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The Limits on Limited Liability, <i>Real Estate Intelligence</i>

The Limits on Limited Liability, Real Estate Intelligence

Clauses which seek to limit or exclude liability for loss can be a sensible way of allocating risk and are frequently used within contractual documentation. However, disputes frequently arise as to whether such clauses are enforceable. Whether or not an exclusion/limitation clause is enforceable will often have a very significant impact on the amount of damages that can be recovered and such clauses need to be clearly communicated and very carefully drafted if they are to be enforceable.

The parties to contract will often seek to exclude or restrict their liability to one another in the event of default. Such exclusions can take a number of forms, with some clauses seeking to exclude liability altogether. Others put a limit on liability, perhaps by capping the amount payable in damages on a breach, restricting the types of loss recoverable or the remedies available or imposing a short time limit for claims. In these circumstances, the general principle of freedom of contract must be balanced against concerns that a party who freely undertakes a binding contractual obligation should not be equally free to absolve itself from its duty to perform. To help strike this balance, English law has developed a mix of statutory rules and case law which must be taken account of when drafting, negotiating or reviewing these clauses. Two recent cases have considered the enforceability of such limitation clauses, with markedly different results.

The case of Allen Fabrications Limited -v- ASD Limited [2012] EWHC 2213 (TCC) involved a rigid steel platform for boats which incorporated a grating, part of which had been supplied by ASD to Allen. The grating collapsed and an employee suffered debilitating head injuries as a result. Allen claimed that the fixings supplied by ASD for the grating did not comply with their description, were too few in number, were not of satisfactory quality or fit for their purpose and that ASD had also breached a duty of care in tort. In defence of Allen’s claim, ASD sought to rely on the exclusion and limitation clauses in its standard terms, whilst Allen attempted to argue that the exclusion clauses in ASD's standard terms were not incorporated into the contract between the parties because they were onerous and unusual and, therefore, terms which ASD should have specifically drawn to Allen’s attention.

The court acknowledged that where terms and conditions contain an onerous or unusual clause, a party will not be bound by the clause unless it has been specifically brought to its attention. However, the court also stressed that whether a clause is onerous or unusual depends on the context since if a particular type of clause is in common use, it is less likely to be regarded as onerous as between two commercial parties. In this case, Allen’s managing director gave evidence that he knew ASD’s terms would have exclusion clauses in them, as this was common practice within their industry. In this context, the court did not view ASD’s exclusion clauses as onerous or unusual and accordingly ASD had no duty to draw those particular clauses to Allen’s attention and they were incorporated into the contract. It was also relevant that Allen had already previously dealt with ASD on numerous occasions.

The court then considered whether the clauses could be classed as "unreasonable" within the meaning of the Unfair Contract Terms Act 1979 ("UCTA"). UCTA provides that a term included in written standard terms of business cannot limit or exclude liability unless the term satisfies the requirement of reasonableness. The burden of proving that a term is reasonable is on the party seeking to rely on the term (ASD, in this instance) and when considering the reasonableness of a term, the following factors are relevant: (i) the circumstances known to the parties when the contract was made; (ii) the strength of the bargaining position of the parties; and (iii) whether the party arguing the term does not apply knew or ought reasonably to have known of the existence and extent of the term.

The fact that Allen had appropriate insurance cover in place was critical to the finding that ASD's limitation clause was fair and reasonable as the court held that the insurance cover was one of the ways in which Allen protected itself against the recognised risk of buying goods from suppliers who include limitation clauses in their standard terms and conditions. It would have been highly unlikely that Allen would be able to negotiate different terms with ASD, at least not without a substantial increase in the price of the goods. The clauses did not create a blanket exclusion of liability because ASD did offer to refund the purchase price when there were defects. It was not unreasonable for ASD to limit liability to the price of the goods because in many cases ASD supplied goods of a much higher value than the ones in this case and the court found that the exclusion and limitation clauses were reasonable.

In Trustees of Ampleforth Abbey Trust v Turner and Townsend Project Management Limited 2012 EWHC 2137 (TCC), Turner & Townsend Project Management (TTPM) were employed as project manager by the Trust on a project to provide new boarding accommodation for the Ampleforth College. TTPM's Appointment contained a clause limiting its liability to the amount of fees payable to TTPM (£111,321). The Trust argued that the limitation of liability clause was unreasonable under UCTA, whilst TTPM argued that the terms of the limitation of liability clause were clear and unambiguous, and that as the parties had equal bargaining power they should be allowed to apportion risk between themselves as they see fit.

The court decided that even though the limitation clause was plain to read and understand, it was nevertheless unreasonable. The reasoning in this case was based primarily on the fact that the terms of TTPM's Appointment required it to maintain professional indemnity insurance cover of £10 million with the costs of obtaining the insurance cover presumably being passed onto the Trust. It was unreasonable to deny the Trust of the benefit of £9 million of that cover. The court also reasoned it was wrong for TTPM, after having built up a relationship of trust over two previous projects, to seek to introduce such a draconian term without specific notice or any discussion.

As these cases demonstrate, whether or not an exclusion/limitation clause is enforceable will often have a very significant impact on the amount of damages that can be recovered. In Allen, it was effectively unable to claim against ASD, whereas in the Turner & Townsend case, TTPM’s liability to the Trust was far greater than it had anticipated. There are some important lessons to remember here: (i) it is essential to ensure that onerous limitation or exclusion clauses are brought to the other party’s attention; (ii) the reasonableness of clauses will often be judged by what is generally accepted within the relevant industry, a fact which should be borne in mind if you are considering incorporating a clause which is much stricter than usual; and (iii) insurance is always an important factor in determining the reasonableness of a clause, since both courts in these cases considered that the parties’ ability to protect themselves with insurance was key.

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Nick Roberts
London
nroberts@jonesday.com
+44.20.7039.5304

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