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Education Update - Contracts

Published: 7th October 2009

Reasonable exclusions?
In the case of Lobster Group Ltd v Heidelberg Graphic Equipment Ltd and Close Asset Finance Ltd [2009] the High Court has considered whether exclusion clauses in certain agreements relating to the hire of a printing press were reasonable under the Unfair Contract Terms Act 1977 (UCTA). In the event, the court found that some of the exclusion clauses were reasonable, and some were not.

Obviously, under UCTA, a term by which a seller excludes or restricts his liability for breach of contract, (where the other party is a consumer or has contracted on the seller's written standard terms of business) is enforceable only to the extent that it satisfies the reasonableness test. The reasonableness test is that the term will be reasonable if it was a fair and reasonable one to have been included in the contract, having regard to the circumstances known (or which ought reasonably to have been known) to the parties at the time of making the contract.

A non-exhaustive list of the factors to consider in assessing reasonableness is contained in Schedule 2 to UCTA. One of those factors is the relative bargaining power of the parties (including alternatives open to them, such as being able to insure).

In this case, Lobster argued that a printing press was defective and stopped paying the hire charges to the finance company. The finance company terminated the Hire agreement. Lobster claimed damages for the losses it had suffered because of the defect and the finance company counterclaimed for the outstanding hire charges, together with the sums due on the early termination of the hire.

Both the supplier and the finance company accepted that the printing press was defective, but sought to rely on their exclusion clauses.

The Hire Agreement
Lobster hired the printing press from the finance company under the Hire agreement, which incorporated the finance company's standard terms of hire.

Clause 5.3 provided: "the finance company does not let or otherwise supply the printing press with the benefit of any term condition warranty or stipulation, written or oral, express or implied, whether by statute or otherwise. The terms of Sections 8 to 10 inclusive of the Supply of Goods and Services Act 1982 will not apply to this Agreement."

Held: the court did not consider that the finance company could exclude its liability under the implied term as to satisfactory quality under Section 9(2) of the 1982 Act in the Hire agreement nor did it consider that there could be an effective exclusion of damages for breach of that obligation

Clause 5.4 provided that "subject to the above the finance company will not be liable in contract or tort or otherwise for any loss or damage suffered by Lobster or another whether or not caused by the negligence of the finance company".

Held: the exclusion in Clause 5.4 of all loss or damage suffered by Lobster was unreasonable, on the grounds that a complete exclusion of losses would be unreasonable in circumstances where the press failed to perform properly because it was not of satisfactory quality. However, he noted that an exclusion of loss of profits and consequential losses would have been reasonable, because it would be Lobster who would know what losses might be suffered and could insure against that risk. However clause 5.4 went much further than these heads of loss.

Warranty agreement
It was common ground between the parties that clause 10 of the suppliers standard trading conditions applied, under which they guaranteed the printing press for 12 months from the date of installation against breakdown due to defective materials or workmanship. The following exclusion clauses in the supplier's standard trading conditions were relevant:

Clause 11 provided: "the supplier's obligations to remedy defects in the goods under the warranties set out above shall be its sole liability (other than for death or personal injury caused by the supplier's negligence as defined in section 1 of the Unfair Contract Terms Act 1977) to Lobster for defects in the goods after delivery ... the supplier shall have no liability (other than as provided for in the warranties set out in paragraph 10) regarding the fitness and purpose, satisfactory quality or merchantability of the goods, whether express or implied, statutory or otherwise."

Held: Where it undertook a limited obligation to replace or repair, the supplier's exclusion of any other liability under clause 11 was reasonable. The judge came to this conclusion by emphasising the following important factors as part of the reasonableness test:

• The parties were both reasonably substantial commercial entities, experienced in the printing industry.
• The parties had previously been involved in the provision of the printing press.
• Without the Warranty agreement, the supplier would have had no contractual liability for defects in the press.
• Lobster would be best placed to know what losses it might suffer if its business were affected by problems with the printing press. There was also evidence that they had some insurance. The insurance point was discussed in relation to many of the argued clauses by the judge. The more insurance Lobster had, the more likely the exclusions would be "reasonable."

Clause 12 provided "the supplier will be under no liability whatsoever for any loss or damage injury or expense caused by Lobster's misuse of the goods which arises by way of Lobster's' incompetence or negligence or any other cause which is the fault of Lobster."

