Exclusion clause and cap on liability deemed reasonable under UCTA
ELVANITE v AMEC [2013]
The Court commented that an exclusion clause and a limit on liability were reasonable under UCTA (Unfair Contract Terms Act 1977) and that a clause allowing a party only one year to make a claim was effective.
Facts:
- Following a dispute related to a failure to make a planning application by the deadline specified in the contract, Elvanite (E) sought to recover around £800,000 for loss of profit from AMEC, the professional consultant involved.
- The contract included an exclusion of consequential and indirect damages and a limitation on when claims could be brought stating, "all claims by [E] shall be deemed relinquished unless filed within 1 year after substantial completion of the Services".
- It also included a cap on liability which limited AMEC’s liability to, “the total compensation actually paid to AMEC for the Services or £50,000, whichever is less”. AMEC’s fee was around £14,000.
Decision:
- The Court found against E and largely dismissed its claims on the facts and also because the claim had not been filed in time. However, it made some observations on the exclusion and liability clauses which were not a part of the Court’s decision but which are interesting in any event.
- Reasonableness under UCTA - E had alleged that AMEC’s exclusions and limitations of liability were unreasonable under UCTA, which applies to standard terms of business which seek to restrict or exclude liability. However, the Court found that the terms were reasonable because:
- the parties' bargaining positions were broadly equal;
- E knew what AMEC’s terms said and had not raised any objections to them; and
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terms limiting liability are common in contracts for the supply of goods or services. This is because the supplier has no way of ascertaining what losses may be suffered as a consequence of the breach by the injured party. Also, the law does not regard it as unreasonable for those down the contractual chain to try and obtain this kind of certainty.
- Loss of profit/consequential and indirect damages - E’s claim for loss of profit failed as it was found to be too ‘remote’ to be recoverable from AMEC. The Court considered it would be unlikely for the loss to be regarded as ‘flowing directly and naturally’ from AMEC’s breach so would be indirect and caught by the exclusion clause. The Court drew a rather strange distinction saying that the loss claimed did not relate to the subject matter of the contract ie the planning permission application but rather the land itself. The judge distinguished this case from decisions involving the supply of physical ‘profit making’ goods or equipment which are themselves defective or from construction contracts where the work itself is deficient and where a loss of resulting profit could indeed be regarded as being a direct loss. This seems a rather strange and artificial distinction.
- Time limitation on bringing claims - The time limitation clause meant that the limitation period for bringing claims was reduced to one year (normally it would be at least six years) and as E’s claim had not been ‘filed’ within the relevant period, the claim was time barred by virtue of the contractual limitation. ‘Filing’ the claim in this context would have required "a clear summary of facts on which each claim is based" and "the basis on which each claim is made, identifying the principal contractual terms relied on". A one year limit was upheld as being reasonable and therefore enforceable, consistent with earlier cases.
- Limit on Liability - The Court indicated that AMEC’s cap on liability would have been effective in limiting AMEC’s liability. It acknowledged that it is not unusual for those providing professional services to limit their liability and that it is common for those providing goods or services to seek to limit their liability to the value of the contract, particularly in circumstances where their goods or services are only a small component in an otherwise much larger machine or structure. Referring to an earlier case, the judge said that, "this form of limitation of liability by reference to an amount received under a contract by a party seeking to limit liability is, in my experience, quite common under various types of commercial contract, and there is nothing inherently unreasonable in this form of limitation”. This provision would have been held to satisfy the statutory requirement of reasonableness.
Points to Note:
- Where the parties are regarded as being on an equal commercial footing, an exclusion or limitation clause is generally more likely to be found to be reasonable.
- Claims for loss of profit have been treated as a direct loss in some relatively recent cases (eg McCain Foods v Eco-Technical [2011]) and in this respect this case is somewhat out of step and, we would suggest, unlikely to be followed.
- In relation to the cap on liability, it is interesting that the Court drew a comparison with the outcome of Ampleforth v Turner & Townsend [2012] in which a limit equivalent to the price paid was found to be unreasonable due to a required insurance limit of £10 million. However, such a ‘stark discrepancy’ did not arise here. The Court added that it was not provided with evidence on whether E could meet its potential liabilities from other sources or whether it could obtain insurance but it is possible that if AMEC had had appropriate insurance at a higher level, then its cap may not have been found to have been reasonable.
- Rather strangely, the judge did not think it made any difference whether the limitation clause limited liability with reference to ‘whichever is the lesser’ or whichever is the greater’ (in terms of the sums paid or £50,000). With respect, we disagree. It has to be more likely that a clause will be upheld as being reasonable if there is a ‘greater’ alternative where the sums actually paid are relatively low.
- What the decision on this aspect does highlight is that exclusion clauses that can never be guaranteed to be enforceable and that all contract drafters can do is try to ensure that clauses are worded so as to improve the chances of the limitations and exclusions being upheld if challenged.