A recent High Court decision highlights a number of useful practical points on limitation clauses and the incorporation of standard terms.
In commercial contracts, it is common practice for a supplier of goods or services to seek to limit the liability it owes to the customer. For example, a supplier may only agree to an obligation to use reasonable skill and care in the performance of their services. Often, liability is capped at a fixed amount or as a percentage of the total contract value. However, any such clause may be ineffective and unenforceable leaving the supplier without protection if:
- it is not incorporated properly into the contract; and/or
- it fails the reasonableness test in the Unfair Contract Terms Act 1977 (UCTA).
Both points were considered by the High Court in Phoenix Interior Design Ltd v Henley Homes plc.
Background
Phoenix was engaged by the defendant to provide interior design services and to supply furniture, furnishings and fittings for one of Henley’s hotels. The brief was for “hard-wearing and contract quality which is easy to clean, maintain and replace but with a luxurious 5-star feel” with an “ambitious budget”.
The claimant pitched its design ideas to the defendant and email discussions about the requirements and scope of the project followed. The claimant then sent its proposal to the defendant by email, which also referred to the claimant’s standard terms and conditions “overleaf”. However, the standard terms were not overleaf; they were attached as a separate file to the same email. Two subsequent emails with revised proposals again referred to the terms being “overleaf”, but no terms were attached. The parties signed the final contract and work commenced.
The dispute
Delays and multiple disagreements between the parties culminated in an irreconcilable breakdown of the relationship when the defendant refused to pay the claimant in the sum of £232,550.42. The claimant issued proceedings. The defendant counterclaimed that it was owed damages arising from the claimant’s breaches of the contract (i.e. a failure to deliver five-star quality interiors and furnishings). In defence of the counterclaim, the claimant sought to rely on their standard terms and conditions, which included a clause excluding liability:
“8.2.3 the [claimant] shall be under no liability under the above warranty (or any other warranty, condition or guarantee) if the total price of the Goods has not been paid by the due date for payment,”
If the above clause applied, it would mean that the claimant’s liability to pay any damages to the defendant would be entirely excluded because of the defendant’s refusal to pay the fees due.
The judgment:
Specification
Firstly, the Court held that there was no binding term or specification about a “five-star standard”, and the budget imposed on the claimant meant that the starting point of the defendant’s case (i.e. that the claimant had breached the design contract) was not made out. Freedman J commented: “the Defendants have been chasing a standard of finish for which they never contracted.”
Incorporation
Secondly, it was concluded that the claimant’s standard terms and conditions were properly incorporated into the contract. This was due to a number of factors, including:
- The defendant had been handed a hard copy of the standard terms at the initial pitch by the claimant.
- The claimant had attached a copy of the standard terms by email when it sent its proposal.
- The subsequent revisions to the proposal did not affect the standard terms, and they also included a reference to them. This was despite the fact that no copy of the standard terms was included “overleaf”.
Additionally, the defendant had made no attempt to contract on their own terms, and the parties clearly had a long history of previously dealing on the same standard terms.
Unfairness
Although the claimant’s standard terms and conditions were deemed to be incorporated into the contract, the Court held that the clause excluding liability (quoted above) was ineffective because it failed the reasonableness test under UCTA. As well as being “unusual”, the clause was “tucked away in the undergrowth of the Standard Terms and Conditions without any particular highlighting of the consequences of even the slightest delay in payment”. The claimant had failed to draw the defendant’s attention to the consequences of this clause when entering the contract.
Furthermore, Freedman J viewed that the clause was “potentially exorbitant” since even the slightest delay or deduction in payment might bar all of the defendant’s rights be compensated for a breach of contract by the claimant.
Finally, the clause was practically difficult to comply with. Under the standard terms, the due date was not a calendar date. Rather, it was the date of completion and therefore lacked certainty. This is because determining when completion has taken place is often a question of degree and evaluation. Theoretically, completion could be deemed to have taken place even if there are snagging issues outstanding. However, an exclusion of liability clause like the one in this case could cause the customer to pay the final amount under protest, purely to protect its position.
Conclusion
This decision does not create new law and is specific to the facts of the case. However, it does highlight a number of important points which are useful to both lawyers and contracting parties alike:
- Onerous and unusual clauses that limit or exclude a party’s liability should be visible and brought to the other party’s attention. They should not be “tucked away in the undergrowth” or buried in small print. The same factors affecting incorporation of standard terms will be applied in the UCTA reasonableness test. It is therefore critical that this type of clause is well highlighted.
- Standard terms which are intended to be incorporated into a contract should be obviously and expressly incorporated; they should not be difficult to find. This is because standard terms are more likely to pass the reasonableness test if they have been successfully incorporated. In this case, while the judge found that the standard terms were expressly incorporated, the argument on incorporation did not help the claimant’s case on reasonableness, nevertheless.
Finally, it is worth nothing that a clause is more likely to pass the UCTA reasonableness test where it is fully negotiated between parties of equal bargaining power, who have been advised by lawyers, and who understand commercial risks involved. A clause is less likely to be upheld if it is contained within standard terms.
