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Limitation of liability: context is crucial

Posted: 08/08/2018

English lawyers love a precedent: a hook to hang our legal and factual arguments on. But precedents aren’t always the answer. For example - Germany winning the World Cup? England losing a penalty shoot-out? And, the final goal in that (unconventional) hat trick, previous limitation clauses as precedent. A recent Court of Appeal case confirms that limitation/exclusion clauses must be interpreted in their own particular factual context, to avoid scoring an own goal.

Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] concerned an exclusion clause in the standard terms of a specialist fire suppression contractor. The issues before the Court of Appeal were whether the clause was incorporated into the contract between the parties, and, if so, whether the clause was reasonable within the meaning of the Unfair Contract Terms Act 1977 (UCTA).

Match stats

The appellant, Goodlife, produces frozen food products. It had a multi-purpose fryer which it used to cook the products prior to freezing them and selling them on to customers such as supermarkets. The respondent, HFP, supplied automatic fire sprinkler systems to commercial, industrial and retail developments. Both companies carried the same or similar insurance at the time of the contract.

In early 2001, Goodlife sought a quotation from HFP for the provision of a fire detection and fire suppression system for the multi-purpose fryer. The quotation was dated 30 January 2001. HFP’s standard terms and conditions were expressly referred to on the face of the quotation, and they were also sent with the quotation. The opening paragraph of the conditions made it clear that they ‘do not provide for the imposition of any form of damages whatsoever and are based on English law’ (paragraph 11).

Section 4 of the conditions was also relevant. This comprised 22 conditions, of which the first 19 were on the first page ‘correctly described by the judge as being “in relatively small but no means illegible type”’ (paragraph 12). Of particular interest is clause 11, which read as follows (although it was the first instance judge who split it out into three components): 'We exclude all liability, loss, damages or expense consequential or otherwise caused to your property, foods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFP for whatever reason.

In the case of faulty components, we include only for the replacement, free of charge, of those defected parts.

As an alternative to our basic tender, we can provide insurance to cover the above risks. Please ask for the extra cost of the provision of this cover if required.'

Section 9 of the conditions also contained a 12 month warranty on defective plant items.

Goodlife did not accept the quotation for over a year, eventually providing a purchase order in April 2002. The contract value was £7,490. Ten years later, in May 2012, there was a fire which Goodlife said originated at the fryer, causing property damage and business interruption losses of some £6.6 million. Goodlife’s insurers pursued an adjusted claim by subrogation against HFP (who were also insured against this claim).

Ninety minutes: game over?

In April 2017, Stephen Davies J decided the preliminary issue of whether clause 11 had been incorporated into the contract, and if so, whether it was reasonable within the meaning of UCTA, in HFP’s favour. Jackson LJ gave Goodlife leave to appeal on those two grounds on 1 August 2017.

Extra time: Court of Appeal

Lord Justice Coulson gave the lead judgment for the Court of Appeal, which unanimously dismissed Goodlife’s appeal.

Coulson LJ started his judgment by reminding himself of the correct approach of the Court of Appeal to first instance decisions dealing with issues of reasonableness. In essence, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong (as per George Mitchell (Chesterhall Ltd) v Finney Lock Seeds Ltd [1983] – and similar indeed to video assistant referees!). The same careful approach should also be taken in relation to the judge’s findings as to the allegedly onerous nature of the clause and whether notice was reasonably and fairly given.

Coulson LJ then gave a yellow card to previous High Court authority (Allen Fabrications Ltd v ASD Ltd [2012]) that a more flexible approach could be taken towards what is truly onerous where the terms would be subject to scrutiny under UCTA. The two principles (incorporation at common law, and reasonableness under UCTA) are separate, and the questions to be decided in respect of each are distinct. There may however be overlap in the matters that fall to be considered under each principle. Gross LJ also specifically endorsed this approach (paragraph 106).

Tackling the arguments: unusual or onerous?

It is a well-established common law principle that, even where one party knows that the other party is providing standard conditions, a condition which is particularly onerous or unusual will not be incorporated into the contract unless it has been fairly and reasonably brought to the recipient’s attention.

Goodlife’s opening play was that clause 11 was an unusually onerous blanket exclusion clause: having reviewed other terms and conditions in common use, the first instance judge himself had described it as ‘at the most far-reaching end of the spectrum’ (paragraph 56, 2017 judgment). Notice therefore had to be over and above the norm, and Goodlife argued that expressly referring to the terms and conditions on the face of the quotation was irrelevant. Moreover, the wording at the opening paragraph of the conditions (referred to above) was inaccurate, not to say misleading. Goodlife sought to characterise the warning as ‘so "over the top" that it would have put off any reader going further’ (paragraph 40).

On the counterattack, HFP submitted that the fact that the clause was a limitation or exclusion clause did not, without more, make it onerous or unusual. Neither did it accept that it was a blanket exclusion clause, because of the warranty, which Davies J had described as being something of real value. Clause 11 was, as the judge had found, more akin to a clause limiting liability to the contract price.

With regard to notice, HFP argued that the terms and conditions had been expressly referred to in, and supplied with, the 2001 quotation and the 2002 acknowledgement of order. The starker than necessary warning was a point in its favour: it was something which Goodlife simply had to consider. Goodlife had had the quotation for a year before agreeing to it and the wide-ranging nature of the conditions was clear from those introductory words.  They could not therefore plead ignorance of the conditions.

No foul play

Coulson LJ did not consider that there were any grounds to interfere with the judge’s conclusions in relation to these issues.

