How does a Limit of Liability Clause Interact with the Unfair Contract Terms Act 1977

The Unfair Contract Terms Act 1977 has an exciting impact on parties contracting. It prevents one party from being over-enthusiastic with the terms they seek to impose on the other party. Where a party has a term included in the contract that is unfair against the other party subject to certain conditions being met, the court can reset the contract as if the term was not included. In the case of Benkert UK Ltd v Paint Dispensing Limited, Benkert argued that the limitation of liability clause was unfair and should be removed from the contract under the 1977 act.

Paint Dispensing was contracted to Benkert's printing factory to service ink dispensing machines regularly. It transpired that a fire was caused due to a leaking hose with solvent vapour escaping. Resulting in Benkert suffering a loss of circa £30 Million with their insurers seeking to recover damages from Paint Dispensing. Paint dispensing relied on the standard terms of the contract, which had two clauses serving as a limit of liability clauses, resulting in their total liability being £3225.06, approximately 0.01% of Benkert's loss. Benkert argued in court that the limitation of liability clauses did not meet the section 24 requirement for reasonableness as part of the act.

When considering the case, the court reflected on the parties and their bargaining powers, noting that Benkert had sufficient bargaining powers to allow them to negotiate the standard terms of the Paint dispensing contract; despite being aware of the time, no attempt was made to achieve a negotiated position.

The court examined section 24(3)(b) of the act concerning whether it was reasonable for one party to insure against losses and whether this made the limit of liability unreasonable. The court held that Benkert was better placed than Paint Dispensing to assess any potential losses due to the contract. The court also noted that the case was brought by the insurers of Benkert, who had indemnified them before taking any action. In comparison, the court stated, "to obtain insurance sufficient to cover very substantial losses sustained by each of their customers, the nature and extent of which they were in no position to estimate, would be entirely unrealistic" when considering the Paint Dispensing position. Although Paint Dispensing insurance certificate had been provided to Benkert and was for a significantly higher value than the limit of liability, this had no bearing on the fairness of the clause.

This is an interesting case because it demonstrates the robust approach the courts will take when considering a limit of liability clause in respect of the Unfair Contract Terms Act. The courts are likely to assess the suitability of the parties to insure against the event and the parties' respective bargaining power. Parties with a limit of liability clauses can rest easily because their clauses are likely to be maintained in court, where their customers' losses are identifiable and insurable.

If you need any advice on unfair contract terms, or a contract to be proof read before you agree to it please contact Velocity Dispute Management where one of our team will be happy to help.

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