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Reasonableness of exclusion clauses in downstream supply contracts

The judgment in Allen Fabrications Ltd v ASD Ltd discusses the use and reasonableness of limitation and exclusion clauses in downstream supply contracts. Given the number of supply contracts in the construction industry, this is an important decision for those who produce parts that are then used to manufacture products, and who use such clauses to allocate risk.

Background to the preliminary issues action

Allen and ASD’s action arose following Bembridge Marine Ltd’s commission of the design and construction of a workshop to include a platform that would be used to lift boats (Bembridge carries out boat maintenance and repairs on the Isle of Wight):

  • The supply and construction of the platform was sub-contracted to PB Structures which, in turn, sub-contracted the supply of platform elements to Allen.
  • The platform was constructed using grating, which was fixed using clips. Allen sub-contracted the supply of grating and clips to ASD.
  • Mr Cleightonhills, an employee of Bembridge, suffered very serious injuries when a section of grating gave way, causing him to fall through the platform.
  • Bembridge settled Mr Cleightonhills’ personal injury claim for £7 million, and sought to recoup those settlement monies from the various parties involved in the design and construction of the platform. It brought a claim against six parties, including Allen, and alleged that Allen had been negligent in failing to specify the appropriate method of fixing the grating to the platform.
  • PB Structures also claimed against Allen.
  • In turn, Allen alleged that ASD was negligent in failing to provide an adequate number of fixings and to advise if more fixings were required. Allen sought an indemnity from ASD in respect of the claims against it.

In its defence, ASD relied upon various exclusion and limitation clauses found in its standard terms and conditions (“the terms”), including:

Clause 8.6: “We are not liable for any other loss or damage (including indirect or consequential loss, financial loss, loss of profits or loss of use) arising from the contract or the supply of goods or their use, even if we are negligent.”

Clause 8.8: “For all other liabilities not referred to elsewhere in these conditions our liability is limited in damages to the price of the goods.”

The preliminary issues

The court had four preliminary issues to decide, including:

  • Were the terms incorporated into Allen and ASD’s agreement?
  • Were the clauses reasonable for the purposes of the Unfair Contract Terms Act 1977 (UCTA 1977).

Were the terms incorporated into the agreement?

HHJ Waksman QC found that the terms had been incorporated into the parties’ contract on the basis that Allen must have made a written application to ASD (although this could not be located) for a credit facility that required specific agreement to the terms (on the basis that this was ASD’s standard practice).

The court also considered whether the terms had been incorporated through a course of dealing. Allen accepted there was a course of dealing (250 transactions each involving sending an advice note and an invoice, which respectively contained the terms and referred to the terms). However, it argued that clauses 8.6 and 8.8 constituted onerous and unusual clauses within the rule in Interfoto Picture Library v Stiletto Visual Programmes Ltd and had therefore not been incorporated.

The court referred to the general principle (as set out in Chitty on Contracts, volume 1) that even if the other party knew that the document contained or referred to conditions generally, it would not be bound unless the terms were fairly and reasonably brought to its attention.

The court held that this principle should be adjusted where the other party already knew not merely that the document contained terms but also that it contained, or was likely to contain, terms of the type complained of, even though they had not read the actual clause. The court rephrased the principle:

“If [the other party] knew that the writing or printing on it contained or referred to the onerous condition relied upon or conditions of the same type, he is bound.”

Here, the terms were not unusual in the industry and thus no further steps were required to satisfy the normal notice test for incorporation and course of dealing.

Reasonableness for the purposes of UCTA 1977

HHJ Waksman QC considered the guidance set out in UCTA 1977, Schedule 2, and held that the clauses were reasonable. It is worth highlighting the relevant factors:

  • The respective position of the parties. Although ASD was a larger company, what was important was that both were “substantial commercial entities” (AXA Sun Life v Campbell Martin).
  • The insurance position. “Critically”, Allen had appropriate insurance in place covering claims such as those made in the main action (see the rationale of Christopher Clarke J in Balmoral v Borealis [2006] EWHC 1900 (Comm)).
  • Availability of parts. Allen had a choice of sellers, even though they would all have used similar terms. If they all had similar terms, it is arguable that this may be no choice at all. However, where the context is one commercial party dealing with another in a market where such terms were used “up and down the line” and price is the determining factor, that is a factor in favour of reasonableness.
  • Knowledge of the terms. Allen used similar terms and was found to have actual knowledge.
  • Non-reliance upon such clauses in the industry. Allen relied on Lord Bridge’s judgment in George Mitchell Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, where he considered it decisive that four witnesses said that it had always been their practice to negotiate settlements of claims they considered to be genuine, rather than rely on the clause. HHJ Waksman QC cast doubt on the utility of this argument by commenting that the decision was set in a different context, that of the Supply of Goods (Implied Terms) Act 1973. In any event there was insufficient evidence to establish non-reliance.

Conclusion

ASD succeeded on all of the live issues. This is an interesting judgment and there are a few points to note:

  • This was the first time (to the author’s knowledge) that the non-reliance argument in Finney Lock Seeds has been discussed in a judgment, and this decision casts doubt on its future use. This must be right. It would be inconsistent for courts to uphold this argument and at the same time encourage commercial parties to resolve disputes between themselves by negotiation rather than litigation.
  • The court refined the principles of incorporation so that parties may not need to draw attention to exclusion or limitation clauses where they are common in a particular industry. This should alert parties that they cannot bury their heads in the sand when it comes to each others’ terms and conditions.
  • The decision highlights that insurance is likely to be a critical factor when considering whether an exclusion clause is reasonable. Given that most commercial parties carry liability insurance, those who supply inexpensive parts downstream may find confidence in their limitation and exclusion clauses being upheld following this decision.

2 thoughts on “Reasonableness of exclusion clauses in downstream supply contracts

  1. Not quite my area of law, but the liability here was in relation to a personal injury. Isn’t it customary to make it clear that any exclusions of liability do not apply in relation to death and personal injury, and isn’t the reason for this that s2 UCTA says a person can’t exclude that liability. How was it possible in this case?

  2. Bembridge settled the personal injury claim for £7 million, and sought to recoup those settlement monies from the various parties involved in the design and construction of the platform. Amongst these claims, Bembridge had brought a claim against Allen and alleged that it had been negligent in failing to specify the appropriate method of fixing the grating to the platform. Allen in turn alleged that ASD had been negligent in failing to supply an adequate number of fixings. Allen sought an indemnity from ASD in respect of any claims made against it.

    Thus, this was not a liability in relation to death or personal injury which section 2(1) of UCTA prohibits. ASD’s liability was to indemnify Allen for liability it might have to Bembridge for breach of contract/negligence. ASD was not liable for death or personal injury; it was liable for an indemnity.

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