England and Wales High Court (Technology and Construction Court) Decisions

1. This is a trial of preliminary issues.

2. The defendants are suppliers of air compressors.

3. The claimants are a company in the Gist Brocade Group.

4. In the course of their business, the claimants use varying amounts of air under pressure to aerate and mix fermenting wort to produce yeast. To economise on fuel, the claimants require compressors used by them to be adjustable within a specified range so that energy is not wasted at times when the need for air is reduced.

5. In September, 1990, the defendants agreed to supply and install in the claimants' premises at Felixstowe, Suffolk a centrifugal air compressor for a price a little under £300,000.

6. In this action, the claimants claim damages for breach of that contract. The claimants complain that the compressor failed to comply with the performance terms and warranties of the agreement despite the defendants' attempts to improve its performance.

7. It is now agreed (though it was formerly disputed) that the contract was subject to the terms of the Institution of Mechanical Engineers Model Form of General Conditions of Contract Form C 1975 edition as amended in September, 1978. The defendants rely on that condition as excluding their liability in this action. The claimants contend that the term relied on is inept to exclude liability on the facts of the case, and they also rely on the Unfair Contract terms Act, 1977.

8. For the purpose of the trial of the preliminary issues, it is to be assumed that certain pleaded facts are true:

11. The burden of proof is on the defendants to show that the claims sought to be excluded come within the exclusion of liability condition on its true construction: The Glendarroch [1894] P 226 at 231 per Lord Esher M.R.

12. Condition 11 of the General Conditions has to be construed in the context of the contract and of the conditions as a whole. Particularly important parts of the context are to be found in conditions 4 and 5.

13. Condition 4 provides for testing on delivery:

That condition gave the claimants an important right. The compressor was tested in accordance with the condition and failed to give the specified performance. The claimants did not exercise their right under this condition to reject the compressor, although they did consider doing so, and they did consider buying a substitute compressor from another supplier.

14. Condition 5 gave to the claimants another right:

1. Efforts were made after delivery to make the compressor meet its specification but those efforts failed and the claimants did not exercise their right to reject under this condition.

15. It is in the context of having taken the decisions not to exercise those rights that the claimants claim damages for breaches of express conditions and warranties as to the specification of the compressor. I have given permission for amendments of the Statement of Claim in that regard including an amendment to plead condition 11(i).

16. In response, the defendants rely on the whole of condition 11.

17. As amended, condition 11 of the General Conditions is in the following terms:

18. No doubt considerable care and attention has been given to the drafting of this Model Form of contract. An historical note printed in the Form states that a Form was first published by the Institution of Electrical Engineers in 1924 and revised in 1940. Then after consultation between the Institutions of Mechanical Engineers and Electrical Engineers, "the scope of the Model Form was enlarged to make it suitable for both the electrical and mechanical engineering industries" and the Model Form was published jointly by the two Institutions as Model Form 1956 Edition, later replaced by the 1975 edition. Following the enactment of the Unfair Contract Terms Act, 1977 some amendments were made. Those amendments were incorporated in the Form used by the parties.

19. In construing the words of the Model Form, I bear in mind the words of Lord Hoffman in Investor's Compensation Scheme Limited v. West Bromwich Building Society [1998] 1 WLR 898 at 913:

20. The claimants also rely on certain statements of general principle in Chitty on Contracts 27th edition paragraphs 14-005 to 14-018. In particular, the claimants rely on the well known general principle that the court will be reluctant to ascribe to an exemption condition a meaning which effectively absolves one party from all duties and liabilities: Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361 at 482.

21. It is common ground that the compressor's assumed failure to meet the guaranteed performance level can only be due to a defect arising under proper use from faulty materials workmanship and design thereby bringing it within the scope of condition 11(i). It is also common ground that the claimants gave the defendant written notice of the defect as required by condition 11(i).

