Exclusion and limitation clauses in construction contracts - recent developments
As Philip Barnes explains, consultants and contractors, as well as suppliers, are increasingly seeking to limit their potential exposure to clients (and others) in the construction contracts they agree. From their point of view this has the advantage that they can try to contain not only the types of loss which they may face should their work or advice be faulty, but also the total quantum of that potential loss. However as recent case law shows, these clauses must be clear and concise otherwise you may find they are deemed to be unfair and unenforceable.
Where one or other party puts forward its standard conditions, then substantial parts of those conditions may be written standard terms of business which fail to satisfy the requirement of reasonableness under the terms of the Unfair Contract Terms Act 1977. Section 3 provides as follows:
“(1) This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term –(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; except insofar as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.”
The reasonableness test is set out at section 11(1):
“In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act ... is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made ...”
Further, the presumption is that exclusion clauses are not reasonable; s. 11(5) provides that:
“It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.”
Section 13(1) of the Act provides:
“To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents – (a) making the liability or its enforcement subject to restrictive or onerous conditions; (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; (c) excluding or restricting rules of evidence or procedure; and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.”
It is not necessary, for the Act to bite, for the whole of the contract terms to be standard.1 Further, in the case of Yuanda (UK) Co. Ltd v WW Gear Construction Ltd,2 Mr Justice Edwards-Stuart said that to be standard, the terms have to be terms which the company uses for all (or nearly all) of its contracts of a particular type without alteration. The terms in question were not standard here because while Gear had offered the same terms to all of the trade contractors, few, if any, had contracted on the same terms.
Exclusion and limitation clauses
As well as needing to be clear and consise, exclusion clauses are subject to the “reasonable” test imposed by the Unfair Contract Terms Act 1977 (“UCTA”).3 UCTA also imposes a blanket ban on certain types of exclusion clauses – you cannot exclude liability for personal injury or death,4 and any attempt to exclude liability for one’s own fraud will always be unreasonable.
Subject to those constraints, and excluding legislation particular to “consumers” only, the general approach of English law is to allow the parties to decide for themselves what the terms of their contract are to be. If the parties agree that the liability of one (or both) should be limited in a specific way then the courts tend not to interfere. As a result construction law cases which involve consideration of whether contract terms are “unfair”, in the context of UCTA, are relatively rare.
Recent case law
Saint Gobain Building Distribution Ltd (T/A International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd.5
Here the court considered the question of whether the express exclusion by a party’s standard terms and conditions of contract of the otherwise implied term of “satisfactory quality” of goods supplied, and its attempt to limit its liability to the value of the goods concerned, was reasonable. The case also serves to show that the particular circumstances of each case will affect the conclusion a court will come to in deciding if contract terms are “unfair”.
Saint Gobain (trading as International Decorative Surfaces (“IDS”) supplied laminate sheets to Hillmead who bonded these sheets to MDF to make bonded panels which they then supplied to a shopfitter. The shopfitter used them in fitting out a number of Primark stores. There were alleged to be problems with the goods.
IDS had not been paid for sheets they had supplied to Hillmead, so they issued a claim. The claim was admitted but was met by a counterclaim of over £367,000 for different goods supplied to Hillmead by IDS. In the counterclaim Hillmead alleged that IDS’s laminate sheets were not of “satisfactory quality”,6 as Statute required.
IDS’s primary defence to this was that the statutorily implied term that their goods were of “satisfactory quality” had been excluded by their express standard terms and conditions which had been incorporated into the contract between the parties. In particular, IDS’s standard terms and conditions included the following clauses:-
“8.9: Save as set out in the foregoing sub-clauses no other terms, whether conditions warranties or innominate terms, express or implied, statutory or otherwise shall form part of this contract (except where the customer deals as a consumer within section 12 of the Unfair Contract Terms Act 1977 ...).”
“8.10: “The company shall not be liable for any loss of profit, loss of business, loss of goodwill, loss of savings, increased costs, claims by third parties, punitive damages, indirect loss or consequential loss whatsoever and howsoever caused ... suffered by the customer or any third party in relation to this contract ...”
“8.11: “Except for death or personal injury directly attributable to the negligence of the company or in the case of fraudulent misrepresentation in no circumstances whatsoever shall the company’s liability (in contract, tort or otherwise) to the customer arising under, out of or in connection with this contract or the goods supplied hereunder exceed the invoice price of the particular goods concerned.”
If this argument was correct, and IDS’s terms and conditions applied to the contract, then IDS had a good defence to the claim for £367,000.
Did these exclusion and limitation clauses apply?
