Businesses often seek to exclude or limit liability in their contracts with their customers.  This may take the form of an expressly negotiated term but more often than not liability is limited or excluded by way of various “boiler plate” clauses in the  business’ standard terms and conditions of business (“TOB”).  The fact that liability is limited or excluded by contract, however, does not automatically absolve the business of its liability in the event of the contract being breached by the business. The business may still be exposed to consequential loss claims that far exceed the value of the contract.

In this article Luke Tucker Harrison, Associate, in Debenhams Ottaway Business Services Team, provides useful guidance as how best to exclude or limit liability in contracts.  He firstly examines the laws that apply to business to business contracts and then takes a look at the enhanced protection given to consumers in business to consumer contracts.  The article finishes with a recent case study which illustrates the need properly to exclude or limit liability.

The Unfair Contract Terms Act 1977 & “The Reasonableness Test” 

Under Section 3 of The Unfair Contract Terms Act 1977 (“the Act”) it is unlawful to exclude liability in contracts where the effect of the exclusion clause falls into either of the following categories:-

1. It renders the obligations under the contract substantially different from that which the parties could reasonably have expected; or

2. It allows one party not to perform all or part of the contract at all.

Section 3 of the Act is qualified in that such clauses will be permitted it they satisfy the requirement of “reasonableness”.  Needless to say there has been much debate in the Courts as to what reasonableness means but in practical terms the Court will look to the facts.  Below is a non-exhaustive list of circumstances in which terms were considered to be unreasonable:-

1. Clauses which allow the seller/supplier to retain sums paid by a buyer/consumer where the seller does not perform the contract due to the seller cancelling;

2. The binding of a consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract;

3. Limiting the seller's obligation to respect commitments undertaken by his agents or making his commitments subject to compliance with a particular formality;

4. Obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his;

5. Excluding or hindering the consumer's right to take legal action or exercise any other legal remedy.

The burden of proving the reasonableness of the clause, however, will fall upon the business seeking to rely upon it.  In these circumstances it is important to keep records of the thinking behind the clause.  Why was the clause considered necessary?  What commercial risk did the business envisage?  Was there an alternative? Why did the business consider the clause to be proportionate? 

In addition the business should ensure that onerous exclusion clauses are drawn to the attention of its customers and that evidence of that is maintained within the business’ records.  It may be as simple as flagging up the clause in bold or larger type or specifically referring to it in a covering letter that sends out standard TOB. 

The Unfair Terms in Consumer Contracts Regulations 1995 and “The Unfair Test”

Where the business deals with an individual, however, then the business also needs to be mindful of the ability of the Courts to strike down unfair terms pursuant to Regulation 5 of The Unfair Terms & Consumer Contracts Regulations 1999 (“the Regulations”).  Regulation 5 will almost always catch standard TOB as it applies to terms that have not been individually negotiated.  A term will be considered unfair if it is contrary to the requirement of good faith and it causes a significant imbalance of the parties’ rights to the detriment of the consumer.  The Regulations list, at Schedule 2, a non-exhaustive list of terms which may be regarded as unfair. These can be found here.

The protection provided under Regulation 5 is more wide-ranging than that provided by Section 3 of the Act as it applies even where there have been more minor i.e. not substantial breaches of contract and where service has been sub-standard rather than not performed at all. 

Again businesses should keep records as to their thinking behind relevant clauses to show that they were drafted in good faith.  They should also ensure that exclusion clauses are brought to the attention of the consumer by in some way flagging them up and that the consumer is given time to consider the exclusion clauses before entering into the contract.  In such circumstances it is arguable that the contract has been individually negotiated and if it has not that the business has acted in good faith.  The burden is, however, on the business to prove that this is the case if a fairness test is raised under the Regulations. 

Debenhams Ottaway successful in claim for consequential damages against VIP Sporting Events Company

Luke Tucker Harrison acted for a successful local entrepreneur in connection with a claim against a sporting events company arising out of the Ryder Cup 2010.  The Ryder Cup in 2010 took place at Celtic Manor in Wales.  The client had purchased two VIP tickets to the Ryder Cup for Saturday 2 October 2010.  The tickets were to include travel to and from the Ryder Cup on the Orient Express (including breakfast and a five-course supper) and VIP hospitality at the Ryder Cup itself.  Shortly before the event the client was advised that the tickets were not available for 2 October 2010 and instead was offered tickets for 3 October 2010 but unfortunately the client was due to be out of the country on that date and could not take those tickets.  The contract, in any event, had provided for the tickets for 2 October 2010 and that was what the client was entitled to receive under the contract. 

The client accordingly demanded the return of her money and the company refused relying on a clause in its standard terms and conditions of business that enabled it to change the booking details and excluding liability for losses arising out of its failure to perform the contract. 

The client was naturally disappointed as the lost opportunity to see the Ryder Cup was in 2012 where it was being held in the USA.  Her losses, therefore, were more than she had paid for the UK package as they involved the cost of return flights to the USA and accommodation at the event.  Having received no response to a letter before action, Debenhams Ottaway, on behalf of the client issued proceedings and obtained Judgment for damages to be assessed.   The claim eventually settled on the basis of a payment of damages at more than twice the original contract price an all-expenses paid trip to the Open Golf Tournament in a chauffeur-driven Bentley and payment in full of the client’s costs. 

Had the business maintained records of the reasoning for its exclusion clauses and done more to flag up the clauses to the client, then it may very well have been able to rely on its ability to change the date of the event and restrict its liability to the price of the event package.  Its liability, however, as a result of not having done so extended to approximately 15 times the profit that it made on the original booking and represented a significant loss.

For advice in connection with the matters set out in this article please contact Luke Tucker Harrison via e-mail to lth@dolegal.co.uk or via telephone to 01727 837161.