A recent case demonstrates the effectiveness of contractual liability clauses, as a paper printing company’s £29.68 million claim has been limited to just £3,225.06.
Benkert UK Ltd v Paint Dispensing Ltd, decided recently by the Scottish Outer House of the Court of Session, considered a limitation of liability clause in a contract between two companies.
Lord Tyre’s decision that the contractual term limiting liability was reasonable is a positive sign for parties seeking to protect themselves against contractual claims through their standard terms and a warning to those who do not pay due attention to the fine print of contracts.
Background to the dispute
Benkert, the pursuer, alleged that a fire in its premises causing losses totalling £29,680,235 was due to Paint Dispensing Limited’s (PDL’s) failure to properly maintain a paint dispenser, as required by the maintenance contract between the parties. Benkert claimed that PDL’s maintenance engineer should, when performing PDL’s twice-yearly service, have recommended changing clip connections on the dispenser, and the failure to do so resulted in the fire.
As well as contesting the cause of and liability for the fire, PDL contended that any liability was limited by the terms of the contract, to £3,225.06, the “Basic Charge”, defined in clause 1.1 as “the annual maintenance charge to be paid by the Customer”. This was despite PDL having £5 million of indemnity cover in place.
The parties’ contract
Benkert contracted with PDL from 2002 onwards for the maintenance and repair of two paint dispensers that PDL had supplied and installed in Benkert’s industrial premises, in which it printed paper. From 2005, an arrangement between the parties was formalised: the defender would visit and service the dispensers twice a year, having provided the pursuer with a maintenance contract beforehand.
Each contract, including the one in place at the time of the fire, included the same limitation of liability clauses, to which English law applied. These provided:
“THE CUSTOMER’S ATTENTION IS SPECIFICALLY DRAWN TO THE PROVISIONS SET OUT BELOW
5.3.1 the Company’s total liability in contract, tort, misrepresentation or otherwise arising in connection with the performance or contemplated performance of the Services shall be limited to the Basic Charge;
5.3.2 the Company shall not be liable to the Customer for any indirect or consequential loss or damage (whether for loss of profit, loss of business or otherwise), costs, expenses or other claims for consequential compensation whatsoever and how so ever caused which arise out of or in connection with this Agreement.”
The “Basic Charge” was £3,225.06 payable in two six-monthly instalments of £1,612.53.
Did this limitation restrict any liability of PDL for Benkert’s claimed loss of £29,680,235, to £3,225.06?
Judgment – was this a fair exclusion of liability?
Lord Tyre considered whether the clause was a fair exclusion of liability or an unfair term that should not be enforced.
His judgment focused on the Unfair Contract Terms Act 1977 (UCTA) and cases interpreting it. However, he also noted that in different circumstances, so-called common law “ticket” cases (named after judgments related to the fairness or otherwise of small print on tickets) could also be considered if the question was whether terms were unusual or onerous and adequately drawn to parties’ attention.
The parts of UCTA relevant in this case were that contracts based on written standard terms can only restrict liability if they pass the “reasonableness” test set out in section 11. Whether or not they pass this test turns on a range of factors including:
- whether the customer knew, or ought to have known, of the existence and extent of the term;
- the resources that the limiting party could be expected to have available to it for the purpose of meeting the liability and how far it was open to it to cover itself by insurance;
- the strength of bargaining positions of the parties; and
- whether the goods were manufactured to the special order of the customer.
Lord Tyre noted that the court must weigh a range of considerations and decide on which side the “balance” comes down. He highlighted the need to consider the extent to which the customer could have gone elsewhere for the service provided by the supplier and the ease with which one or other of the parties could obtain insurance.
Considering and balancing the various factors, Lord Tyre decided that PDL’s limitation of liability terms were fair and reasonable and could be relied upon. This was primarily because:
- As to insurance, Benkert was better able to assess the possible quantum of damage to its property in the event of a fire, which in this case far exceeded the insurance cover held by the defender. It was reasonable for PDL to say, via a limitation of liability clause, it would not accept liability for unquantifiable costs and Benkert should insure for these separately.
- As for customer awareness, the limitation terms were given prominence in a short contract, at least one Benkert representative was aware of them, and a clause limiting liability to the contract price is not especially onerous or unusual.
- As to equality of bargaining power, this was neutral. PDL would have been unlikely to renegotiate the liability limitation terms and, though impractical, Benkert could have taken its business elsewhere and its decision not to was its commercial choice
- Finally, adaption to the special order of the customer was also a neutral consideration. Although PDL made the dispensers for Benkert, this did not preclude them being maintained elsewhere or in-house.
How might this affect future cases?
The case highlights the utility and effectiveness of limitation of liability clauses where they are fair and reasonable. Such terms are unlikely to be invalid simply because the capped liability amount is low compared to potential or actual losses, or because the party limiting liability has insurance cover that exceeds the capped amount. Equally, parties seeking to enforce such terms may be unable to do so, if the terms are judged unfair or unreasonable on a balance of the relevant considerations principally derived from UCTA.
For more information please contact Iain Drummond, Solicitor Advocate and Partner in our property and infrastructure disputes team, at Iain.Drummond@shepwedd.com, or your usual Shepherd and Wedderburn contact.