Limitations of Liability and the Unfair Contract Terms Act 1977 (UCTA)

Under UCTA any terms in a company's standard terms of business which seek to exclude or restrict liability need to be deemed reasonable to be upheld and be enforceable.

The High Court has recently decided that various limitations of liability in standard term contracts were unreasonable under UCTA. (Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd).

The usual thinking is that limitation of liability clauses have a good chance of passing the reasonableness test if the buyer at least has some remedy, for example, replacement of the goods or a refund. If such remedies are available, then it is often considered reasonable to exclude any liability beyond what is commonly referred to as indirect or consequential loss.

In the present case, the judge was not prepared to accept clauses whose effect would deny the buyer of any remedy in certain circumstances, even if total denial would only occur in those circumstances, and a refund or replacement was available in other circumstances.

The case raises a number of old and new points for suppliers to consider:

• Where the UCTA reasonableness test is likely to apply, it is dangerous to exclude the implied statutory terms without offering something reasonable as an alternative, for example, a warranty of compliance with a written specification.
• It may be dangerous for a seller to exclude "all liability" in certain particular circumstances, even if some limited liability is accepted in other circumstances. The safer course may be not to exclude liability completely in any particular circumstance, but subject all different types of liability to an overall cap, covered by insurance, and expressed as a generous percentage of the value of the contract.
• It may be prudent for a seller to accept liability for some defined forms of loss that might otherwise be considered indirect and not recoverable, but again subject to an overall cap.

The decision in the present case is consistent with the view of some lawyers that a prudent rule of thumb is to employ drafting which results in the buyer ending up with at least a right to compensation that amounts to something like 125% or 150% of the invoice value. The case did, however, turn very much on the facts, and in other cases it has been held reasonable to cap liability at the contract price.

Dixon Phillips solicitors would be pleased to have an initial, no obligation discussion or meeting with any local business which has a query or concern about commercial law issues.