Excluding liability in a contract? Be reasonable!

- 01/12/2007

Builder and Engineer
David Blake

Lets’ face it; the construction industry is no stranger to disputes and the use of terms in contracts to exclude or limit liability is commonplace. But if you think you’re protected, think again – there are acts out there that may severely restrict the application of these terms.

Contractors would do well to familiarise themselves with the Unfair Contract Terms Act 1977 (UCTA). Created to reduce the use of exclusion clauses in contracts, it applies to contracting parties dealing with both consumers and businesses and is relevant to the majority of construction contracts, based upon one party’s standard written terms. It is the use of bespoke terms however, that try to exclude liability past the current industry norm, which usually fall foul to the act.

In order to gauge whether your own trading terms are acceptable it is best to compare yourself to the industry norm. Any term included in a contract must be seen to be reasonable, but what on earth does ‘reasonable’ mean?

The best way to assess ‘reasonableness’ is to apply a three part test, considering the relative strength of the bargaining positions of the parties; whether the other party received an inducement to agree to the terms now relied on; and whether the other party ought to have reasonably known of both the existence and extent of the term.

Practical Application
There are clear examples of how the act has been applied on the ground, both to the benefit and the detriment of those involved. The case of Expo Fabrics and Naughty Clothing (2003) is an interesting example. The court of appeal deemed the term, which outlined that any claim based on defective goods must be notified in writing within 20 days from delivery, to be acceptable. This was because 20 days was seen as sufficient notice to inspect the textiles and raise any concerns – in other words it could be viewed as an industry norm.

More recently however the Mercantile Court threw out an exclusion clause in a serviced office agreement on the basis it was unreasonable. The disclaimer, which was in the company’s standard terms, left the claimant IT Company with no financial remedy despite extremely poor performance. This highlighted the fact that contractors cannot simply rely on bespoke terms to exclude liability, as the facts of the case may mean contracts do not pass the ‘reasonable test’. In such instances the contract would be deemed invalid and the contractor left liable.

Size is No Excuse
SME’s working directly with consumers are not off the hook either. Here the Unfair Terms in Consumer Contract Regulations (UTCC) Act comes into play. This Act states that a term, which has not been individually negotiated, is unfair if it causes a significant imbalance in the rights and obligations of the parties to the detriment of the consumer.

In short a contractor undertaking work for a consumer cannot expect to exclude or restrict their own liability on a project. This successfully eliminates the possibility of a contractor breaching the contract or delivering a different level of work than that which was originally agreed.

Staying Safe
In order to fully protect yourself against liability it is imperative that the terms included in contracts meet the reasonableness test. In addition to this if you are an SME and your work therefore falls under the UTCC then the extent of your contract terms must be made clear to the party you are undertaking work for.

My advice? A simple remedy: Do your homework, employ effective contract management and work with all parties in a clear and open fashion. It’s the only way to really avoid trouble.

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