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The difficulty of limitation clauses in commercial contracts

The T&Cs of most businesses contain some sort of limitation of liability in the hope that if the goods they sell turn out to be faulty they cannot be sued for millions of pounds and the liability is often limited to the sale price of the goods.
All contracts are subject to the Unfair Contract Terms Act.  If a term in a contract is found to be unreasonable then the term will not be upheld or enforceable.  A court will take a far stricter view of contracts with consumers and a term is more likely to be unreasonable where consumers are concerned.  However, terms with businesses can also be held to be unreasonable.  Courts will look at a variety of issues to determine whether a clause is unreasonable – not just the wording itself but also the bargaining strength of both parties to the contract.
If a seller attempts to restrict all liability then it is far more likely that the seller will end up with unlimited liability.  A seller has to make an assessment and probably settle for more liability then they would like, in return for greater certainty that the limitation will be enforceable.
A recent case, Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd [2015] EWHC B7 (TCC) explores the point at which too great an attempt at restricting liability means that no liability is enforceable.
In this case the seller attempted to restrict liability to the value of the goods.
The High Court decided:

  • the attempt to exclude statutory terms as to implied quality was unreasonable and not valid;
  • a clause which required the buyer to inspect within a very short timescale was unreasonable and not valid;
  • a clause prohibiting any claim for consequential loss was unreasonable and not valid;
  • a clause limiting the value of any claim to the value of the invoice was unreasonable and not valid.

Fortunately for the seller, given that all its attempts to protect itself had failed, the buyer’s claim failed for other technical reasons.  This case does suggest that all suppliers should consider amending their standard T&Cs.  There is no point in having all singing and all dancing limitation clauses if they will be unenforceable.  There is no set guidance as to what level of limitation will be acceptable but commentators are suggesting that a limit of between 125% – 150% of the contract value may be acceptable.  The decision for all businesses is whether they would rather have greater certainty or try and get away with paying less in the event the contract goes wrong.