Incorporation and the UCTA reasonableness test, is there unfairness in standard commercial terms?

It is common practice for parties to construction contracts to seek to limit their liability, or even to exclude certain liabilities altogether. For example, designers will usually only agree to an obligation to use reasonable skill and care in the performance of their services. It is also common for liability to be limited to a fixed amount, which may be agreed at the level of insurance, or even a multiplier of the contract sum.

Whilst parties are of course free to agree such limitations, care must be taken to ensure that the limitation or exclusion does not fall foul of the reasonableness test in the Unfair Contract Terms Act 1977 (UCTA), a point considered recently in Phoenix Interior Design Ltd v. Henley Homes PLC [2021] EWHC 1573 (QB).

Background

Here the defendant invited the claimant to tender for interior design services as part of the refurbishment of the Dunalastair Hotel in the Scottish highlands. The brief was for “hard-wearing and contract quality which is easy to clean, maintain and replace but with a luxurious five-star feel”, and the defendant made clear they were looking to create a “high-end” hotel, with a “luxurious, light and modern” interior.

The claimant presented its design concept to the defendant. Following that presentation, the parties continued to discuss the requirements for the project and its scope. The claimant sent its proposal via email which referred to standard terms and conditions which were said to be ‘overleaf’, although in fact they were attached as a separate document. Two revisions of this proposal were issued via email. While these subsequent proposals referred to terms and conditions as being overleaf, none were attached to the emails. The defendant accepted the final proposal and work commenced, with the claimant providing samples and a mock-up hotel room for inspection and approval. 

The dispute

The performance of the contract was beset with delay and disputes arose between the parties over numerous issues, including the quality and acceptance of the fixtures, fittings and soft furnishings supplied. This ultimately led to an irreconcilable breakdown in the relationship in July 2017, when the defendant refused to release payment to the claimant in the sum of £232,550.42. 

The defendant argued that this sum represented the balance of the contract price which was only due to the claimant on practical completion of the works, but that the services provided and goods supplied were so defective that practical completion could not have occurred. In the alternative, the defendant alleged it was entitled to special damages by way of compensation reflecting the cost of replacing what it asserted were the three-star quality hard and soft furnishings supplied, with five-star equivalents. 

In defence of the counterclaim the claimant sought to rely on their terms and conditions. These provided that, while the claimant’s warranty covered the condition of goods supplied, “the [claimant] shall be under no liability under the above warranty (or any other warranty, condition or guarantee) if the total price of the goods has not been paid by the due date for payment”.

The decision

In his judgment, Freedman J held that there was no requirement on the claimant to provide a “five-star finish”, or that there was a “five-star specification” – whilst it was intended that the hotel would have a high-quality look or feel, the budget imposed on the claimant and the fact that the defendant had inspected and approved the goods and materials meant that the defendant’s case was not made out.

As to the question of whether the claimant’s terms and conditions were properly incorporated, Freedman J concluded that yes, they did apply to the contract. This was on the basis that:

• hard copies of the terms and conditions had been provided at the presentation in early 2015;
• the initial proposal referred to terms and conditions as being ‘overleaf’ and a set of those terms and conditions was attached separately to the email;
• whilst the initial proposal was not accepted by the defendant, the proposal which they did sign and accept was made on precisely the same basis – with terms and conditions referred to as being ‘overleaf’, and with the defendant having been provided with a copy of those terms and conditions previously;
• there was no attempt by the defendant to contract on their own terms and conditions; and
• there was a clear course of dealings between the parties over the preceding ten years which demonstrated that terms and conditions had been sent and accepted, and provided at presentation meetings.

What about UCTA?

Whilst Freedman J held that the terms and conditions did apply, he decided that the limitation clause failed to satisfy the reasonableness test, and therefore fell foul of UCTA. This was because:

• it was an unusual clause, tucked away in the standard terms and conditions and not something which had been highlighted to the defendant;
• the claimant had failed to demonstrate why an anti-set off clause would not have sufficed instead;
• the effect of the clause was potentially exorbitant given that even the slightest delay in payment meant that the claimant avoided all liability relating to the quality of goods supplied;
• the clause was difficult for the defendant to apply, given the uncertainties around timing of completion and the due date for payment; completion being an event as opposed to a fixed date; and
• similarly, without an independent certifier it is difficult for the defendant to establish precisely when completion occurred.

The case therefore acts as a useful reminder to ensure that any limitation of liability clause is clearly visible and well highlighted, not simply tucked away in the small print of terms and conditions. 

Ordinarily, the UCTA reasonableness test is easily satisfied in a fully negotiated clause between commercial parties of roughly equal bargaining power, especially if they understood the risks and were advised by lawyers. The more prominent, heavily negotiated and well understood the clause, the more likely it is to be upheld. The test is harder to satisfy in standard terms, and reasonableness will always depend on the facts and context of the transaction.

If you require any assistance with drafting and negotiating contract terms please do not hesitate to contact a member of the Birketts Construction Team.