24. Counsel for the claimants further submitted that the contract contains express performance warranties and in making it the parties cannot be taken to have been intended that, in the event that the warranties were breached by the seller and the seller being unwilling or unable to put matters right, it would be under no liability to the buyer whatsoever. Such an interpretation, says Mr. Isaacs, would fly in the face of business commonsense.

25. I reject the claimants' contention as to what is business commonsense in the terms of this agreement. It seems to me that the business commonsense intention of the agreement as a whole is that the vendors undertake to supply a machine of the specification warranted, and if they fail in that undertaking the purchasers have an initial right to withdraw from the contract and reject the machine on terms that the vendors pay for them to buy from other suppliers a machine that is up to specification. If the purchasers so choose, there will be a period when the vendors will try to bring the machine up to specification, and those efforts again may be terminated by the purchasers by rejecting on the same agreed terms. If the purchasers still do not reject when the machine fails to come up to specification, the purchasers keep the machine but on terms that they do not complain thereafter of the failure to come up to specification. The amount of the damages claimed in this action compared with the purchase price shows the good business commonsense of the contract. If the project is not successful, the purchasers have two opportunities to withdraw and buy a substitute machine of the standard warranted from another supplier at the vendor's expense, but they are not to be allowed to stand on the deal and charge the vendors enormous sums for their loss continuing for the life of the machine.

26. Are the words of the contract apt to achieve that intention? In my view they are. The opening lines of condition 11(ii) are restricted to "any warranty or condition implied by law", and we are not concerned here with implied warranties or conditions. But condition 11(ii) continues "and save as provided in this condition the vendor shall not be under any liability to the purchaser (whether in contract, tort or otherwise) for any defects in the goods ..." The words "save as provided in this condition" clearly refer to the words in brackets later in the condition making an exception in favour of death or personal injury as required by the Unfair Contract Terms Act, 1977. It is accepted by the parties that "defects in the goods" includes failure to come up to specification. The words, "shall not be under any liability to the purchaser" cannot be read ejusdem generis with "warranty or condition implied by law" because the following words "(whether in contract, tort or otherwise)" indicate an intention to go far beyond the boundaries of liability for breach of implied terms and to refer to liability for breach of express terms, tort, and other forms of liability. In this context, tort liability cannot be read as ejusdem generis with liability for breach of implied terms and hence the reference to "contract" also must extend beyond implied terms to include liability for breach of express terms.

27. The claimants argue that the words of condition 11(ii) do not exclude liability for failure to comply with the obligation imposed on the vendor by condition 11(i). If that is right, then the whole intention of the scheme set out in conditions 4, 5, and 11 would be defeated because liability for breach of express terms as to capacity would be resurrected as liability for failing under condition 11(i) to rectify deficiencies of capacity. I am sure that is not the intention of the contract, and the result for which the claimants contend is excluded by the closing words of condition 11(ii), "or from any work done in connection therewith". To elucidate that point I extract from condition 11(ii) the following words: "the vendor shall not be under any liability to the purchaser ... for any defects in the goods or for any damage [or] loss ... resulting from such defects or from any work done in connection therewith". If the defendants had done no work to perform their obligation under condition 11(i) the claimants would have had a good ground of complaint, but as the defendants have done such work they are under no liability arising from the failure of that work to achieve the specified capacity because that work was "work done in connection therewith". For the claimants it was also submitted that condition 11(ii) purports to exclude all liability of any kind and that is plainly unreasonable. I will deal with the question of reasonableness later, but I reject the submission that clause 11(ii) purports to exclude all liability: it does not exclude liability to pay for substitute goods under conditions 4(iii) and 5(ii).

28. Because of the amendment which I allowed to the Statement of Claim immediately before embarking on the trial of these preliminary issues, the argument before me and my decision go beyond the issues as originally envisaged.

29. I hold that condition 11 of the General Conditions is apt to exclude liability where the claimant claims for breach of an express term of the agreement as to the compressor's guaranteed performance level in circumstances where the defendant has been unable to remedy the defect and that exclusion of liability also excludes any similar liability alleged to arise from any duty imposed by condition 11(i).

