Limitation of Liability in B2B contracts: a reminder of the application of UCTA

04 May 2016

Author: Rachel Craig
Practice Area: Commercial Law, Corporate - M&A

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In the complex world of liability limitation in business to business (“B2B”) contracts, the recent case of Commercial Management (Investments) Ltd. v Mitchell Design and Construct Ltd. and another[1] (the “CMIL case”) is a valuable reminder of both the existence and the extent of the reasonableness test set down by the Unfair Contract Terms Act 1977 (“UCTA”).

The UCTA reasonableness test, in the context of liability exclusions in contracts, applies where parties contract on one party’s standard terms of business.[2] It is therefore widely accepted that bespoke, individually negotiated contracts are less likely to be the subject of criticism from the courts as to the reasonableness or otherwise of their liability limitations or exclusions (provided that parties do not attempt to exclude liability for matters which cannot be excluded at law). The recent CMIL case, however, confirms that the UCTA reasonableness test can apply to liability limitation in B2B contracts even where standard terms are only incorporated in part.

The UCTA reasonableness test: a reminder

UCTA provides statutory regulation of the limitation clauses included in B2B contracts entered into on standard terms. UCTA requires that a contract term is “…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.”[3] The burden of showing that a limitation clause was reasonable at the time at which the contract was made rests with the party seeking to uphold the clause.[4]

Liability Limitation: the CMIL case

The defendant contractor (Mitchell) was engaged to design and build a warehouse in Kent. Mitchell subcontracted some of the groundworks to the second defendant (Regorco). The claimant (Commercial) subsequently bought the warehouse, and received a collateral warranty from Regorco. Nine years later, Commercial brought proceedings under this warranty, alleging that the groundworks were defective.

Battle of the Forms

Both Mitchell and Regorco had their own standard terms which each sought to use in respective B2B arrangements generally.[5] When Mitchell invited Regorco to tender for the works, it indicated that the subcontract would be on the JCT standard form of subcontract (DOM/2). Regorco replied, referring to its own standard terms. Mitchell subsequently sent an order to Regorco (after the works had been completed) (the “Order”) and specified that the subcontract would be JCT DOM/2. Mitchell’s standard terms and conditions were printed on the back of the Order. Regorco signed and returned the Order having made some manuscript amendments to Mitchell’s terms.

Which terms governed the B2B contract between Mitchell and Regorco? The answer to this question became important when Commercial brought its claim alleging defective groundworks.

Regorco’s amendments to Mitchell’s terms included the amendment that Mitchell’s terms would only override Regorco’s terms “where applicable”. If Regorco’s terms applied, the reasonableness of its liability limitation clause, which required claims to be notified in writing within 28 days of the appearance of any alleged defect or the occurrence of the event complained of (and in any event within one calendar year of the date of completion of the works) (the “exclusion clause”), would then be called into question.

Decision

The court held that Regorco’s terms were not incorporated into the subcontract between Mitchell and Regorco.

On the basis that the Order introduced Mitchell’s terms for the first time, the court held that this was not an acceptance of Regorco’s terms.[6] The court further commented upon the fact that when Regorco returned the Order, it did not do anything to draw Mitchell’s attention to the amendments which it had made to Mitchell’s standard terms.[7] However the court was of the view that Mitchell was aware of the amendments and thus accepted Regorco’s counter-offer which was made by the return of the amended forms.[8]

In the amended forms, Regorco had made the following amendments (shown in bold) to Mitchell’s clause 14: “The terms of this order and its conditions, where applicable, shall be deemed to override any terms and conditions of your tender, otherwise [Regorco’s] Conditions apply.”

Regorco argued that Mitchell’s terms prevailed only if they were inconsistent with Regorco’s terms. Mitchell, on the other hand, argued that all that was necessary for its terms to prevail was for them to be “applicable”.

In reaching its decision, the court commented that “the overarching objective for the court is to identify the intention of the parties”[9] and confirmed that this is done by determining “what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant.”[10]

The court was of the view that Mitchell’s terms did not prevail only where there was inconsistency between Mitchell’s terms and Regorco’s terms, and further noted that in its view, there was no ambiguity. In any event, the insertion of the words “where applicable” indicated, in the court’s view, that inconsistency between the two sets of terms was not a precondition for Mitchell’s terms to apply.

Mitchell’s terms included an indemnity requiring Regorco to indemnify Mitchell against liability at law for death, personal injury, loss or damage to property arising from the performance of the subcontract (the “indemnity”). This indemnity included no limitation on the time in which a claim had to be made, in contrast to the exclusion clause in Regorco’s terms. On the basis that there was no provision in Mitchell’s terms governing the time limit for making claims, counsel for Regorco suggested that the exclusion clause was not overridden by Mitchell’s terms and thus applied. The court, however, disagreed, and was of the view that Regorco’s exclusion clause dealt with the same subject matter as the indemnity in Mitchell’s terms and therefore was overridden by Mitchell’s terms.

Going further: UCTA

Notably, despite Regorco’s exclusion clause not being incorporated into the subcontract, the court went on to consider whether it would have been reasonable if it had been included. The court’s view was that the exclusion clause would not have been reasonable.

Regarding the reasonableness of the exclusion clause, the court regarded that it was unreasonable because it acted as a time bar against claims. Having regard to the fact that there will “often be a substantial lapse of time between the carrying out of the work and the occurrence of any visible cracking to the fabric of the building”,[11] and given that failure of ground treatment works is likely to be a “gradual process”,[12] the court’s view was that “the parties would not reasonably have expected – if they had thought about it – that compliance with both the 28 day time limit and the requirement to make a claim within a year would be achievable, yet alone practicable, save in rare cases.”[13]

Practice points

Beware the ‘battle of the forms’. Contracting parties should be careful to avoid ambiguity regarding which terms apply to their B2B agreements.

Limitation of liability wording is a notoriously difficult area both for legal practitioners advising on B2B contracts, and for those involved at the coal face of commercial negotiations relating to such arrangements. The decision, which confirms that standard terms can be amended in part but still qualify as written standard terms and therefore be subject to the UCTA reasonableness test, is therefore of wide commercial interest.

Furthermore, the fact that the court was not required, in the CMIL case, to give a view on the (un)reasonableness of Regorco’s exclusion clause, but that it did so anyway, shows a willingness on the part of the courts to enter the complex and murky area of liability limitation reasonableness. Contracting parties should be alive to the court’s openness to do this, and not think naïvely that they can escape criticism for liability limitation wording which isn’t up to standard.

[1] [2016] EWHC 76

[2]UCTA 1977 s.3(1)

[3] UCTA 1977 s.11(1)

[4] UCTA 1977 s.11(5)

[5] [2016] EWHC 76, paragraph 18

[6] [2016] EWHC 76, paragraph 32

[7] [2016] EWHC 76, paragraph 35

[8] [2016] EWHC 76, paragraph 38

[9][2016] EWHC 76, paragraph 44

[10] [2016] EWHC 76, paragraph 44

[11] [2016] EWHC 76, paragraph 77

[12] [2016] EWHC 76, paragraph 77

[13] [2016] EWHC 76, paragraph 88

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