Clause excluding liability failed the "reasonable test" under the Unfair Contract Terms Act 1977

The High Court has held that an exclusion clause in a supplier's standard terms and conditions was ineffective because it failed the "reasonableness" requirement in the Unfair Contract Terms Act 1977 ("UCTA").

This was the outcome in Phoenix Interior Design Limited v Henley Homes plc [2021] EWHC 15, a case which concerned a commercial contract for interior design services and certain goods in connection with refurbishing a hotel in Perthshire in Scotland. The supplier's contract stated that it was subject to terms and conditions "overleaf". When the contract was completed, the terms and conditions were not overleaf, nor had they been attached to the contract.

The supplier's clause at the centre of the case was part of the standard terms and said: "The Seller shall be under no liability under the above warranty (or any other warranty, condition or guarantee) if the total price of the Goods has not been paid by the due date for payment”. In practice, this means that the clause attempts to excuse the supplier completely of any liability if the customer failed to pay for any goods supplied.

Subsequently, a dispute arose as to whether some of the goods and services supplied had been defective. The customer withheld the balance of the purchase price which remained to be paid. As a result, the supplier attempted to rely on the exclusion clause above. The customer argued in court that the exclusion clause was ineffective for two reasons:

• The Supplier’s standard terms and conditions (including the exclusion clause) had not been incorporated into the contract, because they did not appear “overleaf”; and
• If the exclusion clause was incorporated into the contract, it was ineffective as it was not reasonable under the UCTA.

The Law

As a business to business transaction, liability for goods supplied in the course of a business is governed by a combination of the Sale of Goods Act 1979 ("SGA"), and the UCTA. Under the SGA in a business to business transaction, the contract automatically contains certain implied warranties in relation to the goods e.g. goods are of satisfactory quality and meet their description. The UCTA regulates clauses in commercial contracts that attempt to exclude or limit a party's liability. Relating to the customer's argument in this case, section 11(2) of the UCTA states that a term is "reasonable" if it was fair and reasonable having regard to the circumstances which were, or ought reasonable to have been, known to or in the contemplation of the parties when the contract was made.

The Outcome

The court held that the supplier's standard terms (including the exclusion clause) had been incorporated into the contract, but the exclusion clause was ineffective because it had not been reasonable.

The supplier had previously supplied its standard terms to the customer, both in hard copy and via email; and this was deemed sufficient. Even though the terms had not been "overleaf" or attached to the contact, the court determined that a reasonable person would have concluded this obviously referred to the terms previously provided to the customer by the supplier.

The exclusion clause was found to be ineffective because it had not been reasonable. The judge noted the burden was on the supplier to show that this clause was reasonable but failed to do so for various reasons:

• Exclusion clause was "unusual"– it was different from a clause preventing the customer from setting any claims off against the purchase price, which would have been more common, and the supplier failed to demonstrate why an anti-set off clause would not have sufficed instead.
• The clause was not highlighted to the customer – it was considered to be hidden within the contract, and its consequences were not made obvious at the time the contract was made.
• The clause was difficult to apply because the contract did not stipulate a due date for paying the balance of the purchase price – by not stipulating a due date for paying, it made it impracticable for the customer to comply without having to pay under protest to avoid the exclusion clause applying.

Although the court found that the exclusion was unenforceable, the supplier was able to recover almost all of the remaining contract price on other grounds.

What does this mean for the future?

The decision shows the importance of ensuring that any terms purporting to limit or exclude liability in a contract subject to the UCTA 1977 meets the test of “reasonableness”. It is difficult to create a definitive set of rules to ensure reasonableness, but there are steps that can be taken to increase the chance of an exclusion or limitation being reasonable:

• Bring the exclusion to the other party’s attention – ensure it is not hidden away or obscure. This is especially important if the exclusion or limitation are especially unusual or harsh;
• Ensure the exclusion is not disproportionate – the clause should not go further than acceptable to achieve a desired outcome;
• Make sure it is possible to determine when the exclusion will apply when the contract is made – meaning the condition is measurable; and
• Ensure the standard terms are incorporated into the rest of the contract, which could include specifically referencing terms provided earlier or clearly stating where these can be found.