30. The claimants contend that the terms of contract relied on are governed by sections 3, and 6, of the Unfair Contract Terms, Act, 1977:

31. The defendants submit that the Act does not apply at all to this contract.

32. Section 6 does not apply because we are not concerned here with the seller's undertakings implied by sections 13, 14, or 15 of the Sale of Goods Act, 1979.

33. The defendants submit that section 3 does not apply because this is not a case where one of the contracting parties "deals as a consumer or on the other's written standard terms of business".

34. A consumer is defined by section 12 of the Act:

2. The claimants made this contract in the course of a business and plainly did not deal as a consumer.

35. The Act gives no guidance on the meaning of "the other's written standard terms of business". The Institution of Mechanical Engineers Model Form of General Conditions of Contract are plainly "written standard terms of business" but the defendants contend that they are not the defendants' standard terms of business and therefore not covered by the Act. Mr. Blackburn submitted that if it were otherwise, it would follow that where a building employer contracts on the terms of a JCT Form of Contract, or an architect is appointed under the terms of the RIBA Form of Agreement for the Appointment of an Architect, terms in the contract limiting or excluding liability would be subjected to the test of reasonableness. Mr. Blackburn plainly regarded that possibility as totally unacceptable, but I can see no reason why Parliament should not require the test of reasonableness to be applied to terms excluding or limiting liability in such contracts. The question is, has Parliament done so?

36. Mr. Stuart Isaacs, counsel for the claimants, had not expected this point to be taken and I did not receive a full argument or any citation of authority upon it. Mr. Isaacs did, however point to the fact that the 1978 Amendment to condition 11(ii) of the Model Form was made solely to deal with the impact of the Unfair Contract Terms Act. Mr. Isaacs asked, "Why introduce the 1978 amendment if the Unfair Contract Terms Act did not apply?". Though the question was asked rhetorically, I hazard the answer that those responsible for the Model Form, having taken legal advice and received no definite guidance, anticipated that the Act might apply on some though not necessarily on all occasions when the Model Form would be used and inserted words to comply with the Act in case it was necessary.

37. The editors of Chitty on Contracts 27th edition at page 675 express the view that the expression "on the other's written standard terms of business" probably would embrace the standard terms of a third party:

38. In making the recommendations leading to the enactment of the Unfair Contract Terms Act, 1977, the Law Commission and the Scottish Law Commission considered the question what were written standard terms of business (Law Com No. 69; Scot Law Com No. 39 paragraphs 151 - 157).

39. At paragraph 152 the Law Commissioners considered the type of terms referred to by Mr. Blackburn:

40. The Law Commissioners then said that although lawyers are familiar with the idea conveyed by the terms "standard form contract" it is not easy to formulate a precise definition. One possible distinguishing mark, the lack of negotiation was considered and rejected as a defining feature:

41. Finally, the problem was left to the courts:

42. In McCrone v. Boots Farm Sales Limited [1981] SLT 103 at 105, a decision on a point of pleading, Lord Dunpark considered the meaning of the words "standard form contract" in the part of Unfair Contract Terms Act, 1977 applicable to Scotland:

3. That opinion is of limited assistance in the present case because Lord Dunpark did not have in mind the conditions of an outside body used by one of the parties and he was construing different words. However, it is interesting that Lord Dunpark expressed a requirement that the terms should be generally applied by a party if he is to be subjected to the provisions of the Act.

43. In Walker v. Boyle [1982] 1 WLR 495, Dillon J, on a finding alternative to his main decision, applied the reasonableness test of the Unfair Contract Terms Act 1977 to the National Conditions of Sale. That decision does not, however, help in the present case because the reasonableness test only became applicable there because of the provisions of section 3 of the Misrepresentation Act, 1967 as amended by the Unfair Contract Terms Act 1977. Section 3 of the Misrepresentation Act is not limited in its effect to consumer sales or standard terms of business: it applies to any contract containing a term which would exclude or restrict liability or remedies arising on a misrepresentation by one of the parties.

