The corollary of the freedom to contract is the mutual right of parties to agree terms that exclude or limit liability for breach of contract. It is possible to limit damages for culpable delay by way of a liquidated damages clause or to exclude liability for breach altogether. Since Victorian times, the courts have had to adjudicate on thousands of such terms.
Between 1960 and 1980, the courts thought up many ways to try to get round unfair exclusion clauses. A party in “fundamental” breach or in breach of a “fundamental” term could not rely on an exclusion clause to avoid liability for that breach. However, all these judicial ruses were set aside by the House of Lords in Photo Production vs Securicor Ltd, which reinstated the basic principles of freedom to contract, a decision later eased by the passing in 1977 of the Unfair Contract Terms Act.
This act prevents a party that deals with a “consumer” or on its “written standard terms of business” from relying on an exclusion-type clause to exclude liability, unless the clause is “reasonable”. A consumer is someone who does not make the contract in the course of his or her business, whereas the other party does.
A term is fair and reasonable in the context of circumstances that were, or ought reasonably to have been, known to the parties when the contract was made. Therefore, one can have regard to such factors as the relative strength of the parties’ bargaining position and the extent to which the exclusion clause was brought to the attention of the other party.
The judge was impressed by terms that gave some practical remedies of replacement or repair. That they had not used those remedies was a matter of choice
In a recent decision in the Technology and Construction Court, Judge Bowsher QC had to apply the statutory provisions to a standard form construction contract. In British Fermentation Products Ltd vs Compair Reavell Ltd, Compair Reavell agreed to supply and install an air compressor at British Fermentation’s premises, but this was alleged to be defective.
The agreement incorporated the Institution of Mechanical Engineers Model Form of Contract, Form C. Under clause 11(ii) of this form, Compair Reavell was excluded from liability for any damages or loss “resulting from … defects” in the air compressor, except insofar as there were particular expressed entitlements under a rejection and replacement clause (clause 5) or a post-delivery repair or replacement clause (clause 11(i)). Because those clauses had not been operated, British Fermentation argued that the exclusion clause should be disregarded under the 1977 act as being unfair.
The first important question was whether Form C was Compair Reavell’s written standard terms of business. The judge found that it was not enough that the standard form was used in one instance; it had to be shown that the standard form was “invariably or at least usually used by the party in question”. Since this was not established, the act did not apply.
The next question was whether the exclusion clause was reasonable in any event. The judge held that it was, and was impressed by the other terms in the contract (clauses 5 and 11(i)) that gave British Fermentation some practicable remedies of replacement or repair. That they had not used them was a matter of choice.
