15 November 2007 | David Barker

David Barker explains the Unfair Contract Terms Act and outlines cases where supplier exclusions have failed to hold sway with the courts

Suppliers often promise the earth to win business, and then rely on contractual exclusions and limitations to avoid paying compensation when they fail to deliver. Some new case law shows that this tactic will sometimes backfire.

The Unfair Contract Terms Act 1977 regulates the use of exclusion and limitation clauses in various scenarios, including:

where the contract is on the supplier's standard terms;

where the supplier is excluding or limiting liability for negligence or misrepresentation;

where the supplier is excluding or limiting certain statutory implied terms, for example that goods will fit their description or be fit for their purpose.

In these scenarios, the exclusion or limitation will be enforceable only if the court considers it to be reasonable.

In Balmoral v Borealis, Balmoral produced storage tanks which started to suffer from serious defects. Borealis had supplied the polymer used in the production of the tanks and Balmoral argued that this polymer was not fit for purpose, and therefore caused the defects.

Borealis' standard terms stated "Borealis does not assume any responsibility for products being suitable for any particular purpose unless Borealis in writing has approved such suitability." Liability was limited to an exchange or refund, and Borealis excluded liability for any direct, indirect or consequential loss caused by any defect in the goods.

The judge criticised the exclusion of all liabilities for defective goods, and noted the exclusion deprived Balmoral of any remedy. If the polymer was not suitable for making oil tanks Balmoral would suffer a huge loss (a foreseeable consequence of such a defect), which they had no real opportunity to avoid. He concluded the clause was unreasonable.

A similar sentiment was echoed recently in Regus v Epcot. Regus sought to recover unpaid serviced office fees from Epcot, a small firm that provided professional IT training.

Epcot counterclaimed for loss of profits resulting from the defective air conditioning in the offices and Regus' subsequent suspension of office services for non-payment. Regus argued that this counterclaim was excluded by its standard terms as follows: "We will not in any circumstances have any liability for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss."

The judge stated that in principle it was reasonable for Regus to restrict damages for loss of profits and consequential losses. But he said it failed to "satisfy the burden of reasonableness" as the clause deprived "Epcot of any remedy at all for failure to provide a basic service like air conditioning in what is the business equivalent of a hotel." The clause was so broad that its effect was to exclude any failure by Regus to provide the services it was contracted to provide.

These cases are important to buyers for two main reasons. First, they provide valuable ammunition when negotiating with a supplier on its contract terms. Second, if a customer has signed up to draconian terms and the supplier fails to deliver, these cases may help when arguing for compensation.

* David Barker is a partner at Pinsent Masons