Scottish UCTA decision illustrates courts' reluctance to interfere in a commercial bargain

In the recent case of Benkert UK Ltd v Paint Dispensing Ltd [2022] CSIH 55, the Scottish Appeal Court dismissed an appeal which challenged the reasonableness of a limitation of liability clause  under the Unfair Contract Terms Act 1977 (UCTA). The decision is consistent with the approach of the English courts who have also shown they are reluctant to interfere in cases where contractual terms have been negotiated and agreed between commercial parties of equal bargaining power.

UCTA

UCTA imposes a statutory limit on the extent to which contractual terms can exclude or limit liability for breach of contract, negligence and other breaches of duty. The reasonableness of the contractual term is fundamental to the operation of UCTA. This is always a question of fact in each case. However there are some guiding principles (derived from Schedule 2 of UCTA) which the courts consider when assessing the reasonableness of the term which include: (i) consideration of the parties’ respective bargaining power; (ii) whether there was any inducement to accept the particular term; (iii) whether the party was or ought to have been aware of the term and (iv) the extent to which the respective parties were able to cover the risk(s) with insurance.

Background facts

This case arose out of a maintenance agreement between Paint Dispensing Ltd (PDL) and Benkert UK Ltd (Benkert), under which PDL was engaged by Benkert to service two of its ink dispensing machines at one of its printing factories (the Contract).

On 10 November 2009, a fire broke out causing substantial damage to one of the factories. The fire was caused by a spark which ignited flammable solvent vapour that had escaped after a clip had suddenly come off one of the hoses containing the vapour.  Benkert argued that, in breach of the Contract, PDL had failed to advise it that the use of the clips to attach the hoses was liable to lead to a fire and that PDL ought to have recommended their replacement. Benkert claimed that, had PDL done so, it would have implemented that advice and the fire would not have occurred. The agreed losses amounted to £29,680,235 and Benkert’s insurers brought a subrogated claim against PDL for damages for the same amount arising from PDL’s breach of the Contract.

However, the Contract (based on PDL’s standard terms) contained the following limitation of liability clause:

“5.3 THE CUSTOMER’S [Benkert] ATTENTION IS SPECIFICALLY DRAWN TO THE PROVISIONS SET OUT BELOW:

5.3.1 [PDL’s] total liability in contract, tort, misrepresentation or otherwise arising in connection with the performance or contemplated performance of the Services shall be limited to the Basic Charge; and,

5.3.2 [PDL] shall not be liable to [Benkert] for any indirect or consequential loss or damage (whether for loss of profit, loss of business or otherwise), costs, expenses or other claims for consequential compensation whatsoever and howsoever caused which arise out of or in connection with this Agreement.” (Emphasis added).

Benkert claimed that the limitation of liability clause was ineffective on the basis that it did not satisfy the ‘reasonableness’ test in section 24 of  UCTA. If the clause was held to be effective, PDL’s liability would have been limited to £3,225.06.

Court of Session decision

The Court held that PDL was not liable for Benkert’s losses. The fact that PDL did not advise Benkert to replace the clips did not amount to a breach of the Contract, nor did PDL owe a common law duty of care in relation to the design. Notwithstanding its finding with respect to PDL’s liability, the court went on to consider the merits of Benkert’s claim that the limitation clause was ineffective under UCTA.

Having regard to the reasonableness test in section 24 of  UCTA and the guidelines in Schedule 2  (referred to above), the Court found that the limitation clause was not unreasonable within the meaning of UCTA on the following grounds:

1. The courts should be “reluctant to interfere with a bargain made by a commercial party” (Goodlife Foods Limited v Hall Fire Protection Limited [2018] CTLC 265 applied). As commercial parties, PDL and Benkert entered into the Contract on the agreed terms, which Benkert had never attempted to negotiate.
2. Benkert knew (or should have known) of the existence and scope of the limitation clause. As “the only clause in capital, underlined letters in the short and uncomplicated nine-page agreement”, Benkert’s attention had clearly and specifically been drawn to it. Furthermore, they had the sufficient bargaining strength to negotiate it had they considered it important to do so.
3. The Court noted that the policy intention behind UCTA is for the courts to have regard to the availability and practicality of taking out insurance by each contracting party. It found that had the limitation clause not existed, PDL would have had to increase its insurance costs and that would have been reflected in the prices charged to its customers. The Court held that it would be “entirely unrealistic” to expect PDL to obtain insurance to cover substantial losses that could be potentially sustained by each of their customers, particularly when the contract was for a small amount. Benkert, on the other hand, was in afar better position to estimate the potential losses to their business from a fire at the factory and to obtain insurance (which they in fact did – the claim having been brought by their insurers).

Key takeaway

This Scottish decision is aligned with a wider trend in the English courts to decline to intervene in cases which involve potentially “unfair” terms that have been fully negotiated and agreed between commercial parties of equal bargaining power. In such circumstances, the courts tend to consider that the test of reasonableness has been satisfied. This approach can be seen in Goodlife and more recently in the 2022 case of Last Bus Ltd v Dawsongroup Bus and Coach Ltd [2022] EWHC 2971 (Comm). Companies do, however, need to  remain alive to  UCTA and be careful to draw attention to any particularly onerous or unusual terms contained in their standard terms and conditions. For instance, in Phoenix Interior Design Ltd v Henley Homes plc [2021] EWHC 1573 (QB), the High Court held that an exclusion of liability clause was unreasonable under UCTA as it had been “an unusual clause tucked away in the undergrowth” of the contract and was “potentially exorbitant”.