Limiting liability in supply contracts: further guidance on the UCTA requirement for reasonableness

United Kingdom

A recently published Northern Irish decision has rejected an attempt to rely on a standard form limitation clause which sought to limit a supplier’s liability for defects to the price of goods supplied. The court found that the clause did not meet the requirement of reasonableness under the Unfair Contract Terms Act 1977 and awarded the purchaser substantial damages for the cost of rectifying the works into which the goods had been incorporated. The decision is notable as the first UCTA case on supply contracts since the Court of Appeal’s decision in the Goodlife Foods case in 2018 where a trend toward upholding limitation clauses was suggested.

B A Kitchen Components Ltd v Jowat (UK) Ltd

Kitchen Components is a manufacturer of kitchen doors. In 2003 it contracted Jowat to supply adhesive for the purpose of bonding together MDF and PVC as part of the manufacturing process. However, the adhesive was inherently defective and not compatible with the type of MDF used by Kitchen Components, with the result that there was delamination of the affected doors.

Kitchen Components brought a claim against Jowat for losses suffered as a result, principally the costs of replacing the affected doors. Jowat defended the claim by seeking to rely on an exclusion clause contained within its standard terms and conditions. The relevant part of the clause, which the court found to be validly incorporated into the contract, read:

“Where any claim in respect of any of the goods which is based on any defect in the quality or condition of the goods or the failure to meet specification is notified to the seller […] the sellers will be entitled to replace the goods (or the part in question) free of charge or at the seller’s sole discretion refund to the buyer the price of the goods (or a proportionate part of the price) but the seller shall have no further liability to the buyer” (clause 8.4).

The court considered, among other things, whether clause 8.4 failed to satisfy the reasonableness requirement in the Unfair Contract Terms Act 1977 (“UCTA”). This applies to exclusion or limitation clauses in contracts based on a party’s standard terms and conditions and to any exclusion or limitation clause relating to liability for negligence.

Goodlife and Balmoral

In reaching its decision, the court considered the competing conclusions as to the question of reasonableness reached in two previous cases involving supply contracts: Goodlife Foods v Hall and Balmoral Group v Borealis.

Goodlife concerned the supply and installation of a fire suppression system and the clause in question excluded all liability save for the replacement of defective parts, which the English Court of Appeal upheld as reasonable. This was because (i) the parties were of equal bargaining power (ii) the only loss in contemplation was fire, which was a risk that Goodlife was reasonably expected to insure against and (iii) the clause specifically alerted Goodlife to the availability of insurance to cover losses excluded by the clause, and noted that the supplier could provide insurance to cover the same. For a more detailed summary of the Goodlife decision, please see our Law-Now here.

By contrast in Balmoral, where liability in relation to the supply of polyethylene polymer was limited to the exchange of defective products with non-defective products or the price paid for the defective products, this was found to be incompatible with UCTA. The key reasons for this were (i) the supplier knew the product was for use in the manufacture of oil tanks and that the purchaser was relying on it to supply a polymer suitable for such a use; (ii) it was foreseeable that a latent defect in the polymer would cause large losses to the purchaser because it would have to replace the tanks manufactured using the polymer; and (ii) the supplier had product liability insurance which would respond to the purchaser’s claim.

Clause struck down

The court found the clause in this case did not meet the requirement of reasonableness and awarded Kitchen Components damages for the costs of replacing the affected doors. The court emphasised that there was an inherent defect in the adhesive and that Jowat was aware that Kitchen Components intended to use the adhesive for bonding MDF and PVC to manufacture kitchen doors. It was therefore apparent to Jowat that if the adhesive was ineffective, the doors would fail and it was foreseeable that Kitchen Components would be required to replace them. The position was therefore more aligned with the facts of Balmoral than with Goodlife.

The Court also considered that, to the extent such loss might be disproportionate to the cost of the adhesive, Jowat was well placed to obtain and did in fact obtain the requisite insurance, in contrast to the position of the supplier in Goodlife. On this basis, it was deemed more appropriate that the risk of loss from the defect should fall on Jowat as supplier.

Conclusion and implications

This case provides support for the continued application of the reasoning in the Balmoral case to standard form limitations of liability in supply contracts. The Court of Appeal’s decision in Goodlife had noted a trend in UCTA cases toward upholding terms freely agreed where the parties were of equal bargaining power. It was unclear to what extent this trend might be relied upon to distinguish Balmoral in future cases – Balmoral having been decided in 2006.

Application of the Balmoral reasoning suggests that supply contracts which limit liability to the price of goods supplied will rarely satisfy the requirement for reasonableness under UCTA unless they are of a sufficiently generic nature that the supplier is not to be taken to have notice of the use to which the goods are to be put and any broader works or products into which they will be incorporated. If the supplier does have such knowledge, the availability of product liability insurance is likely to tip the balance against the reasonableness of such a limitation, unless circumstances similar to those in Goodlife apply, where the consequences of failure is something which the purchaser would be expected to insure against (e.g. fire).

Suppliers would be well advised to employ other means of seeking to reduce levels of liability, such as limiting liability to multiples of the contract price, or including tiered provisions to provide alternative levels of protection in the event any primary exclusions are found to be unreasonable.

References:

Balmoral Group Ltd v Borealis [UK] Ltd [2006] EWHC 1900 (Comm).

Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371.

B A Kitchen Components Ltd v Jowat (UK) Ltd [2021] NIQB 3.