Most companies agree to involve a liability clause. These are often attempted in many weird and wonderful ways!
In order to rely on limited liability, in any business to business contract, the test for reasonableness must be satisfied. Under the Unfair Contracts Act 1977 a party cannot apply a contract term which excludes or restricts liability in respect of the breach unless that contract term fulfils the requirement of reasonableness. The test is whether the term is fair and reasonable with regards to the circumstances which were known, or ought to have been reasonably known, to the parties when the contract was made.
In the case of Benkert UK Limited v Paint Dispensing Limited (2022), the court restated the reasonableness test for the applicability of limitation of liability clauses.
Background of the case
A fire at the Benkert UK Limited premises resulted in a loss to it of nearly £30 million. The fire occurred due to highly flammable inks and solvents being on site, the dispensers for which were supplied by Paint Dispensing Limited (PDL). Benkert claimed the fire was a result of PDL’s negligence. The judge Lord Tyre preferred the explanation that PDL had breached its contractual duty in failing to provide a safer ink dispensing method. However PDL’s liability to for breaches of contract was limited to only £3,225, being the annual fee PDL was paid for the supply and maintenance of the dispensers. Benkert sued claiming the limitation was unreasonable.
Limitation of liability clause
The factors taken into account by the court in determining reasonableness were:
- The equality of the bargaining positions of the parties to each other
- Whether the customer knew or ought reasonably to have known of the existence and the extent of the term
- The resources available to PDL to meet the liability should it arise
- How far it was open to either party to cover themselves by insurance
- Whether the goods were manufactured, processed or adapted to the special order of the customer
Following consideration of the factors set out above, it was found that the clause was reasonable and therefore Benkert was only entitled to the limited sum of £3,225.06.
Lessons learnt
Clearly the most obvious lesson is for anyone entering a contract to carefully read the contract and in particular any clauses that seek to reduce, avoid or limit liability of the other party.
If following negotiations it is still clear that a risk exists insurance needs to be explored or other methods of mitigating the risk.
You should also review your own limitation clauses and check they are reasonable and enforceable and make sure you bring them clearly to the attention of the other party.
This article was co-authored by Chris Jackson. Our Dispute Resolution team are happy to support you in any situation involving liability clauses.