Standard terms in B2B contracts and reasonableness

18th July 2016

 

The Unfair Contract Terms Act 1977 (UCTA) applies to clauses that seek to limit or exclude liability in business-to-business contracts.  Section 3(2) of UCTA states that a party cannot rely on a contract term to exclude or limit liability for breach except in so far as the term satisfies the requirement of “reasonableness”.  UCTA will only apply, however, where the parties are entering into the contract on written standard terms of business (section 3(1)).  So, UCTA will not apply to negotiated contracts.

The recent High Court decision in Commercial Management (Investments) Ltd v Mitchell Design and Construct Limited and another [1] concerned the very common situation where the contract was entered into partly on standard terms and partly negotiated – did UCTA apply to the contract in this situation?

The contract in question was to design and build a warehouse. The first defendant, Mitchell, entered into subcontracts with the second defendant, Regorco.  The claimant was the beneficiary of a warranty given by Regorco.  When a dispute arose as to the performance of the subcontract works, an issue for determination by the Court concerned a provision in Regorco’s standard terms, which required claims to be notified within 28 days of the appearance of the alleged defect, or of the occurrence of the event complained of and, in any event, within one calendar year of completion of the works.  If this provision was effective then the claimant would be out of time.

The subcontractor had submitted its standard terms to Mitchell but had made several manuscript amendments following a “battle of the forms” exchange of standard terms and conditions with Mitchell.

The first issue for the High Court was whether Regorco’s standard terms had been effectively incorporated into the contract and the Court held that they had not been. The Court therefore did not, strictly, need to decide the issue of whether the amendments to the standard terms would mean that UCTA did not apply but did so nonetheless.

Regorco’s group risk manager said in evidence that the company’s terms were negotiable “for a price” but that in practice the company did what it could to ensure its standard terms were accepted.

The Court was satisfied that Regorco was trading on its “standard terms of business”, with the consequence that UCTA would apply. It drew a distinction from the position where the relevant terms were being used for a one-off project and the situation, like here, where the same terms were to be used time and time again on different contracts and where, in most cases, some amendment was made to them by the main contractor.

It also rejected the argument advanced by Regorco that, to be dealing on its standard terms, the entirety of the terms and conditions had to be incorporated into the subcontract, which they hadn’t been.

Regorco also referred to internet sales where amendments to contract terms are very rare, to draw a contrast from what happened in this particular case, but the Court was unconvinced of the relevance of this, saying that the provisions of UCTA had not been drafted with online contracts in mind.

Still obiter, the Court went on to say that the clause would in any event have been unreasonable as a substantial time would often elapse between completion of the works and visible defects.

The case is useful in highlighting the extent to which standard terms of business can be negotiated whilst continuing to remain subject to the UCTA reasonableness requirement.

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[1] [2016] EWHC 76 (TCC)