Aberdeen-based Balmoral makes
storage tanks for hazardous substances. When some of its tanks
began to split, Balmoral blamed Borealis, a Vienna-based plastics
firm that supplied a product it used in the manufacture of its
tanks called Borecene. Raising its action in 2002, Balmoral said
the Borecene was unfit for the purpose of making its tanks.
Borealis denied responsibility. It said Balmoral's designs and
quality control were flawed.
The ruling
On 25th July, Justice Christopher Clarke rejected Balmoral's
claim. After hearing expert evidence for both sides he concluded
that the Borecene was neither defective nor incorrectly
manufactured. It was fit for the purpose of making storage tanks,
he said, accepting arguments from Borealis that Balmoral's moulding
process was flawed.
The judgment did not end there. Acknowledging that it may go to
appeal – and Balmoral CEO Allan Joyce told OUT-LAW today that the
company is still considering an appeal – Justice Clarke went on to
consider the terms and conditions on which the parties
contracted.
Even the question of whose conditions applied was contentious:
each party sought to rely on its own standard terms of trade
because there was no negotiated contract. It was another factor
that contributed to Justice Clarke's judgment filling an epic
126-pages.
Borealis won the battle of the forms: its standard terms
applied. But notwithstanding its overall victory in the £50 million
claim, Justice Clarke disliked its attempts to exclude
liability.
UCTA
If a clause in a contract is deemed by a court to be
unreasonable, its effect can be annulled by the Unfair Contract
Terms Act of 1977, better known as UCTA. Had the decision on
fitness for purpose been decided in Balmoral's favour, Justice
Clarke indicated that he would have applied UCTA to prevent
Borealis from relying upon clauses that limited its liability to an
exchange or refund for breach of conditions ordinarily implied
under the Sale of Goods Act of 1979.
The limitation of liability clause in the Borealis conditions
stated: "Borealis does not assume any responsibility for Products
being suitable for any particular purpose unless Borealis in
writing has approved such suitability." It went on to limit
liability "for whatever reason" to an exchange or refund.
Another clause sought to exclude "to the fullest extent
permitted by law" all conditions and warranties expressed in or
implied by statute or common law. It added that Borealis would have
no liability for any loss or damage – be it "direct, indirect or
consequential" – which may be suffered by its customers "by reason
of any defect of whatsoever kind in the goods".
Justice Clarke noted that these clauses excluded core terms
implied by the Sale of Goods Act of satisfactory quality and
fitness for purpose. The clauses also denied the buyer any redress
if the goods are defective, other than a refund where the goods
fail to meet Borealis's own specification.
When the contracts were made, Borealis knew that Balmoral was
buying Borecene for the purpose of making oil tanks.
Justice Clarke wrote: "It was the assumption of both sides that
it was so capable. The supply of a product which, because of a
latent defect […] made the manufacture of consistently satisfactory
tanks impossible would confound those assumptions. In those
circumstances a blanket exclusion of any liability whatever is
prima facie unreasonable […]. I do not regard the supply of product
with a latent defect as so remote a contingency that it ought to
play no weight in determining the reasonableness of the
exclusion."
Justice Clarke next considered whether the allocation of risk
effected by the exclusion was appropriate. "I have not been
persuaded that requiring Balmoral to bear the entire risk of a
latent defect in Borealis' product is an appropriate allocation of
risk," he wrote. "The Sale of Goods Act itself recognises that, all
other things being equal, it should be the seller who bears the
responsibility. Borealis has extensive insurance against just such
a risk. Whilst product recall insurance would probably have been
available to Balmoral, albeit expensively, Balmoral did not have
such insurance. The evidence does not establish that product recall
insurance would have been normal for someone in Balmoral's
position."
He continued: "But commercial parties habitually make agreements
amongst themselves that allocate risk; and the Court should not
lightly treat such agreements as unreasonable."
Acknowledging a paucity of suppliers of alternative materials,
Justice Clarke wrote: "Borealis' terms were presented on a
take-it-or leave it basis and Balmoral's scope for going elsewhere
on any better terms was very limited […]. Whilst Borealis UK's
terms were standard in the trade they are not the product of any
agreed process of negotiation between representatives of sellers
and buyers."
It is not unreasonable that he who stands to make the profit
should carry the loss for latent defects, explained Justice Clarke.
He also noted that Borealis is much larger than Balmoral. "If
Borecene was, contrary to my findings, not suitable for making oil
tanks because of a latent defect, Balmoral will have suffered a
huge loss (a foreseeable consequence of such a defect) which they
had no real opportunity to avoid at the manufacturing stage. It is
not reasonable that they should be without any redress from the
manufacturer at all."
In the circumstances, Borealis could not use a contract to limit
its liability to an exchange or refund for breaches of conditions
ordinarily implied under the Sale of Goods Act.
Reaction
Jim Milne, chairman and managing director of Balmoral Group,
pointed out that other tank makers shared Balmoral's complaint
about increased levels of tank failures when Borecene was used. "I
am quite taken aback by this judgment; this was not expected at
all," he said in a company statement. "In my view the failure
statistics speak for themselves, regardless of the other bodies of
evidence drawn up and presented in court. The failure rates of
Borecene tanks compared to other materials tells its own story, to
me."
Reforming the law
By coincidence, on the same day as Justice Clarke handed down
his judgment, Minister Without Portfolio and Labour Party Chair Ian
McCartney told the House of Commons that recent suggestions from
the Law Commission and the Scottish Law Commission for reforming
the law of unfair contract terms legislation will be
implemented.
The Commissions' proposal includes a draft bill designed to
produce a unified regime replacing the Unfair Contracts Terms Act
1977 and the Unfair Terms in Consumer Contracts Regulations 1999
for the whole of the UK in a way that is much clearer and easier to
follow.
"The Government have carefully considered the Law Commissions’
report and is content in principle to accept the recommendations
for reform," said Mr McCartney. "The proposed legislation will be
subject to full public consultation."
