Limitation of Liability  © Daniel Atkinson 1999

Model Forms of Plant Contract use exclusion and limitation of liability clauses to define and allocate risk between the parties. In supply and installation contracts for mechanical and electrical equipment, Purchasers will normally require tests before delivery and further performance tests on installation, with a right of rejection at each stage. With the safeguard of tests to verify the capacity and capability of equipment and the right of early rejection, many Purhasers adopt terms which limit a Supplier’s liability for any defects appearing during use of the plant in which the equipment operates. The Purchaser benefits by obtaining sensible prices, whilst the supplier knows the extent of his liability. The scheme may work against the Purchaser if he fails to exercise his right of rejection of the equipment when it arises. He may find that the limitation clause prevents him later making any recovery at all for the effects of the defective equipment. This is what happened in the recent case of British Fermentation Products Limited v Compair Reavell Limited (June 1999) TCC.

The Purchaser in this case was British Fermentation Products Limited who required a compressor to supply air under pressure to aerate and mix wort to produce yeast. The compressors were required to be adjustable within a specified range so that energy was not wasted when the need for air was reduced. The Supplier Compair Reavell Limited agreed to supply and install the compressors to specification for some £300,000.

Tests were carried out on the compressors before delivery, and they failed to perform as specified. The Purchaser had an express right under the contract to reject the compressors. Although enquiries were made and substitute compressors found, the compressors were not rejected.

The compressors were delivered, but still failed to perform as specified. The Purchaser had a second express right under the contract to reject the compressors providing it was within a reasonable time after delivery. Again the Purchaser did not reject the compressors.

If the Purchaser had exercised either of the rights of rejection, he would have been entitled to have the price of the substitute compressors deducted from the contract price, and the Supplier would have paid the reasonable costs of obtaining substitutes.

The Supplier had an express obligation under the contract to remedy any defects which appeared within 12 months of delivery, and he accordingly attempted to rectify the known defects in performance. The compressors still did not perform to the contractually guaranteed level as shown by the tests performed before handover. It was common ground that the defects were due to faulty materials workmanship and design.

The Purchaser claimed for the consequences of the defects; the excessive consumption of electricity over the life of the compressor amounting to £1million together with loss of capacity and downtime. The Supplier relied on an exclusion clause in defence, but the Purchaser argued that the parties could not have intended that the Supplier would have no liability to the Purchaser whatsoever, as this would fly in the face of business common sense.

His Honour Judge Bowsher QC held that the exclusion clause did not exclude all liability. It did not exclude liability to pay for substitute compressors if the Purchaser exercised its right to reject the compressor following failure to pass a test. Since the Purchaser had not exercised its two separate rights to reject the compressor, it could not later complain of the failure of the compressor to come up to specification. The whole intention of the scheme would be defeated if liability for breach of express terms as to capacity could be resurrected as liability for failure to rectify defects. The amount of damages of over £1million claimed in the action compared to the purchase price of £300,000 showed the good business commonsense of the scheme. It was held therefore that the exclusion clause was effective to exclude liability for the defects in the compressor.

It was also held that the exclusion clause was not unreasonable. The Purchaser made a choice between loss of production for a limited time in obtaining and installing a replacement at the cost of the Supplier, and less efficient working for the life of the Supplier’s compressor if it was not replaced. That choice was foreseeable at the time of making the contract.

Decisions on particular exclusion clauses have to be approached with some care because reasonableness has to be considered in the light of the particular circumstances of the parties at the time the contract was made. Nonetheless the decision does show how a commonsense and practical scheme dealing with the capacity and capability of equipment as well as defects will allow exclusion clauses to be effective even if widely drawn. Purchasers must understand the scheme and when to exercise their rights.