England: Corporate and Commercial Update - July 2012
Exclusion of Terms Implied by Law
International Supply Contracts
It is to be expected that a party to a contractual negotiation will look, where possible, to agree terms that are more favourable to it than the other contracting party. The respective bargaining positions of the parties and their skills as negotiators will dictate the extent to which each manages to protect its interests and limit its exposure to risk. In contracts for the sale of goods exclusion clauses are, when subject to discussion, typically amongst the most heavily negotiated terms. A seller will endeavour to limit or exclude its liability to the buyer for the sale of the goods as far as it is able, and conversely the buyer will attempt to assume as little of this contractual risk as possible.
A contract for the sale of goods under English law is governed by the Sale of Goods Act 1979 (SGA). The SGA provides protection for buyers by implying conditions into a contract that goods sold by a seller will correspond with their description, be fit for purpose and be of satisfactory quality.
Predictably, it is not uncommon for a seller to attempt to limit or exclude its potential liability in the event of its breach of these conditions implied by the SGA. The Unfair Contract Terms Act 1977 (UCTA) determines that a seller cannot exclude these implied terms in contracts with consumers, but states that a seller may, subject to a test of "reasonableness", successfully exclude them in business to business contracts. There is one further exception; UCTA does not apply to business to business contracts for the international supply of goods, nor where the contract's governing law is only English law by choice of the parties.
The form and scope of exclusion clauses has frequently been considered by the courts who will have regard to circumstances which were, or ought reasonably to have been, in the contemplation of the parties when the contract was made. The courts may take the custom and practice of the parties' relevant trade into account, or analyse the parties' historical relationship for a course of dealing when assessing what constitutes "reasonable" for the purposes of UCTA.
Moreover, if a seller wishes to rely on an exclusion clause in a business to business contract it must be expressed in a way that clearly and unambiguously conveys the liability it is attempting to exclude. If an exclusion clause is vague or uncertain it will generally be construed against the party seeking to rely on it. Specifically case law has suggested that in order to exclude conditions implied by statute such as the SGA, the language of an exclusion clause must expressly refer to "conditions" (KG Bominflot Bunkergesellschaft für Mineralöle mbH & Co v Petroplus Marketing AG  EWCA Civ 1145).
The form that a valid exclusion clause must take has recently been considered by the High Court in Air Transworld Ltd v Bombardier Inc  EWHC 243 (Comm) (Transworld). The case involved the sale of an aircraft which, 14 months after delivery, developed a serious fault with the main engine pump. The buyer argued that implied terms of the SGA had been breached as the aircraft sold to it was unfit for purpose and not of satisfactory quality.
The contract contained a capitalised exclusion clause which attempted to exclude terms implied by statute such as the SGA. In Transworld the acts of offer and acceptance and, separately, the carriage of goods, all took place across English, Canadian and Portuguese borders. The buyer was unable to rely on UCTA as the facts demonstrated that this was an international supply contract. Additionally, the contract was governed by English law only by the choice of the parties; otherwise the default governing law would have been Canada. There was therefore, no requirement in this case for the court to consider the "reasonableness" of the exclusion clause under UCTA.
The buyer argued that the exclusion clause was not expressed clearly enough to be relied upon, in particular that it did not make specific reference to "conditions" that were to be excluded. Case law was clear that in order to exclude the SGA conditions, there had to be an explicit exclusion of all "conditions". The High Court disagreed. It found the contractual phrasing precise and unambiguous enough such that no person reading the clause could be in any doubt that every promise implied by law was excluded.
Transworld demonstrates that the SGA may be validly excluded without making specific reference to "conditions" as long as the clause makes it clear that the parties are intending that the only remedies that they will have are those contained in the agreement itself. Although the seller was successful in Transworld, this case continues to highlight the importance of precision when drafting exclusions of statutory terms and conditions, in particular where (unlike in the Transworld case) the UCTA "reasonableness" test were to apply. Rather than leave it to the court to construe the meaning of an exclusion clause, a seller would be well advised to ensure that an exclusion clause should be drafted carefully, without ambiguity and in a form that makes specific reference to "conditions" intended to be excluded.
Transworld comes on the back of a number of important cases in recent years that have considered exclusion clauses. Internet Broadcasting Corporation Ltd (t/a NetTV) and another v Mar LLC (t/a MARHedge)  EWHC 844 (Ch) (NetTV) controversially held that there was a strong presumption that a standard exclusion clause should not apply to deliberate, repudiatory breaches of contract. The decision was widely criticised; in assessing a defendant's liability for breach many thought that one should look simply to the construction of the exclusion clause itself, rather than create any presumption.
In AstraZeneca UK Ltd v Albemarle International Corporation and another  EWHC (Astrazeneca) the Judge Mr Justice Flaux challenged and effectively dismissed the presumption set out in NetTV stating it "does not properly represent the current state of English law". Accordingly, following the comments made in Astrazeneca, parties entering into business to business contracts should no longer make an assumption that an exclusion clause will not apply to a deliberate breach. As with Transworld these two cases further demonstrate the value of applying careful thought and detail when drafting, and seeking to rely on, exclusion clauses.