Terms limiting liability must not only be fair but must also correspond with a service provider’s standard terms of business
Clauses that attempt to exclude or limit liabilities are well established in construction contracts. Every contract should identify particular risks and the party who assumes liability for each one. The pressure to regulate clauses that seek to exclude or limit liabilities ultimately gave rise to the 1977 Unfair Contract Terms Act (UCTA). Section 3 of the act states that a party that is in breach of contract cannot exclude or restrict its liability in respect of the breach except and insofar as the contract term satisfies the requirement of reasonableness. Clauses that seek to exclude or limit liability for personal injury or death are ineffective in every case. However, the act will only apply where one of the parties deals as a consumer or on the other’s written standard terms of business.
Furthermore, despite its somewhat vague title, the act does not extend to strike out any clause that either party would belatedly consider to be unfair. Its application is limited only to clauses that purport to exclude or limit liability. Nobody would want to admit that their written terms of business limiting or excluding its liabilities are unreasonable, but there may be occasions when they may be so judged.
“What is the test for determining whether a contract constitutes the other party’s standard terms of business? It requires proof that the other party habitually uses those terms – not just sometimes”
Most recently, the Court of Appeal in African Export–Import Bank and others vs Shebah Exploration and Production Company and Others (June 2017) had to consider whether an agreement could be construed as being a party’s standard terms of business. The case involved loans of $50m from three banks to a borrower. The loan agreement was an adapted and amended version of a standard form that had been concluded after negotiations between the parties. When the borrower defaulted on the loan, it argued it was entitled to set off its counterclaim of $1bn against the sum borrowed. But the court rejected this argument on the basis that the loan agreement excluded any right of set-off. The argument that UCTA rendered it ineffective as an unfair exclusion clause was also rejected. The lender had no realistic chance of establishing that the loan agreement was concluded on the basis of the lenders’ standard terms of business. The subsequent appeal against this decision was dismissed.
The Unfair Contract Terms Act does not extend to strike out any clause that either party would belately consider to be unfair
This judgment has direct application for construction contracts. Standard forms of contract are common, but they are inevitably amended, with little opportunity for negotiation. So what is the test for determining whether they constitute the other party’s standard terms of business? It requires proof that the other party habitually uses those terms – not just sometimes. If a particular standard form is used, with or without amendments, it would need to be proven that a party had adopted that particular standard form as its written standard terms of business. The absence of amendments to a standard form of contract may not be fatal to this element of the test. However, in practice it will still be relevant. There is always the ultimate requirement that it is reasonable to rely on it. A court would be far more reluctant to consider a clause in an unamended standard form to be unreasonable.
Furthermore, can the contract terms constitute the party’s written standard terms of business if there has been negotiation between the parties resulting in some, but not all of the standard terms being applied? The authorities indicate that, while there may be some negotiation, UCTA would apply only where the terms remained effectively untouched. The Court of Appeal in the African Export case approved a statement in the earlier construction case of Yuanda (UK) Co vs WW Gear Construction (2011). This stated that the conditions have to be standard in that they are terms the company in question uses for all, or nearly all, its contracts of a particular type without alterations, apart from blanks that have to be completed, showing price, name of the other contracting party, and so on.
Thus the application of the UCTA to construction contracts will be limited by application of these requirements. Even then, the exclusion or limitation clauses will still stand if it can be shown that it is reasonable for them to remain. There may be instances nonetheless where UCTA may apply. Consider where a specialist purpose vehicle (SPV) is formed to deliver a large project. This will be the SPV’s only project. It will have prepared standard terms for its contracts with its subcontractors. A failure to accept the SPV’s written terms in its entirety may invalidate a bid, or at least lead to it being adversely assessed by the SPV. Thus there will be little or no negotiation. It is in such a situation it will be easier to prove they are the SPV’s standard written terms of business, and that the UCTA will apply. The last hurdle will then be to consider the requirement of reasonableness.
Jeffrey Brown is a partner in the London office at Veale Wasbrough Vizards
Jeffrey Brown is a partner in the London office of Veale Wasbrough Vizards