Liability clauses: make sure they are fair

The terms of domestic subcontracts are the result either of individual negotiation or, commonly, of imposition by one party, which could well subject them to control under the Unfair Contract Terms Act 1977 (UCTA).

Frequently there are terms that seek to exclude or limit liability for what would otherwise be a breach of contract. For example, it may place a financial limit of, say, £2000 per event, or it may state, ‘Our sole responsibility is to repair the defective work up to the value of our subcontract.’

These are called limiting clauses, and the court had to construe such clauses in the recent case of J Murphy & Sons v Johnston Precast (2008).

The court case

Thames Water Utilities engaged Murphy to design and install major water main refurbishment works. One element of those works involved the design and construction of a tunnel and the installation of pipes. The pipes were supplied to Murphy by Johnston. One of the pipes in the tunnel burst open and there was considerable flooding, which resulted in damages of £4.17 million.

One of the issues for the court was whether certain clauses in Johnston’s standard terms and conditions fell foul of the relevant provisions concerning reasonableness of UCTA.

This law requires that the term should have been a fair and reasonable one to be included, taking into account the circumstance that was known, or ought reasonably to have been known, or was in the contemplation of the parties when the contract was made.

Through its clause 14, Johnston limited its liability regarding defective goods due to faulty workmanship or materials by stating that it had to be notified in writing within seven days of the discovery of such defects, and in the event not later than 28 days from the date of delivery.

Further, through its clause 15, Johnston excluded its liability for defects beyond clause 14 by excluding any consequential loss, loss of profit, loss of goodwill or similar financial loss, damage, claim or any other liability, however it was caused, whether due to negligence or default by Johnston.

The court found the clauses to be draconian in their effect and held them to be unfair and unreasonable, failing to comply with the requirements of UCTA

Johnston argued that the clauses were reasonable because, once the pipes were installed (which was not an operation in which Johnston was involved), anything could happen to them, which would be outside Johnston’s control. So Johnston said that it was reasonable for it to limit its liability to a short period after delivery.

The effect of the clauses meant that, 29 days after the date that the pipes were delivered, no claim could be made by Murphy against Johnston, no matter how defective the pipes. So for example if, 29 days after the delivery of the pipes, the pipes collapsed because they had been incorrectly manufactured, even if the collapse occurred before they had been installed, Johnston would have no liability to Murphy. This would reduce the statutory limitation period of six years to 28 days.

In the absence of such clauses, the position would be entirely different because if, following post-installation testing, a defect was discovered in the pipes, that would be Johnston’s responsibility by virtue of the Sale of Goods Act 1979 (as amended).

Not surprisingly, the court found the clauses to be draconian in their effect and held them to be unfair and unreasonable, failing to comply with the requirements of UCTA.

Comment

Limitation of liability clauses are contractual provisions that restrict the amount of damages a party can recover. In general, the law permits parties to negotiate limitation of liability clauses.

However, they are only as valuable as their ability to be enforced, therefore properly drafted, and where enforceable, they can provide protection against contractual breaches and negligence.

This is a valuable tool for allocating contractual risk. Increasing the likelihood that a limitation clause will be enforced may simply be a matter of observing UCTA.

This article was originally published in EMC March 09 as Fair play or not?