44. Section 3(1) of the Unfair Contract Terms Act, 1977 was also considered by Potter J. in The Flamar Pride [1990] 1 Lloyds Rep 434 (in which Mr. Stuart Isaacs appeared for the plaintiff). That decision again was on a pleading point. The decision does not help in the present case because Potter J. at page 438 expressly left aside the question whether the standard form of management agreement which the defendants possessed at that time would amount to "standard terms of business" in the sense contemplated by the Unfair Contract Terms Act.

45. On the issue of reasonableness, a number of authorities were mentioned as cases in which terms were held to be in some cases reasonable and in other cases unreasonable, but it was not suggested that in any of those cases is there to be found any guidance on the question of the applicability of the Act which I am now considering.

46. I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of Model Forms drafted by an outside body. However, if the Act ever does apply to such Model Forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the Model Form is invariably or at least usually used by the party in question. It must be shown that either by practice or by express statement a contracting party has adopted a Model Form as his standard terms of business. For example, an architect might say, "My standard terms of business are on the terms of the RIBA Form of Engagement". Without such proof, it could not be said that the Form is, in the words of the Act, "the other's" standard terms of business. I leave open the question what would be the position where there is such proof, and whether such proof either alone or with other features would make section 3 of the Act applicable.

47. In the present case, the issue of the Unfair Contract Terms Act was raised in the Reply in the following terms:

4. There is before me a draft amendment to that Reply (for which no permission has yet been granted) which makes no further allegation about the applicability of the Act.

48. It has not been alleged or proved that the defendants either invariably or usually used the Model Form. The only evidence as to defendants' use of the Model Form is to be found in the documents before me. The defendants', typed quotation CC/2155 of July 1990 contains the paragraph:

5. That quotation was accepted by an order of September, 1990 in which the Claimants included the words "Terms and Conditions as per quote". There then followed some correspondence in which there was a dispute as to whether the Model Form superseded the terms and conditions printed on the back of the claimants' Order form. In the course of that correspondence, the defendants wrote on 9 October, 1990,

6. It was not said in that letter that the terms of the Model Form were the only or even the usual terms on which the defendants contracted, only that the defendants made extensive use of them. The defendants did not say that they would only have been willing to contract on the basis of the Model Form. The position taken by the defendants was that the contract had in fact been made in terms which included the Model Form. On the evidence before me, it is quite possible that if the matter had been raised in negotiations, the defendants would have entertained negotiations as to whether the Model Form or some other terms would form part of the agreement.

49. A question of the burden of proof arises. Section 12(3) of the Act provides that it is for those claiming that a party does not deal as a consumer to show that he does not. There is no similar provision as to the words "the other's written standard terms of business" in section 3. I therefore hold that it for the party alleging that a statute applies to demonstrate its application.

50. I therefore hold that the Model Form has not been shown to be the defendants' standard terms of business and the Unfair Contract Terms Act does not apply to the contract between these parties.

51. In case I am found to be wrong in that decision, I shall consider the question of reasonableness as if the Act did apply.

52. It is only condition 11 which is said by the claimants to be unreasonable.

53. The Act puts the burden of proof of reasonableness on the defendants. Section 11(5) provides:

54. In considering whether a condition is reasonable, the relevant date to be taken is the date of making the contract. Section 11(1) of the Unfair Contract Terms Act, 1977 states the test of reasonableness:

55. It was submitted in argument that in considering reasonableness the Guidelines set out in Schedule 2 to the Act should be applied. Those Guidelines are prescribed by section 11(2) of the Act to sections 6 and 7. Those sections do not apply to this case and the Guidelines have no direct application, but they are usually regarded as of general application to the question of reasonableness: Stewart Gill Limited v. Horatio Meyer & Co. Limited [1992] 1 QB 600 at 608 per Stuart-Smith L.J. The Guidelines are in the following terms:

56. As to Guideline (a), both parties to this action are substantial companies carrying on considerable businesses. It appears from a statement of Tristao Valente e Branco attached to the written submissions of counsel for the claimants that when the claimants bought the compressor from the defendants, the claimants already had two Demag compressors. Moreover, when it was evident that the defendants' compressor was not up to specification, the claimants considered buying a replacement and obtained quotations from other suppliers, including Atlas Copco. I find that there was no disparity between the relative bargaining positions of the parties, and there were alternative means by which the customer's requirements could have been met.

