Are your attempts to limit your liability ‘reasonable’?

It is common practice for most businesses to include various limitation clauses in their standard terms and conditions with the hope that, in the event of a fault in the goods or services supplied, their liability will be limited.  The enforceability of these limitation clauses are however subject to the reasonableness test under The Unfair Contract Terms Act of 1977 (UCTA).

Although all cases involving the test for reasonableness turn on their specific facts, if the decision of the High Court in the recent case of Saint Gobain Building Distribution Ltd (Trading as International Decorative Surfaces) (IDS) v Hillmead Joinery (Swindon) Ltd is anything to go by, it might be time for suppliers to reconsider their approach to restricting liabilities, and revisit their standard terms and conditions of supply.

The claimant, IDS, took legal action to recover the cost of various goods which had been sold and delivered to Hillmead, the defendant.  Hillmead responded with a counter-claim alleging that the products supplied by the claimant were defective; resulting in losses to the business.  IDS sought to rely on the limitation clauses in their standard terms to restrict their liability, and it was for the courts to decide whether all or some of these clauses were reasonable, and as a result, could be enforced.

Following careful consideration of all the clauses, the court came to the decision that none of IDS’ exclusion or limitation clauses were enforceable, as they did not conform to the reasonableness requirement of UCTA.

Of major consideration was the unequal bargaining power of the parties with the complete exclusion of liability being seen as too extreme a consequence.  IDS had also not provided a warranty or suitable alternative to the statutory implied terms as to quality and fitness for purpose that it had excluded. Equally, the terms were not individually negotiated by the parties, but were instead IDS’ standard terms.

While it remains uncertain whether or not this precedent will be followed closely in the future, one lesson to be taken from the reasoning is that going too far when seeking to restrict your liability can result in no limits being placed on them.  In light of this decision, when drafting standard terms and conditions you should

• consider your bargaining power and position in the market
• provide suitable alternatives or adequate warranties if excluding statutory terms
• accept some liability and provide remedies you can live with rather than adopt ‘standard’ exclusion or limitation clauses, which are potentially unenforceable
• obtain commercial legal advice when drafting your provisions.