Liability successfully limited to £3,225 in £30 million fire damage claim

In this recent finding in the Scottish courts, Lord Tyre restated the reasonableness test for the applicability of limitation of liability clauses.

On 10 November 2009, a fire broke out at Benkert UK Limited's industrial premises in Clackmannanshire resulting in losses of almost £30 million. Benkert printed paper, used mainly in the manufacture of cigarette filters, which involved the use of highly flammable solvent-based ink. The inks and solvents were mixed by dispensers which were supplied and maintained by Paint Dispensing Limited (PDL). Benkert contended the fire was caused by PDL's negligence. PDL denied liability and argued the fire was caused (or materially contributed to) by Benkert, and that in any event PDL's liability was contractually limited to the sum of £3,225.06.

After much expert discussion, it was ultimately determined that it was more likely than not that the fire's inception was at the dispenser and was not attributable – even in part – to Benkert. Lord Tyre preferred the explanation that PDL had breached its contractual and common law duty in failing to recognise and recommend a safer method of mixing and dispensing ink.

Reasonableness of limitation of liability clause

The maintenance and repair contract between Benkert and PDL, extant at the time of the fire, was signed by Benkert's production manager. It was materially the same as previous contracts, and included Clause 5.3 which stated "THE CUSTOMER'S ATTENTION IS SPECIFICALLY DRAWN TO THE PROVISIONS SET OUT BELOW":

Clause 5.3 limited PDL's liability to the Basic Charge, defined in the schedule as £3,225.06. The losses sustained by Benkert as a result of the fire amounted to c. £30million. Under the Unfair Contract Terms Act 1977 (as the contract was governed by the law of England & Wales, although there was no material difference from the Scottish provisions) a party cannot enforce a contract term which excludes or restricts liability in respect of his breach unless that contract term satisfies the requirement of reasonableness.

Section 11 of the 1977 Act requires that "the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made." The applicable factors to the reasonableness of the clause in this case were:

• The resources which [PDL] could expect to be available to him for the purpose of meeting the liability should it arise (s11(4)(a))
• How far it was open to [PDL] to cover himself by insurance (s11(4)(b))
• The strength of the bargaining positions of the parties to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met (Schedule 2(a))
• Whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between parties) (Schedule 2(c))
• Whether the goods were manufactured, processed or adapted to the special order of the customer (Schedule 2(e))

There was no suggestion that clause 5.3 was not properly incorporated into the agreement due to inadequate notice of an unusual or onerous term. While PDL were certainly insured – in fact, the action was being defended by their insurers – Benkert were in a preferable position in terms of predicting the potential losses of any insurable event at their plant. Even though the production manager had not read the contract in detail, and had no memory of reading clause 5.3, PDL had certainly given the clause adequate prominence. Bargaining power was held to be neutral and there was nothing in relation to the bespoke nature of the machinery which affected the reasonableness.

It was held, therefore, that Benkert were only entitled to the limited sum of £3,225.06, regardless of the magnitude of the losses and the multitude of factors the court must consider in order to find such a clause reasonable.

Impact

The importance of ensuring any attempts to restrict or limit liability in contractual terms are compliant with the requirement for reasonableness cannot be overstated. A carefully-worded and sufficiently-highlighted limitation of liability protected PDL in this instance against the vast majority of a £30 million claim. All parties would be well advised to read, understand the potential consequences, and consider the enforceability of any limitation of liability clauses proposed, with reference to the 1977 Act and the developing case law.

This article was written and originally posted by leading law firm Brodies LLP. 

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