Let the buyer beware in a commercial contract, as exclusion clauses are upheld

Year Published: 2012

A recent High Court decision in Air Transworld Ltd v Bombardier Inc has illustrated why having an effective exclusion clause incorporated into a business contract can be the simplest and cheapest type of protection and insurance against potential liability.

In this case, an aircraft supplied by the Defendants developed a serious fault after delivery. The Claimant was seeking to rescind the contract and recover the purchase price. The exclusion clause limited the Defendant’s obligation in the event of a fault arising to repair or replacement or reworking of the defect.

Both Parties had the benefit of legal advice when the Contract was signed and the Court decided that they must have considered and agreed the allocation of risk between them at that point. It was not therefore, open to the Claimant to reapportion the risk on the occurrence of a fault, no matter how serious. The exclusion clause was therefore upheld.

This decision follows the 1980 decision from the House of Lords in Photo Productions Ltd v Securicor, when it was decided that Securicor were not liable when a night watchman employed by them to look after a factory owned by Photo Productions, set fire to it by throwing a match into a pile of cardboard boxes.

Securicor were protected from liability because there was a clause in the contract that excluded liability for any injurious act or default by an employee, unless it could have been foreseen by the exercise of due diligence by Securicor.

The Court’s view was that a reasonable businessperson knows the risks which he is assuming when he enters into a contract and it is not for the Court to interfere with the clear and unambiguous language of an exclusion clause – no matter how unreasonable the Court itself may think it is. The Court also observed that either party could have insured against the risk.

The lesson for suppliers is to make sure that you have clear and unambiguous exclusion clauses in your contracts with other businesses and to ensure that your contracts apply to your relationship with business customers.

The lesson for purchasers is to read and understand the extent of your supplier’s exclusion clauses and, if possible, to insure against risk for which the supplier will not be contractually responsible.

Different considerations apply in consumer contracts and this article does not relate to them.

We can provide training in contractual risk management for your sales and purchasing teams. For further information, please contact Peter Moore on 0161 475 7659 or 07825 081858.

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