Read the small print

Since the Unfair Contract Terms Act 1977, the courts and arbitrators have been able to disregard unreasonable exclusion and limitation of liability clauses where contracts are based on standard terms of business, or relate to consumer-type relationships.

Construction practitioners have long thought this to be of general application. Where suppliers provide materials on their written standard terms of business, which contain swingeing exclusion clauses for defective goods, it was often thought that these could safely be disregarded since they would fail the test of reasonableness under the 1977 act. The burden of showing that an exclusion or limitation clause is reasonable would rest on the party wanting to rely on it.

Such exclusion or limitation clauses are common in construction. They allow the supplier or specialist subcontractor to avoid limitless damages for deficient goods, enabling them to quote competitively and to stay afloat.

In a recent case in the Court of Appeal, Watford Electronics Ltd vs Sanderson CFL Ltd (2001, BLR vol 4), the court had to consider the reasonableness of such terms. Watford was engaged in the sale of computer products mostly by mail order, while Sanderson supplied software products, particularly for mail-order businesses.

Unless the court is satisfied that one party has taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood – then it should not interfere

Under a contract incorporating its standard terms, Sanderson supplied Watford with computer equipment, software and licences. Sanderson's terms contained an exclusion clause whereby it was not liable for "indirect or consequential losses" and a clause limiting its liability to the price paid by Watford for the equipment or software provided.

Watford alleged substantial deficiencies in the products, and commenced proceedings for loss of turnover, increased costs of working and providing alternative software. The first judge ruled that the clauses restricting liability were unreasonable in their entirety.

The appeal court took a different view, however. The judge said: "Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should … be taken to be the best judge of the commercial fairness of the agreement … [and] of whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered – the court should not interfere." Since the parties were of equal bargaining power, and indeed substantial price concessions were secured in the contract negotiation, the facts of the case supported the conclusion that the exclusion and limitation clauses were reasonable. The 1977 act therefore did not prevent Sanderson relying on those terms.