The recent case of Benkert UK Limited v Paint Dispensing Limited is a reminder of the importance of limitation of liability clauses in contracts. Here's what commercial landlords in Scotland need to know.
What happened?
The Pursuer, Benkert, produced cigarette filter paper at a factory in Alva, Clackmannanshire. The paper was printed with solvent-based ink, which was prepared on the premises using dispensing machines. Benkert engaged the Defender to maintain the dispensing machines.
In November 2009, a fire broke out in the room where the ink and (highly flammable) solvents were mixed. Large parts of the factory were destroyed and Benkert suffered losses exceeding £29m.
Benkert claimed that the fire happened because a hose became detached from one of the dispensing machines, and that the Defender's maintenance engineer should have recommended the use of a different type of hose and connector.
The Defender argued that the cause of the fire could not be established and that its engineer was not under a duty to recommend an alternative hose or connector. The also Defender said that, even if the fire was its fault, its liability to Benkert was limited by the terms of the maintenance contract.
What did the court decide?
In short, the court decided that the fire had been caused by the Defender's negligence and breach of contract. The Defender was, in principle, liable for all of Benkert's losses.
However, the court also held that the Defender's liability was limited by the terms of the contract. Specifically, the contract (which was based on the Defender's standard terms) contained a clause limiting the Defender's total liability to the annual maintenance charge, which was £3,225.06. Benkert argued that this clause was unfair and unreasonable, but the court disagreed and gave effect to it.
The result was that, despite proving that the fire was the Defender's fault, Benkert was awarded just £3,225.06 of its £29m+ losses. In other words, the limitation clause reduced the Defender's liability by around 99.99%.
What does this mean for commercial landlords?
Commercial landlords engage contractors for a variety of reasons. For example, landlords may currently be considering repurposing existing office space or retail space or installing electric vehicle charging points in common areas. Whenever contractors are being engaged, landlords should be thinking about what might go wrong and who will bear the loss – that means looking for limitation clauses in the contractor's terms. Here are some top tips:
1. If a limitation of liability clause is particularly unusual or onerous then the contractor should draw this to the attention of the landlord – it can't be buried in the small print. However, clauses such as the one described above, which limit the contractor's liability to the contract price, are not seen by the courts as unusual. This means that landlords need to read contractors' terms carefully and, if necessary, seek legal advice about what they mean.
2. A court will only give effect to a limitation clause if it is fair and reasonable in the circumstances. If it is not fair and reasonable, the court will just ignore it and the contractor will be liable as if the clause didn't exist. As the Benkert case shows, though, a clause can still be fair and reasonable even if it has the effect of limiting the contractor's liability very significantly.
3. In deciding whether or not a clause is fair, a court will consider a range of factors, including the strength of the parties' bargaining positions, whether the landlord knew about the clause and how the limit compares to those in other standard terms.
4. Another factor that a court will consider is the availability of insurance. Put short, the easier it is for a contractor to obtain insurance cover, the less reasonable it will be for it to limit its liability. On the other hand, if a landlord already has insurance against loss or damage to its property (which will usually be the case) then that will work in the contractor's favour – a court is more likely to find it reasonable for the contractor to limit its exposure (and leave the landlord's insurer to pick up the bill). In Benkert, the court took the view that it was unrealistic to ignore the fact that insurance cover was in place and that the claim against the Defender was a subrogated claim by Benkert's insurers..
5. Finally, because the limitation of liability is a term of a contract, it only binds the parties to the contract. This is good news for landlords. It means that if a tenant engages a contractor, and the contractor's terms exclude or limit its liability to the tenant, that limitation won't apply to any claims the landlord may have for damage to its property.
You can find more commentary from us about limitation and exclusion clauses here and here. For specific, pragmatic advice on this or any other matter affecting commercial landlords, get in touch with our Real Estate Disputes team or your usual Brodies contact.
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