Held: the supplier's exclusion of liability for matters arising from Lobster's incompetence or negligence was also reasonable.

Clause 10(c) provided "This guarantee is confined to replacement or repair at the supplier's option of the defective part and the repair of any damage to the equipment arising from the failure of the said part and any payment by way of damages whether for immediate or consequential loss is hereby expressly excluded."

Clause 13 provided:

"In any event, notwithstanding anything else contained in this contract, in no circumstances shall the supplier be liable in contract, tort (including negligence or breach of statutory duty) or otherwise howsoever and whatever the cause thereof: (i) for any increased costs or expenses (ii) for any loss of profit, business contracts, revenues or anticipated savings; or (iii) for any special, direct [sic] or consequential damage of any nature whatsoever said to have occurred consequent upon the supply or the circumstances of the supply of the goods or services here contracted to be supplied by the supplier or any sub-contractor to its customer."

Held: it was reasonable for the supplier to exclude a wider liability than that expressly undertaken under clause 10 to replace or repair defects. However, it was unreasonable to exclude liability for loss in the terms set out in clauses 10(c) and 13. The combined effect of clauses 10(c), 11, 12 and 13 was to exclude all liability for damage, so that the supplier's liability was limited to replacement or repair of the defective part. The judge held that this unreasonableness meant that the whole of clause 10(c) and clause 13 were unreasonable.

This was their primary obligation under the Warranty agreement, and because the agreement only related to the warranty and not any hire, sale, hire-purchase or supply of any goods, there were no terms implied by any statute.

In relation to damages for "immediate loss" under clause 10(c), and any "increased costs or expenses" and "direct damage" under clause 13, it was unreasonable to exclude liability for these. If, for instance, the supplier failed to replace or repair a defective part then, at the very least, it was unreasonable that Lobster should not be able to recover damages for breach of contract to cover the "immediate loss" or "increased costs or expenses" or "direct damage" suffered in paying others to remedy the defects.

Service agreement
Lobster and the supplier entered into the service agreement for the maintenance of the printing press, which was also subject to the supplier's standard trading conditions.

Clause 9(a) provided that the supplier had to exercise reasonable skill and care in providing the maintenance services. The following exclusion and limitation clauses were relevant:

Clause 9(b) provided: "In any event the supplier shall not be liable in contract, tort (including negligence or breach of statutory duty) or otherwise whatever the cause thereof (i) for any increased costs or expenses, (ii) loss of profit, business, contracts, revenue, or anticipated savings, or (iii) for any special, indirect or consequential damage of any nature whatsoever suffered by Lobster or any third party arising from the provision of the Services."

Held: The cost of labour, travelling and parts were included but consumables were not. In the context of the obligation to carry out repairs and replacement when there was a mechanical or electrical breakdown, an exclusion of liability for increased costs and expenses was unreasonable as it was unreasonable for all "increased costs or expenses" to be excluded where, for example, the supplier failed to remedy defects.

Clause 9(d) provided that, in cases other than physical property damage or personal injury: "the supplier's liability shall be limited to and shall not exceed the aggregate of payments received by the supplier from the customer under this agreement."

Held: In principle, the judge did not consider that the limitation of liability clause (9(d)) was unreasonable, given the limited obligations imposed on the supplier under the Service agreement. However, it would be for the supplier to establish what that limit was, if relevant.

On the facts, Lobster was found to have suffered loss from the defective press and was awarded damages, but the finance company won its counter-claim. Although the case is unusual given the shift from a sale to a hire relationship, in relation to exclusion and limitation clauses the case is a useful illustration of the application of the reasonableness test.

The judge was clear that exclusions of "immediate loss" and "increased costs and expenses" were unreasonable where the supplier breached its obligations. Also unreasonable was the exclusion of "direct damage" which appeared between "special" and "consequential" in clause 13(iii) in the Warranty agreement, and which one suspects may have been an error by the contract draftsman as one would normally expect to see a reference to "indirect loss" in such a series.

Mistake Correction
The House of Lords in Chartbrook Ltd v Persimmon Homes Ltd & Ors [2009] has reaffirmed that an objective approach must be taken when construing contractual terms. Their Lordships held that, where it is clear that something has gone wrong with the language of a contract, the court will construe it in accordance with what a reasonable person would have understood the parties to have meant, taking into account the relevant background.