Many businesses will only supply services to their customers if their customers accept their standard terms and conditions of business. Often these terms and conditions of business will contain a clause which will seek to limit the supplier’s liability in the event that it is found to be in breach of the contract.
Unfair Contract Terms Act
Generally speaking, since such a clause is contained in the supplier’s standard terms of business, it will be caught by Section 3 of the Unfair Contract Terms Act 1977 (“UCTA”) which states that the supplier can only rely upon such a term to limit its liability in so far as the contract term satisfies the requirement of reasonableness.
Reasonableness
The test as to what might be reasonable in any circumstances is summarised in Section 11 of UCTA. In particular, paragraph Section 11(4) states that
“where, by reference to a contract term..... a person seeks to restrict liability to a specified sum of money....regard shall be had in particular.....to -
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
Schedule 2 of the Act gives “guidelines” for the application of the reasonableness test in the form of a non-exhaustive list of matters to which the Court shall have regard.
The combination of all these factors mean that the Court has a very wide discretion when deciding whether or not a limitation clause is reasonable in all the circumstances of any one particular contract and/or breach.
The practical effect of applying these rules
It is nevertheless interesting to review cases where the Courts have had to make a decision as to whether or not a particular clause was reasonable and it reminds practitioners and business people of the potential implications of a court’s decision.
The facts of the case of the Trustees of Ampleforth Abbey Trust – v- Turner and Towns & Project Management Limited decided in 2012 were complex. However, as part of his decision, the Judge decided that a limitation clause contained in the Defendant’s standard terms of business was not enforceable.
The clause read as follows: “Liability for any negligent failure by [the Defendant] to carry out our duties under these terms shall be limited to such liability as is covered by our professional indemnity insurance policy terms....and in no event shall our liability exceed the fees paid to us or £1 million whichever is the less”.
The contract also provided that the Defendant would take out a policy of professional indemnity insurance with a limited indemnity of £10 million.
The Judge assessed the loss as being £226,667. The fees paid to the Defendant were £111,321. If the limitation clause had been effective, the award would have been limited to that sum.
As it was, the Judge decided that the limitation clause was unreasonable. The central factor that led him to that decision was that the contract imposed on the Defendant an obligation to take out professional indemnity insurance to a level of £10 million. The cost of such insurance would, as a matter of commercial reality, be passed on to the Claimant within the fees payable. In the absence of any explanation as to why there should be insurance cover of £10 million in a contract in which there was a clause purporting to limit liability to less than £200,000 the Judge felt the limitation was unreasonable.
Conclusion
Although Courts generally accept that contracts which are freely negotiated between commercial parties are enforceable strictly in accordance with their terms, there are circumstances, such as those that prevailed in this case, in which the Court can effectively re-write the contract so as to achieve a different result.