industry-standard exclusions reasonable under UCTA
RÖHLIG (UK) v ROCK UNIQUE (CA) [2011]
Certain standard trading terms excluding various rights have been held reasonable under the Unfair Contract Terms Act 1977 (UCTA) and were therefore enforceable by a supplier.
facts:
- RÖ was a freight forwarder which had been contracted by RU to ship goods it had bought in India to its premises in the UK. RU claimed RÖ had overcharged it for transport charges and that it was entitled to recover the overcharged sums by setting the amounts off against other invoices.
- RÖ contended that the contract incorporated the British International Freight Association (BIFA) standard terms, which contained a clause preventing set-off (a clause providing that where two parties owe each other money, one party may deduct or set-off an amount to reduce or eliminate what it owes to the other party). Another clause required customers to bring any claims within nine months from the date they arose. RÖ therefore said RU could not set off the disputed amounts and that it was outside the nine month period to bring a claim in any event.
- Under UCTA, any terms restricting a seller’s liability for breach of contract, where the buyer deals on the seller’s standard terms and conditions, must comply with a reasonableness test to be enforceable.
- The reasonableness test applied because:
- a set-off clause constitutes a limitation of liability, as it restricts a remedy otherwise available to the innocent party; and
- imposing a limitation period for bringing claims shorter than the limit applicable under the Limitation Act 1980 (which is six years from the date of the breach of contract) makes the enforcement of such claims subject to restrictive or onerous conditions. UCTA treats this as a form of restriction or limitation of liability.
- RU maintained that these clauses did not pass the reasonableness test. However, the High Court ruled that the clauses were reasonable and hence RU could not set-off amounts it owed to RÖ and it could not bring any claims as the nine month time limit had expired. RU appealed.
decision:
- The Court of Appeal (CA) agreed with the High Court, dismissing RU’s appeal, pointing out that both of these BIFA clauses had been ruled to be reasonable in previous CA cases.
- Regarding the set-off clause, the Court said this did not prevent RU from refusing to pay any incorrectly charged sums as the exclusion only stopped setting off against sums due. This clause was therefore held to be reasonable.
- With respect to the time limit for claims, it was held that whilst this clause prevented bringing claims after nine months, even where RU may not have reasonably been able to discover its cause of action before the time limit expired, it was still reasonable:
- RU had done business with RÖ previously on the BIFA terms;
- they had been sufficiently brought to RU’s attention;
- RU could be expected to be aware of RÖ’s use of these terms; and
- RU ought reasonably to have known of the reduced limitation period before it contracted.
All of these factors weakened RU’s argument that the clause was unreasonable.
- Although the relative bargaining power of the parties is one of the criteria under UCTA for deciding reasonableness, the CA commented that the relative size of the parties was not likely to be important in deciding whether the clauses were reasonable, if a small but commercially experienced buyer, like RU, could choose from a number of other businesses offering freight forwarding services and could probably have negotiated the contract on other conditions had it wished to do so.
points to note:
- This judgment affirms that where clauses have been sufficiently brought to a customer’s attention and there has been a previous course of dealing on these terms, a defence by a supplier that such clauses are reasonable is likely to succeed.
- The time limit clause was a complete discharge from all RÖ’s liabilities after nine months, whether known or unknown, although the clause probably did not extend to liability arising from its own fraud. It could encompass liability arising from accounting mistakes or, as happened here, a misunderstanding of the meaning or effect of the contract which led to overcharging.
- The outcome in this decision is consistent with previous cases in which the Courts have acknowledged that while UCTA plays an important role in protecting consumers and weaker contracting parties, it is less willing to interfere with contracts between commercial parties of equal bargaining strength. The Courts take the view that they should be able to reach an agreement they are happy with and are then expected to be bound by it.
- So, commercial entities should ensure that they know and fully understand on what terms they have contracted and what effect these terms will have. This may seem obvious but many disputes result from parties not knowing in sufficient detail or appreciating what they have actually signed up to.