21 July 2024, 12:39
By Tayler Sani Apr 24, 2023

Limiting liability in supply agreements

Labour shortages, the impact of the pandemic, and the continuing consequences of Brexit are among the challenges currently faced by suppliers – so, suggests Fox Williams LLP’s Tayler Sani, now seems as good a time as any for suppliers to take stock of their existing agreements (and determine the scope of any liability that may arise due to these challenges), and appropriately address the issue of liability in future agreements …

Clauses that seek to limit the liability of a party for a breach of contract have long been the subject of scrutiny by UK court. This can largely be attributed to the fact that, as a matter of English law, a clause limiting liability cannot be enforced unless it satisfies the requirement of ‘reasonableness’.

This requirement of reasonableness was notably the subject matter of a recent judgment of the courts of Northern Ireland. The case involved a manufacturer of kitchen doors, B A Kitchen Components Ltd (‘Kitchen Components’), and a manufacturer and supplier of adhesives, Jowat (UK) Ltd (‘Jowat’). 

Kitchen Components had contracted Jowat to supply an adhesive that would be used to bond together MDF and PVC as part of the former’s’ process of manufacturing kitchen doors. The adhesive, however, was inherently defective and caused damage to the kitchen doors on which it had been used. 

Kitchen Components brought a claim against Jowat for the losses it had suffered as a result of the defective adhesive (principally the costs of replacing the damaged kitchen doors). Jowat, seeking to rely on an exclusion clause contained within its standard conditions of sale, argued that it would only be liable for the price paid for the defective adhesive. 

What did the limitation of liability clause say? It provided that: “Where any claim in respect of any of the goods which is based on any defect in the quality or condition of the goods or the failure to meet specification is notified to the seller in accordance with these conditions the sellers will be entitled to replace the goods (or the part in question) free of charge or at the seller’s sole discretion refund to the buyer the price of the goods (or a proportionate part of the price) but the seller shall have no further liability to the buyer.”

The court decided that this clause did not meet the requirement of reasonableness. The key reasons for this were that: Jowat was aware that Kitchen Components intended to use the adhesive for the manufacture of its kitchen doors; it was foreseeable that an inherent defect in the adhesive would cause damage to the kitchen doors, therefore requiring Kitchen Components to replace them; and Jowat was well-placed to (and did) obtain the requisite insurance against the risks that materialised in the case.

The court therefore awarded substantial damages to Kitchen Components in respect of the cost for replacing the damaged kitchen doors.

What does this mean for suppliers? 

This case seemingly constitutes a departure from earlier ones in which the courts were reluctant to interfere in B2B contracts. In particular, this decision conflicts with a well-known English Court of Appeal judgment in 2018 concerning the supply and installation of a fire-suppression system. 

The limitation of liability clause in that case excluded all liability, save for the replacement of defective parts. The court decided that this clause was reasonable, as: the parties were of equal strength and bargaining power; the loss in contemplation was fire damage, which was a risk that the parties would reasonably be expected to insure against, and the party best placed to obtain the necessary insurance in this instance was the buyer of the fire -suppression system; and the contract in question made an explicit reference to the availability of insurance to cover losses incurred as a result of the failure of the fire-suppression system, and provided for the seller to put in place such insurance at a cost to the purchaser if the purchaser so wished. 

Going forwards, the availability of insurance (and the identity of the party best placed to effect the necessary insurance) and the equality of the parties’ bargaining power are likely to remain key considerations for the courts when determining the reasonableness of a limitation of liability clause. In contrast, the Kitchen Components case indicates that a clause limiting a supplier’s liability to the price of the goods supplied will be unlikely to satisfy the requirement of reasonableness, unless: the goods being supplied are so generic that the supplier would not be taken to have notice of the use that the buyer intends to make of them; or in instances where the supplier is aware of the use to which the goods will be placed, the buyer is able to obtain insurance to cover the risk. 

Takeaways

Suppliers need to consider the enforceability of limitations of liability provisions in their agreements, in the context of: the goods that they supply; and the nature of the loss that is reasonably foreseeable if those goods are defective.

Some means by which suppliers could increase the likelihood of a limitation of liability clause being enforceable would be to: limit liability to multiples of the price of the supply agreement; and/or offer insurance to buyers to cover potential losses arising from defective goods. 

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