Unfair contract terms: suppliers beware

Author: Christian Charles, Digby Hebbard

A dispute over the quality of building products highlights the need for customers to understand the terms they are signing up to – and, where possible, to explore the possibility of alternatives.

It is common in the construction industry for parties to enter into contracts on the basis of their standard terms and conditions. These standard terms will invariably be weighted in favour of the supplier and will typically seek to exclude or limit the supplier’s liability for certain losses. However, any exclusion or limitation of liability contained in standard terms must satisfy the ‘reasonableness test’ under the Unfair Contract Terms Act 1977 (UCTA). A recent case in the Technology and Construction Court shows the courts are willing to level the playing field in certain circumstances and strike out unreasonable contract terms.

The Case

In Saint Gobain Building Distribution Ltd (t/a International Decorative Services) v Hillmead Joinery (Swindon) Ltd, the court was asked to decide whether the exclusions of liability contained in International Decorative Service’s standard terms satisfied the UCTA reasonableness test. The case itself concerned the manufacture and supply of bonded panels for use in the fit-out of Primark stores in the UK. Hillmead was the subcontractor engaged to manufacture and supply these panels, and it entered into a contract with IDS for the supply of laminate sheets, which were intended to form part of the finished panels.

A dispute subsequently arose as to the quality of the laminate sheets supplied by IDS. Hillmead claimed more than £350,000 in respect of losses it had allegedly suffered as a result of the defective sheets, of which some £254,000 was claimed for alleged loss of business.

List Of Exclusions

IDS sought to rely on a number of wide-reaching exclusions of liability in its standard terms, which included exclusions in respect of:

  • All implied warranties as to quality and fitness for purpose;
  • All loss of profit and loss of business;
  • All indirect and/or consequential loss;
  • All remedies other than the replacement of goods or their invoiced value, provided always that the buyer had inspected the goods and reported any defects to IDS within three working days of delivery.

In deciding whether the exclusion clauses were ‘reasonable’, the court applied the guidelines in Schedule 2 to UCTA, which require the court to have due regard to:

  • The relative bargaining strength of the parties;
  • Any inducement given to accept the relevant terms;
  • A party’s knowledge of the relevant terms;
  • Whether it was practicable for the buyer to comply with a particular term;
  • Whether the goods were manufactured to a special order.

No Effective Remedy

The court considered each of the exclusion clauses relied upon by IDS and decided that all of the clauses were unreasonable and therefore unenforceable. The exclusions were drafted so widely that, if they were upheld, Hillmead would be left without an effective remedy for any defective goods supplied by IDS.

In reaching its decision, the court had particular regard to the significant disparity in the bargaining strength of the parties. On the one hand, Hillmead was a £2m turnover company and, on the other, IDS had a reported turnover of £111m. Hillmead had not had an opportunity to negotiate the terms and, in fact, had no realistic alternative but to contract on IDS’s standard terms.

Implications For Contractors

So what does this case mean for contracting parties? While it does not change the law in relation to unfair contract terms, those who contract on their own standard terms should take note that the courts are prepared to strike down exclusion clauses on grounds of unreasonableness. Suppliers would therefore be well advised to review their standard terms to ensure any exclusions are not drafted too widely. After all, a limited exclusion clause which is enforceable is more useful than a wide-reaching exclusion clause which runs the risk of being struck down.

That said, customers who agree to a supplier’s standard terms should not simply expect the courts to come to their rescue. Each case will be decided on its own facts and not all cases will be as clear cut as this one, where the terms were so draconian and the bargaining position of the parties so markedly different. Customers should therefore take steps to understand the terms they are signing up to and, where possible, explore the possibility of alternative terms at the outset.

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