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Judge picks holes in supplier's exclusion clause

Contractual attempts to exclude all liability for economic loss are likely to fail, according to a High Court ruling in a £50 million dispute over the supply of materials for the manufacture of oil tanks.11 Aug 2006

One of Balmoral's 10,000 litre fuel oil tanksAberdeen-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."

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