57. As to Guideline (b), there is no evidence that the claimants received an inducement to accept the term. I have no evidence of the terms on which other suppliers would have supplied a compressor.

58. As to Guideline (c), The Model Form was expressly referred to in the Quotation and the claimants' Order also included the words, "Terms and Conditions as per quote". There is no evidence that the claimants had actual knowledge of the content of the Model Form but copies of the Form are readily available.

59. Guideline (d) is not in its literal terms applicable but its spirit is relevant to what I shall later say about the relationship of condition 5 to condition 11.

60. As to Guideline (e), the goods were manufactured to the special order of the claimants.

61. The claimants submit that condition 11 is unreasonable for the following reasons:

62. I am told that there are no reported decisions considering the clause currently under consideration. Counsel for the defendants referred to a number of cases where clauses had been held to be reasonable. Counsel for the claimants referred to a number of cases where clauses were held to be unreasonable. I do not derive much assistance from those cases. They all concerned conditions in different terms. Even a decision on this particular term would have to be approached with some care because in each case as it arises the reasonableness of a condition has to be considered in the light of the particular circumstances of the parties in question at the time the contract was made.

63. I have already expressed the view that the terms contained in conditions 5 and 11 made good business sense. If the compressor failed to come up to specification, the claimants were not left with no remedy at all. The claimants had two opportunities to reject the compressor. If the claimants had rejected the compressor, the price would have been returned to them and the defendants would have paid the reasonable costs of the claimants obtaining from another supplier a compressor which did fulfil the contract requirements. If compressors had not been obtainable from other suppliers that remedy would not have been available to the claimants, and here the spirit of Guideline (d) is relevant. But a replacement compressor could have been obtained, and the claimants did obtain quotations for them. The claimants did not obtain a replacement compressor because, in the words of Sr. Valente e Branco,

7. The cost of replacement would have been borne by the defendants, so it was only the loss of production that was a relevant issue. The claimants made a choice between loss of production for a limited time in obtaining and installing a replacement at the cost of the defendants and less efficient working for the life of the defendants' compressor if it was not replaced. That choice was foreseeable at the time of the making of the contract.

64. Condition 4 does not use the word "damages", but its effect would be that in the event of breach, the defendants would be liable to pay damages of a defined nature, but not the extensive damages sought by the claimants. If the defendants were to quote on terms not including the restriction of liability contained in condition 11 they would no doubt have wished to reconsider the price quoted, having regard to the totally different level of risk undertaken by them. When considering reasonableness one has to consider reasonableness for the vendor as well as reasonableness for the purchaser.

65. In this connection, I should mention one of the cases cited to me, Edmund Murray Limited v. BSP International Foundations Limited [1992] 33 Con LR 1. In that case, the Court of Appeal held that a condition excluding liability for the failure of machinery to come up to specification was unreasonable. By the terms of that contract, the vendors undertook under certain stated conditions "to repair or replace without charge the goods or any part or parts thereof manufactured by them which shall be proved to the satisfaction of the sellers to be defective by reason solely of faulty materials or workmanship supplied or performed by the sellers". That undertaking, limited as it was to faulty materials or workmanship, did nothing to redress the balance of the wide exclusion clause the effect of which was to exclude liability for failure to come up to specification and left the purchaser without any remedy at all when the machinery failed to do what was required of it. That is not the result achieved by the contract which I am considering.