To start with, clause 11 was not a blanket exclusion clause, because the components warranted preserved a limited liability on HFP’s part. The question as to whether clause 11 was particularly onerous or unusual ‘had to be considered in the context of the contract as a whole’ (paragraph 46). Given that this was a one-off supply contract for a modest sum, and HFP had no maintenance obligations or other connection with the premises after installation, it was neither particularly onerous nor unusual for HFP to protect itself fully against the possibility of unlimited liability arising from future events.

Another reason that the ‘wide-ranging’ clause 11 was not particularly onerous or unusual was that HFP had given Goodlife the option to pay a higher price for HFP to make insurance arrangements and accept a wider liability (paragraph 47). Goodlife had not pursued this alternative.

Coulson LJ also agreed that there was no substantive difference between clause 11 and a clause which limited the supplier’s liability to a modest contract sum. Davies J had, quite rightly, focused on the two most likely scenarios (before or after a fire) to support that finding. Clause 11 represented ‘a reasonable allocation of risk: it is the same or similar as the allocation risk supported by the courts in those cases… where the exclusion of any indirect or consequential losses was upheld as reasonable’ (paragraph 52).

On the issue of notice, Coulson LJ was clear that the judge was right in his conclusions. Clause 11 was a standard condition, expressly referred to in the quotation, and printed in clear type. The fact that the warning ‘was cast in almost apocalyptic terms’ was a point against Goodlife: ‘if that did not alert them to the effect of clause 11, then nothing would have done’ (paragraph 53). Moreover, Goodlife had had more than a year to consider the terms and seek advice. It would therefore be ‘commercially unrealistic’ to say that clause 11 was not fairly and reasonably brought to the attention of Goodlife (paragraph 55).

Offside: UCTA and reasonableness

Goodlife’s final challenge was that, if clause 11 was incorporated into the contract, then it was unreasonable under UCTA, rendering the clause ineffective.

Before considering the parties’ submissions, Coulson LJ reviewed the authorities. He focused on two areas as being of particular significance: the ‘importance of terms freely agreed by [commercial] parties of broadly equal size and status’ (as was the case here) (paragraph 61); and the ease or otherwise with which the parties could obtain insurance in respect of the losses caused (also required under section 11 UCTA) (paragraph 64).

He then turned his attention to the UCTA schedule 2 guidelines for the application of the reasonableness test. Three of the five guidelines were of no relevance: the parties were broadly equal in terms of bargaining power; Goodlife ought reasonably to have known of the existence of the terms in question; and this was not a clause that excluded or limited liability on the operation of a condition. Of greater relevance was the fact that Goodlife received no inducement to agree to clause 11, and could indeed have found an alternative supplier who would contract on a less stringent basis. Equally, there was no evidence that the goods were manufactured, processed or adapted to Goodlife’s order. Both these facts pointed towards the reasonableness of clause 11.

Goodlife’s other arguments (many of which mirrored the arguments set out above) also missed the mark.

For example, Goodlife argued that insurance added nothing to the consideration of reasonableness because Davies J had found that both parties had the relevant insurance. Coulson LJ disagreed. Insurance was a critical factor in HFP’s favour, for two reasons: the fact that Goodlife was best placed to effect the necessary insurance (knowing as it did the particular requirements of its business), and the express alternative offered by HFP in the third part of clause 11. This was not an empty offer; it reiterated that HFP did not assume a liability for future events if Goodlife did not put in place insurance. It was not unreasonable for HFP to exclude liability for the vast majority of damage and loss which might arise from its defective performance when it had made clear that it would accept liability if Goodlife took out and paid for the necessary insurance.

Finally, Goodlife submitted that clause 11 was unreasonable because HFP was seeking to avoid its core obligation of providing a proper fire suppression system. This argument also hit the crossbar, mainly because it ignored clause 11 itself: ‘When looking at the parties’ rights and obligations, the contract has to be looked at as a whole… the supply of the system cannot be looked at in isolation from the terms on which HFP were prepared to supply it’ - namely with severely limited liability for future claims (paragraph 85).

It was not impossible for either party to comply with the contract, and the limited warranty offered here was in accordance with general construction industry practice. Standard terms and conditions offered by HFP’s competitors also showed that contractors in the fire suppression business seek to limit or exclude their liability for losses which might occur a long time after their work is done, and in respect of which the customer is in a much better position to effect insurance. Clause 11 was, moreover, freely agreed between the parties and was an entirely reasonable allocation of risk in a contract worth £7,490. It was also an allocation of risk which was expressly advertised, and to which there was an alternative.

Given all of the above, Coulson LJ found that clause 11 was reasonable under UCTA. In ruling Goodlife’s argument that this would ‘emasculate’ UCTA offside, he concluded that UCTA still had a valuable role to play in guarding against unconscionable behaviour. There was no unconscionable behaviour by HFP, so UCTA had nothing to protect against: ‘More widely, it is certainly right, as the commentators have noted, that the trend in UCTA cases decided in recent years has been towards upholding terms freely agreed, particularly if the other party could have contracted elsewhere and has, or was warned to obtain, effective insurance cover’ (paragraph 93).

They think it’s all over!

It is currently very ‘Modric’ to construe a clause in both its contractual and factual context, and with at least one judicial eye on commercial reality. The courts do ‘Sterling’ work in upholding the intentions of the contracting parties as evidenced by the contract, particularly where the parties are on equal bargaining terms. Appealing a first instance decision relating to reasonableness is not, as Coulson LJ made clear, without ‘Hazard’.

To conclude: we don’t think we ‘Kane’ make this any clearer: read the entire contract, terms and conditions and all, or it may get ‘Messi’.

This article was published in Commercial Litigation Journal in July 2018.

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