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Blanket Exclusion of Liability for Defective Product - International Law Office

International Law Office

Product Regulation & Liability - United Kingdom

Blanket Exclusion of Liability for Defective Product

June 28 2007

Facts
Issues and Decision
Obiter Remarks
Comment


Facts

In Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 1900 (Comm) the claimant, Balmoral Group Ltd, manufactured a wide range of products, including oil storage tanks, by a process called rotomoulding. The defendants supplied Balmoral with the material to manufacture such tanks, a polymer called borecene.

Balmoral discovered that the tanks it made using borecene experienced a very high failure rate, as a result of which there were several reported spillages and customer claims. Balmoral sought £50 million in damages from Borealis for breach of contract, misrepresentation and negligence.

Issues and Decision

Balmoral sought to rely on two terms implied by the Sale of Goods Act 1979.

First, it claimed under Section 14(2) that the borecene was of unsatisfactory quality. The judge quickly dismissed this, holding that the material supplied was neither defective nor incorrectly manufactured. Borecene was suitable for rotomoulding generally.

Second, Balmoral claimed under Section 14(3) that borecene was not reasonably fit for the purpose of manufacturing oil tanks by rotomoulding, a purpose that had been specifically made known to Borealis. Extensive expert evidence was offered by both sides as to the suitability of borecene.

The judge emphasized that the onus was on Balmoral to prove the material's unsuitability for the purpose, and held that Balmoral had failed to do so. He considered that the failure rate of the tanks could be explained by Balmoral's own failure to optimize production techniques after switching to a new material. The borecene supplied was fit for its purpose; therefore, there was no breach of Section 14(3).

Obiter Remarks

Although he had determined that that there had been no breach of the implied terms of satisfactory quality or fitness for purpose under Section 14, the judge went on to consider whether the exclusion and limitation of liability clauses contained in Borealis's standard terms satisfied the requirement of reasonableness under the Unfair Contract Terms Act. The judge considered that the question was "quite finely balanced".

Exclusion clauses
The clauses at issue provided as follows:

    "Save as [complying with the seller's standard specification]:

    • all conditions and warranties, whether express or implied by statute, common law or otherwise howsoever, as to the quality or fitness for purpose of the goods or their correspondence with description are hereby expressly excluded to the fullest extent permitted by law; and

    • the seller shall be under no liability for any loss or damage (whether direct, indirect or consequential) howsoever arising which may be suffered by the buyer by reason of any defect of whatever kind in the goods.

    In any event the seller's liability in respect of any defect in the goods shall not exceed the purchase price of the goods.
    "

The judge examined the key exclusion clauses together. In effect, they purported to relieve Borealis of all liability for loss suffered by Balmoral as a consequence of a defect in the borecene. In purporting to exclude all warranties as to quality and fitness for purpose "to the fullest extent permitted by law", Borealis was effectively seeking to exclude the implied warranties under Sections 14(2) and (3) of the Sale of Goods Act.

Reasonableness of the exclusion clauses
In considering whether the terms satisfied the requirement of reasonableness, the judge had regard to Schedule 2 of the Unfair Contract Terms Act, which provides guidelines for determining whether an exclusion clause is reasonable. Among the factors to be considered are:

  • the relative strengths of the parties' bargaining positions;

  • whether a party has received an inducement to agree to the exclusion clause; and

  • whether the buyer knew or ought reasonably to have known that the clause existed.

The judge was unswayed by the argument that Balmoral's own standard terms contained provisions whose effects were similar to those of Borealis's standard terms. The mere fact that a purchaser has similar conditions of sale to those it impugns cannot be conclusive, particularly as the purchaser might find it difficult to defend its terms of sale if challenged under the act. It is for the party which seeks to rely on an exclusion clause to prove its reasonableness and the judge concluded that Borealis had failed to show that the exclusion clauses were reasonable.

The judge emphasized that in deciding whether an exclusion clause is fair and reasonable, regard must be had to the circumstances which were or ought reasonably to have been known or contemplated when the contract was made, not to the question of whether it would be fair and reasonable to allow reliance on the term once the events had taken place. When the contracts were made, Borealis knew that Balmoral was buying the borecene to make oil tanks and that it was relying on Borealis to supply a polymer which was capable of being used to make consistently satisfactory tanks. The supply of a product with a latent defect which made it impossible to manufacture consistently satisfactory tanks would confound such assumptions, in which case a blanket exclusion of all liability was prima facie unreasonable.

In addition, the judge noted that the determination of the reasonableness of a contractual exclusion required consideration of whether the allocation of risk effected by the exclusion was appropriate. He was not persuaded that requiring Balmoral to bear the entire risk of a latent defect in Borealis's product was appropriate. The Sale of Goods Act indicates that the seller should bear such a risk, but commercial realities are such that parties regularly make agreements among themselves which allocate risk. A court should not lightly treat such agreements as unreasonable. However, the present case was such that it could be distinguished from Watford Electronic Limited v Sanderson CFL Limited [2001] EWCA Civ 317, in which the contractual parties in dispute had undertaken serious negotiation over the incidence of risk.

Although Balmoral and Borealis had roughly equal bargaining power when negotiating the price, there was very little scope for Balmoral to negotiate terms with Borealis - Balmoral effectively had to 'take it or leave it', a position which would have been similar throughout the industry. Balmoral was not offered a specific inducement to agree to the exclusion clauses and, being aware that standard terms existed, it had only to study such terms to discover the existence of the exclusion clauses. Furthermore, if borecene had been shown to be unsuitable for the agreed purpose, Balmoral would have suffered a massive loss. It would be unreasonable in such circumstances to deny Balmoral any redress from the manufacturer.

Comment

The answer to the question of whether the borecene supplied by Borealis was satisfactory and reasonably fit for Balmoral's purpose rested on an examination of expert evidence and an evaluation of borecene's fitness for an agreed purpose. This evaluation was necessarily a fact-specific process. However, the more interesting aspects of the case are the obiter dicta (ie, remarks in passing) on the subject of exclusion clauses. As the decision is under appeal, these aspects could achieve greater prominence.

The judge set Borealis a difficult hurdle to overcome. He began with the proposition that the parties had agreed a purpose for the product and that the agreed purpose should not be frustrated; any attempt to exclude liability where the product was unsuitable was unlikely to be successful. Only if the parties had made an obvious, conscious decision to allocate risk to the buyer would this be undermined. As a result, the decision establishes that even in a business context, mere reliance on written standard terms to exclude the warranties implied by Section 14 is unlikely to have effect.

Finally, a clause purporting to exclude liability under an implied warranty in the act will be wholly ineffective against a consumer. The Borealis exclusion clause was subjected to a test of reasonableness only because the parties were dealing in a business-to-business context.


For further information on this topic please contact Richard Harrison or Conrad Williams at Lovells LLP by telephone (+44 20 7296 2000) or by fax (+44 20 7296 2001) or by email (richard.harrison@lovells.com or conrad.williams@lovells.com).



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