Whether you are an SME that often finds yourself having to accept your suppliers’ standard terms in order to close the deal, or you are an entity that has the commercial clout to be able to impose your own standard terms in your commercial arrangements.
The decision reached by the Technology and Construction Court on the reasonableness of a supplier’s standard terms in the recent case of Saint Gobain Building Distribution Ltd (trading as International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd should be of great interest to all.
Primark was in the process of fitting out some of its stores and engaged Hillmead to provide bonded panels which would be used as part of this process. Hillmead entered into a contract with IDS for the supply of laminate sheets which would be used as a decorative surface on the bonded panels. The contract was governed by IDS’s standard terms.
IDS provided the laminate sheets to Hillmead and the bonded panels were produced and sent to Primark. Upon receipt of the panels, Primark complained that the surface finish of some of the panels was inconsistent, had a mottled effect and that ripples were evident across the surface of the panels.
Hillmead withheld payment from IDS on account of Primark rejecting these defective panels. IDS brought a claim against Hillmead for non-payment of the outstanding invoices in respect of the defective sheets. Hillmead issued a counterclaim against IDS for breach of contract in respect of the defective laminate sheets.
Exclusion/limitation of IDS’s liability
In defending Hillmead’s counterclaim, IDS sought to rely on four provisions of its standard terms:
- Clause #1 – this provision sought to exclude all implied terms under the Sale of Goods Act 1979 in relation to quality of goods and fitness for purpose.
- Clause #2 – this provision completely excluded IDS’s liability if Hillmead did not inspect the goods and notify IDS of any defects within 3 working days of delivery of the goods.
- Clause #3 – this provision limited Hillmead’s remedies to replacement of the goods and limited IDS’s financial liability to the “invoice price of the particular goods concerned”.
- Clause #4 – this provision stated that IDS would not be liable for any loss of profit, loss of business, loss of goodwill, loss of savings, increased costs, claims by third parties, punitive damages, indirect loss or consequential loss whatsoever and howsoever caused.
The Court considered whether each of these clauses were reasonable under the Unfair Contract Terms Act 1977 (“UCTA”) and therefore capable of being relied upon by IDS. Whilst the courts often have to assess the reasonableness of commercial clauses, what makes this case interesting is the fact that the clauses IDS wanted to rely on are likely to be identical or significantly similar to provisions that can be found in your own standard terms or those of the parties with which you do business.
Unfair Contract Terms Act
Unfair Contract Terms Act provides that where parties contract on standard terms, any exclusion or limitation of liability must be “reasonable”. Whilst all the circumstances of the case will be taken into consideration by the courts in deciding what is “reasonable”, Unfair Contract Terms Act specifically recommends that the issues below are considered:
- the strength of the bargaining power of both parties;
- did the customer receive an inducement to agree to the terms;
- should the customer have known of the existence and extent of the terms;
- where the term excludes or restricts any relevant liability if some condition was not complied with, was it reasonable at the time of the contract to expect that compliance with that condition would be practicable; and
- were the goods manufactured to the special order of the customer.
It is worth taking a moment to reflect on these issues, as these are the same points that you should bear in mind when making commercial decisions as to how you draft your own standard terms (and indeed negotiate any other commercial contracts).
Were the exclusion clauses reasonable?
Clause #1 – Exclusion of Implied Terms
The Court held that it was unreasonable for IDS to exclude all implied statutory terms relating to quality and fitness for purpose for the following reasons:
- The implied statutory terms were not replaced with any contractual warranties as to quality or fitness for purpose. This meant that the goods were effectively provided with no warranties as to quality whatsoever.
- The parties did not have equal bargaining power – IDS’s turnover was £111million in 2012 whereas Hillmead’s was just £2million. This suggested that IDS were able to enforce their terms on Hillmead with little contractual negotiation.
- The goods were not manufactured to the special order of Hillmead and there was no agreed specification for the goods. This dismisses the possible suggestion that IDS were merely following Hillmead’s instructions in supplying goods of inferior quality.
Clause #2 – Exclusion of liability where there is a failure to inspect and notify
Again, the Court held that the clause was unreasonable. Whilst the Court acknowledged that IDS could have legitimately sought to limit its liability where Hillmead failed to inspect the goods for visual defects, the fact that, in this case, all liability was excluded rendered the provision unreasonable.
Ultimately, a supplier is initially at fault for providing defective goods, and the Court considered it to be unreasonable for a customer to bear the entire risk of liability simply for failing to identify a defect which the supplier could and/or should have already been aware of.
Clause #3 – Liability limited to the invoice price of the goods; sole remedy that of replacement of the goods
Whilst making their decision on the reasonableness of this provision the Courts took account of the fact that IDS knew that the laminate sheets they were providing to Hillmead were going to be used in the production of bonded panels.
The Court held that it was therefore apparent to both parties that if there was a defect in the laminate sheets resulting in a need for Hillmead to invoke their right to replacement goods, it was highly likely that the bonded panels would also have to be replaced and Hillmead would incur a further loss in replacing the panels. As such, IDS would have known that Hillmead’s potential direct loss from a defect in the laminate sheets would be more than the invoice price of just the laminate sheets.
The Court therefore concluded that it was unreasonable for IDS to impose, by way of its stronger bargaining position, terms on Hillmead which limited IDS’s liability to just the price of the laminate sheets.
Clause #4 – Exclusion of liability for indirect/consequential loss etc.
The Court held that this provision was, like the others, unreasonable. Similar to the argument for clause #3, the Court held that both parties knew that the likely direct loss of Hillmead was going to be more than the invoice price of the laminate sheets. As such, it was unreasonable to limit IDS’s liability to such an amount whilst, at the same time, refusing to allow Hillmead to recover any additional costs it had incurred under other heads of loss.
The result of this case highlights the risk businesses run by having standard terms and conditions which are overtly one-sided in their favour.
If, like Hillmead, you are an SME who often contracts with larger businesses on their standard terms then this case offers renewed hope that the courts will not permit suppliers to use their stronger bargaining position to totally exclude liability in instances where this is unreasonable to do so. However, rather than go through the disputes process (and inherent distress this causes) to determine whether any exclusion or limitation clauses to which you are subject are unreasonably restrictive, we would recommend that you consult us before the contract is entered into to advise you on any terms which the other party is seeking to impose on you and what the implications of accepting such terms would be.
From a supplier’s perspective, this case is a timely reminder that whilst filling your standard terms with provisions that will work heavily in your favour gives you reassurance that you are adequately protected from a legal perspective, this does increase the risk that you will not be able to rely on such terms if they are challenged, due to the fact they may be deemed to be unreasonable. Whilst the easy option when drafting and/or negotiating your terms is to simply try and exclude liability to the greatest extent possible, sometimes discretion is the better part of valour and a more reasonable position should be adopted.
Taking the exclusion of implied statutory terms as an example, this is a provision which we would recommend should be included in any set of standard supplier terms. However, the reason you would seek to exclude such implied terms is because you would want the express warranties as to quality etc. that were included in your standard terms to be the only warranties applicable to the goods you were providing. IDS went too far in that they neither gave express or implied warranties, an approach which was deemed by the Court to be unreasonable.
Likewise, it is standard practice for suppliers to limit their liability to the price of the goods supplied under the contract. Again, this is not, in itself, unreasonable, but where the circumstances clearly indicate that the other party will incur losses in excess of the value of the goods in the event of your default (as was the case with IDS and Hillmead) or your insurance gives you protection to an amount over and above the price of the goods then it may be worth considering taking a different and more reasonable stance.