Hillmead said that these terms did not apply because they were in breach of the Unfair Contract Terms Act. In addressing the question of unfair contract terms the court considered (amongst other matters):- (i) What were the terms of the contract between IDS and Hillmead? In particular: were IDS’ standard terms and conditions incorporated into the contract; and/or did the contract have the usual implied terms as to satisfactory quality and/or fitness for purpose as Hillmead alleges? (ii) If IDS’ standard terms and conditions were incorporated into the contract, did they (whether all or individually) satisfy the statutory test of reasonableness? Were IDS in a position to impose their terms and conditions because they were in a significantly stronger position than Hillmead? If there was that inequality of bargaining power then that, coupled with other aspects of the conditions, may mean that IDS’s standard terms and conditions did not satisfy the statutory test of reasonableness and so would not be incorporated into the contract. In the UK there are only two suppliers of the laminate sheets, and IDS supplies 75% of the UK sales. They therefore have a dominant position in the market. IDS’s turnover was about £111 million while Hillmead’s was about £2m. The court concluded that IDS were in a stronger bargaining position than Hillmead. The court considered IDS’ terms and conditions, in particular applying (amongst others) the following tests: (i) whether it is reasonable to exclude implied terms as to satisfactory quality and/or fitness for purpose, as provided for in clause 8.9; (ii) whether it is reasonable to confine any remedy to replacement of the goods, alternatively to limit financial liability to the invoice price of the goods, as provided for in clauses 6.2 and 8.11; (iii) whether it is reasonable to exclude any liability for consequential loss etc, as provided for in clause 8.10. The court considered a key issue in deciding whether clause 8.11 was reasonable was that the direct loss which a defect in the laminate panel would cause to Hillmead would be much greater than the cost of the laminate panel itself, and both parties knew this at the time of the contract. Clause 8.11 did not therefore satisfy the statutory test of reasonableness. The court concluded that the key issues in considering whether clause 8.10 satisfied the statutory test of reasonableness were the following: (i) the parties were not of equal bargaining power; (ii) the term was not negotiated; (iii) the term seeks to exclude all liability for consequential loss, rather than seeks to limit such liability; (iv) if the provision with less serious consequences to the buyer (namely the combined effect of clauses 6.2 and 8.11) does not satisfy the statutory test of reasonableness, that is a strong indication that the clause with more serious consequences to the buyer (namely the effect of clause 8.10) also does not satisfy the statutory test of reasonableness; and (v) it was in the contemplation of the parties that any direct loss to the buyer would be greater than merely the cost of replacing the goods. For all these reasons the court concluded that clause 8.10 also did not satisfy the statutory test of reasonableness. The parties were not of equal bargaining power, IDS could not by their standard terms and conditions exclude implied terms as to satisfactory quality and fitness for purpose, IDS could not exclude liability (except personal injury or death) to the invoice price for the goods and IDS could not exclude liability for consequential loss. As none of IDS’s particular terms and conditions satisfied the test of reasonableness as required by S.6 (3) of UCTA, Section 14 of the Sale of Goods Act 1979 which imposes an implied term as to satisfactory quality was not ousted by the IDS exclusion clauses. The judge then went on to find that IDS were not in breach of contract because the bonded panels were of satisfactory quality in the circumstances. However, the case can be contrasted with an earlier decision from 2007. Shepherd Homes Ltd v Encia Remediation Ltd and Green Piling (2007)7 In that case Green Piling were subcontractors to Encia. Shepherd were developing a site for 94 homes on poor ground. Piling was needed to improve foundations and Encia, the civil engineering contractor, employed Green Piling to carry out the piling work. Encia were a subsidiary of AIG Engineering Group, part of the American International Group of companies, one of the largest insurance groups in the world. Green Piling had an annual turnover of a little over £336,000 at the time. This contract value was £100,000 net, possibly rising to a maximum of £250,000 for the following phase. Green Piling carried out works and after six months some properties showed signs of settlement. Shepherd sued Encia who In turn sued Green Piling. The potential liability was £10m, possibly more. The contract between Green Piling and Encia contained the following condition: “4.3. Our maximum total liability is limited to the Contract Price; whether in contract or in tort, for any damage or loss whatsoever, including all direct or consequential loss.” The contract also required Green Piling to carry £1m insurance. In that case the court, having considered UCTA, concluded that clause 4.3 was incorporated into the contract, it was not unreasonable, there was no inconsistency between the cap on liability imposed by clause 4.3 and the requirement to carry £1m insurance, and that Encia had superior bargaining power – they had other tenders to do the work (which also included limitations on liability), but chose Green Piling. Therefore clause 4.3 limiting Green Pilings liability to Encia succeeded. Important factors in deciding whether limitation of liability clauses will be successful are:- (i) how those clauses come to be incorporated in the contract; (ii) the respective bargaining power of the parties; and (iii) the objective reasonableness of the clause itself. In considering whether to limit your liability you may be better off setting a reasonable limit on your liability and specifying precisely the type of loss you are prepared to accept rather than trying to exclude your liability altogether.
Was the reasonableness test satisfied?
Are limitation and exclusion clauses likely to fail the reasonableness test?
Conclusion