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It's fair when it's not unfair – the Unfair Contract Terms Act 1977 in Scotland

15 December 2022

The manner in which the Scottish courts will assess a limitation of liability clause under the Unfair Contract Terms Act 1977 (UCTA) has been clarified by the Inner House in Benkert v Paint Dispensing Limited [2022] CSIH 55 (9 December 2022).

As part of the case, in which DWF acted successfully for the defender, the court also took the opportunity to provide some more particular guidance where those clauses exist in contracts between commercial entities.

Section 24(4) of UCTA provides that the onus of proving it was fair and reasonable to incorporate a clause in a contract lies on the party seeking to rely on that clause.  In most cases, that will be the vendor of goods or services, as was the case here, where the defender had provided maintenance services to the pursuer, its customer.  After its premises were badly damaged in a fire, the pursuer sought damages from the defender, who (among other defences) relied on a limitation of liability clause to restrict its liability to £3,225.06.

As the court noted, the contract in this case was not complex.  It contained ten clauses and a brief schedule over nine pages (including a cover sheet) in a normal font size.  The clause purporting to limit liability to a fixed amount was the only clause to be prefaced with a warning in underlined capital letters.

The Inner House (in a unanimous opinion) held that:

  • The factors set out in Schedule 2 to UCTA, while not binding in Scotland, can still be taken into account by the court as guidelines when carrying out a balancing exercise to determine whether the clause is fair and reasonable.  Applying the English authority of George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, the balancing exercise is described thus: "in applying the reasonableness test [under UCTA], the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide on which side the balance came down".
  • The balancing exercise to be carried out under the Scottish provisions is similar in nature to that required in the rest of the United Kingdom; therefore authorities from other UK jurisdictions will be of assistance.
  • A relatively high degree of deference will be afforded to the balancing exercise carried out at first instance.  The Inner House will not interfere unless it is satisfied that the lower court proceeded upon an "erroneous principle or was plainly or obviously wrong".

In relation to carrying out the balancing exercise:

  • It would be unrealistic for the court to ignore the size, scale and resources of the contracting parties; those factors are likely to have a bearing on their respective bargaining power.  What might not be a reasonable limitation of liability towards a consumer, who will often be in a relatively weak bargaining position, might be reasonable if applied to a business.
  • Commercial parties are generally the best judges of what is fair and reasonable for them.  The court should be reluctant to interfere with a bargain made by a commercial party.  It should not lightly make a finding that a large commercial concern with access to legal and contractual expertise entered into an unreasonable agreement, or agreed terms in a contract that were not fair and reasonable.  (Whether or not that party in fact chose to obtain legal or other advice is irrelevant.)
  • Section 24(3)(b) of UCTA requires the court to consider the extent to which the party attempting to rely upon a limitation clause could obtain insurance. That is a broad question that takes into account the commercial realities associated with obtaining insurance.  One of those realities is that obtaining insurance to cover potential customer losses will usually result in a price increase for the customer. If, for example, the result of the party taking out insurance would have been a material price increase for the customer, that would be relevant to the question of whether it was in fact “open” to the party to insure against that risk. In some circumstances, it may be more economical for the customer to insure separately against a risk which may or may not materialise.

As the leading authority on limitation of liability clauses in Scotland, the decision provides useful guidance.  The courts will generally look to enforce limitation of liability clauses entered into between commercial entities where the clause is reasonably prominent and the parties have had access to professional advice.  It is always recommended that commercial parties entering into contracts with limitation of liability clauses obtain legal advice before signing.  Where a dispute has arisen under a contract, parties are now able to assess at an early stage whether the limitation of liability clause is likely to be enforceable.

Please contact Andrew Lothian for more information.

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