within the UCTA. The awareness element of the reasonableness test and the respective bargaining powers of both parties demonstrated in this case strongly point towards the fact that regardless of the losses that may be incurred, the court will take a high threshold of measures to apply limitation clauses.

Where commercial entities agree on terms in a contract, particularly in relation to liability caps in limitation clauses that are clearly drafted, regardless of whether they are unfavourable to the corresponding party, the courts will not step in to relieve a party from a bad bargain.

The presentation of limitation clauses must be sufficient to ensure its incorporation. In this case Lord Tyre took the opportunity to provide guidance, commenting that, the clause was given sufficient prominence in the Maintenance Contract which in effect ran to only six pages plus a short schedule, and in which clause 5.3 was prefaced by a warning in underlined capital letters.

This decision is a timely reminder of the risks and pitfalls in drafting exclusion and limitation of liability clauses. Contracts are intended to provide parties with certainties in their obligations. When parties enter into a contract, care must be taken upon drafting limitation clauses, where liability caps must be aligned between all parties involved with the consideration of potential damages and losses that may be incurred.

The onerous clause issue serves as a useful reminder of the importance of competent drafting. While there is no need for a party to actually read your standard terms, the terms themselves should help and not hinder parties who do. Standard terms should therefore be clearly drafted using clear clause headings, sub-clauses, and sensible distinctions between provisions which is considered good practice, rather than lumping them together in ill-defined paragraphs.

Furthermore, onerous or unusual clauses that deviate from the standard terms should be specifically brought to the other party's attention. This includes:

• language such as "the customer's attention is particularly drawn to the limitation of our liability in Clause X".
• visual highlighting, such as by use of capitals, increased font size, underlining or bold text.
• signposting the applicable exclusion/limitation clause by appearing somewhere other than the body of the standard terms, such as the front page of the contract.

It is also worth bearing in mind that this issue largely falls away where a contract is signed.

*All opinions expressed in this article are solely those of the authors for informational purposes only. The content should not be construed as legal advice.