KNOWLEDGE

Unfair Contract Terms and Exclusion of Liability

Morton Fraser_Richard McMeeken
Author
Richard McMeeken
Partner & Solicitor Advocate
PUBLISHED:
13 March 2020
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category:
Blog

The Sheriff Appeal Court recently issued a decision about the application of the Unfair Contract Terms Act 1977 to clauses excluding liability. 

In Caithness Flagstone Limited v Ballyvesey Holdings Limited [2020] SAC (Civ) 1, Caithness Flagstone (CFL)'s business was to extract stone in order to manufacture products from it.  CFL recognised that it may be able to monetise its waste material by using a stone crusher to crush left over stone for construction projects.  CFL obtained a stone crusher on hire purchase.  The stone crusher was supplied by a company called Scotia Plant Limited.  The hire purchase arrangement was financed by the defender, Ballyvesey Holdings (BHL).  Scotia Plant Limited and BHL were part of the same group of companies.  The hire purchase agreement included an exclusion of liability clause which required CFL to bear the entirety of the risk of the stone crusher not working properly or not being fit for purpose.  The exclusion of liability clause acknowledged that the reason for this approach to liability was because CFL was to obtain any necessary warranties from the supplier of the stone crusher.  The exclusion of liability clause also narrated that an alternative approach to liability, e.g. if the risk was shared with BHL, would have resulted in a higher premium or a refusal to provide finance altogether.  It turned out that the stone crusher did not work to CFL's satisfaction.  CFL rescinded the contract with BHL and raised proceedings seeking damages for loss of profit and return of the hire purchase rentals paid.  CFL argued that the exclusion of liability clause should not be given effect as it was not fair and reasonable for it to form part of the hire purchase agreement in terms of the Unfair Contract Terms act 1977.

At first instance, the Sheriff held that the exclusion of liability clause was fair and reasonable.  CFL's director who negotiated the agreement with BHL was an experienced businessman who knew the asset finance industry and ought to have been aware that he could have sought an alternative source of finance for the stone crusher to BHL.  The Sheriff viewed the exclusion of liability clause as being fairly standard for the asset finance industry.

CFL appealed arguing that it was in a much weaker bargaining position to BHL as it was a recently incorporated company which would make obtaining alternative finance, e.g. from an asset finance company that was unconnected to Scotia Plant Limited, a struggle.  CFL also argued that it had required the stone crusher urgently due to the timing of construction work in its area and that also weakened its bargaining position. 

The Sheriff Appeal Court refused CFL's appeal.  Where a business person who is well able to look after himself willing accepts terms that provide for how risk is to be apportioned, it is very likely that those terms are fair and reasonable.  The Sheriff at first instance had been correct to take the approach that experienced business people of largely equal bargaining power, rather than the court, should be taken to be the best judge of whether a term was reasonable.  The Sheriff Appeal Court had little time for CFL's argument that it was not in an equal bargaining position to BHL.  It considered that the Sheriff was entitled to form the view that they were in an equal position.  The fact that BHL was part of the same group of companies as Scotia Plant Limited was of no relevance as the two companies remained separate legal entitles and did this not affect the ability of CFL to obtain finance elsewhere.  The Sheriff Appeal Court drew on the drafting of the exclusion of liability clause in support of its decision.  The exclusion of liability clause was a standard clause and non-negotiable.  Non-negotiable clauses were not unfair simply by dint of their being non-negotiable.   The terms of the clause were what mattered. The Sheriff Appeal Court highlighted that the clause set out in "clear non-technical terms" the reason for the exclusion of liability, i.e. that CFL were to obtain any warranties necessary from the supplier of the stone crusher, and that an alternative approach to the allocation of risk would have resulted in more expensive finance or finance being refused altogether. 

This decision again highlights the challenges in persuading a court that an exclusion of liability clause is unfair and should not be given effect to.  What may at first glance seem to be an unfair allocation of risk is frequently insufficient to persuade a court that the term falls foul of the Unfair Contract Terms Act 1977.  The court will be much more concerned with evidence of the usual practice in the area of industry and how an experienced businessperson in that area would view the term in question.  Where the term in question explains the reasons for the allocation of risk, that will make it even more difficult to persuade the court that the term is unfair. 

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