Exclusion clause fails the UCTA reasonableness test

An exclusion clause in a supplier’s standard terms failed to satisfy the requirement of reasonableness under the Unfair Contract Terms Act 1977 (UCTA).

Background

In Phoenix Interior Design Ltd v Henley Homes plc and another [2021] EWHC 1573 (QB) Henley Homes, a property development company, commissioned Phoenix Interior Design Ltd to design and furnish its Dunalastair Hotel in Scotland.

Phoenix’s standard terms and conditions had been incorporated into a contract between the parties by reference, where Phoenix had provided hard copies of its terms at a meeting with a buyer and in emails to that buyer. 

Phoenix brought an action for non-payment, claiming that Henley had not paid half of the outstanding balance under the contract. Henley counterclaimed that the final 50% was only payable on completion and defective performance meant that completion hadn’t taken place. In the alternative, Henley was entitled to compensation for defective performance (which exceeded the unpaid sum).

In its defence of the counterclaim with regards to defective performance, Phoenix sought to rely on an exclusion clause within its standard conditions. The case considered a number of issues, including the quality of performance, but this insight focuses on the element relating to reliance on the exclusion clause.

Phoenix’s standard terms included a clause that stated:

“8 Warranties and Liability

8.1  Subject to the conditions set out below the Seller warrants that the Goods will correspond with their specification at the time of delivery (subject to the Seller's right under clause 3.3 to alter and amend any specification) and will be free from defects in material and workmanship for a period of 3 months from delivery.

8.2  The above warranty is given by the Seller subject to the following conditions:

……..

8.2.3  the Seller 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. “

Phoenix argued that pursuant to clause 8.2.3, the non-payment of moneys due meant that the warranty did not apply.

Where standard terms seek to exclude liability UCTA applies; the clause is subject to the reasonableness test (which includes having regard to the matters specified in schedule 2 to the Act); and the onus is on the party seeking to rely on the term to prove that it passes the test.

Judgment

Whilst judgement was ultimately found in favour of Phoenix for Henley’s non-payment there was a reduction in the damages actually awarded to take into account the High Court’s finding that Phoenix was, in minor circumstances, in breach of the warranty at clause 8.1, and that Phoenix was not entitled to rely on the exclusion clause in respect of the breach of warranty as Phoenix had failed to demonstrate that the exclusion clause satisfied the reasonableness test.

The High Court held that Phoenix’s standard terms and conditions were incorporated into the contract and turned to assess the issue of whether they were unreasonable for the purposes of UCTA.

In holding that Phoenix had failed to discharge the onus of showing that clause 8.2.3 satisfied the requirement of reasonableness, the High Court pointed to the following factors:

• This was an unusual clause, which was was “tucked away in the undergrowth of the Standard Terms and Conditions without any particular highlighting of the consequences of even the slightest delay in payment”.
• The High Court noted that the clause was potentially “exorbitant” as the slightest delay or deduction could remove all the customer’s remedies relating to the quality of goods.
• The clause posed difficulties in its practical application – the clause purported to take effect if the total price was not paid by the due date but there was no calendar due date for payment, which created the problem of uncertainty, with the customer not knowing whether there had been completion.
• The above was exacerbated by the fact that payment under contract was supposed to be on the date of completion (not a number of days after).
• If the customer sought to ensure that it received the full benefit of the warranty at clause 8.1, it would have needed to pay in full on delivery, which would be in advance of completion. This would mean that the customer would risk losing some leverage against future defective or non- performance as it would no longer have the right to withhold payment for future issues arising.

The judgement also pointed to the following schedule 2 UCTA matters being of particular relevance:

• whether the customer knew or ought reasonably to have known of the existence and extent of the term (schedule 2 c);and
• whether it was reasonable at the time of the contract to expect that compliance with the term would be practicable (schedule 2 d).

As such, Phoenix had failed to discharge the onus under section 11(5) of UCTA, to show that the exclusion clause it sought to rely on satisfied the reasonableness test.

Comment

The case is a useful reminder of the application of the reasonableness test under UCTA. It highlights the importance of ensuring that the terms are incorporated but also that exclusions are clearly signposted. The existence of a clause seeking to exclude liability should be clearly brought to the attention of the counterparty and should not be buried in the small print. It is also important to ensure that there aren’t significant difficulties in practice of a party complying with any clauses which may lead to an exclusion of liability for its counterparty.