High Court declares standard term limitations of liability unreasonable under UCTA

Who: Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) (“IDS”); Hillmead Joinery (Swindon) Ltd (“Hillmead”)

Where: UK

When: 15 May 2015

Law stated as at: 8 September 2015

What happened:

On 15 May 2015, the High Court handed down a decision in the case of Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd, which declared that various terms in IDS’s standard terms were unreasonable under UCTA.

The contract between IDS and Hillmead was for the supply by IDS of laminate sheets, which Hillmead would then use to form a component part of bonded panels to be supplied to Railston Design for use in Primark stores.

The unreasonable terms

The contract contained the following exclusions and limitations on IDS’ liability which were all held to be unreasonable:

1. a term excluding liability for implied terms relating to satisfactory quality and fitness for purpose;
2. a term excluding liability if Hillmead failed to inspect the goods on delivery, save that IDS would replace the goods or pay compensation up to the invoice value of the goods if defects were notified to it within 3 days of delivery;
3. a term excluding all liability for consequential losses; and
4. a term limiting IDS’ liability to the price of the goods.

The effect of these exclusions and limitations was that Hillmead was ultimately left with the remedies of obtaining replacement goods from IDS or receiving compensation up to the invoice value of the goods.  This is not uncommon in suppliers’ standard terms.

Factors behind the High Court’s decision

The High Court’s reasons for declaring that those exclusions and limitations of liability were unreasonable included the following:

• the parties were of unequal bargaining power – compare IDS’ turnover of £111million with Hillmead’s turnover of £2million;
• the exclusion of statutory implied terms was not replaced by any other term as to quality or fitness for a particular purpose (for example, a warranty that the goods would comply with an agreed specification); and
• it was in the contemplation of the parties that Hillmead’s losses (direct and indirect) would be greater than the cost of replacing the parts – because the laminate sheets were being used by Hillmead as a component part, IDS would have known that Hillmead would incur additional costs in using those sheets to make the bonded panels.

Why this matters:

The rationale in this High Court decision seems to be that, if the parties expect losses more than the value of the goods in the event that the goods prove to be defective, and the parties are in an unequal bargaining position, any attempt to exclude liability for losses over and above the value of the goods will be unreasonable.  The issue is that the very purpose behind including such exclusions and limitations of liability is because of the supplier’s expectation that the losses will exceed the invoice price of the goods.

Therefore, is the High Court now suggesting that use of similar exclusions and limitations on liability in a supplier’s standard terms will always be unenforceable?  We suspect not.  Decisions applying the UCTA reasonableness test are always very fact-specific; the judge himself recognised this.  Generally, limitation of liability clauses will be found to be reasonable if the customer has at least a meaningful remedy.

Nonetheless, the case does serve as an important reminder to suppliers that, when drafting standard terms, and to a degree, each time the standard terms are used (particularly where the customer has very little (if any) bargaining power), suppliers should ensure that the right balance is struck between protecting the supplier and limiting or excluding liability to an unreasonable extent.  The tendency is often to draft standard terms which are heavily biased in the supplier’s favour; however, to do so may be counterproductive and actually result in removing the protections that they seek to create.

In particular, suppliers may consider whether it would be prudent to:

• only exclude statutory implied terms to the extent that an alternative is offered;
• limit liability to 125-150% of the invoice price; and
• accept some liability for defined losses which might otherwise be indirect, subject to a cap.

Whether or not it is necessary to do so will, as is often the case, depend on the circumstances…