Drafting terms and conditions or negotiating a contract? Be wary of “unusual” and “exorbitant” exclusion clauses
When drafting a set of terms and conditions, it is important to note that companies must adhere to the requirements contained in the Unfair Contract Terms Act 1977 (UCTA), particularly in relation to any exclusion clauses seeking to limit liability. This was highlighted in the recent case of Phoenix Interior Design Ltd v Henley Homes plc and another  EWHC 1573 (QB), where the High Court found that an exclusion clause contained in a supplier’s standard terms and conditions failed the “reasonableness” test set out under UCTA, and was therefore ineffective. The case serves as a reminder to parties that when drafting exclusion clauses they ensure that they comply with the requirements set out in UCTA.
Background and facts
The case concerned a dispute as to whether the goods and services provided by an interior design company to a hotel in Scotland were defective. Pending resolution of this dispute, Henley Homes plc (Henley Homes) retained the balance of the monies owed to Phoenix Interior Design Ltd (Phoenix), who subsequently attempted to rely on an exclusion clause.
The clause stated as follows:
“The Seller shall be under no liability under the above warranty (or any other warranty, condition or guarantee) if the total price of the Goods has not been paid by the due date for payment".
The practical effect of this clause meant that the customer would be deprived of its rights of redress against the supplier for any liability attributable to the supplier, if the customer did not pay the total price of the goods by the due date. For example, Phoenix would be absolved of any liability whatsoever for any innocent mistake as to the total payment made, a delay in payment due, or non-payment due to concerns with quality.
Henley Homes’ arguments
Henley Homes therefore argued that such a clause could not be effective under UCTA. Firstly, they argued that even though the contract was said to be subject to the terms and conditions “overleaf”, such terms were never attached to the contract. Rather, they were sent separately in hard copy and by email, and they argued that these had not been effectively incorporated as part of the contract.
Secondly, Henley Homes argued that even if the court found that the terms and conditions had been effectively incorporated (thereby also including the exclusion clause), the exclusion clause itself must fail as it would fall foul of the section 11 reasonableness requirement under UCTA.
Whilst the judge found that the terms and conditions had been effectively incorporated into the contract, he held that the exclusion was an unusual clause which was “tucked away in the undergrowth” of detailed terms and conditions and not brought to the defendant’s attention.
There was also further ambiguity as payment needed to be made by the payment due date. However, as regards a portion of the sum owed, there was no due calendar date. Instead, this was the date of an event (completion) which the judge found did not carry the same level of certainty as a specified calendar date. In these specific circumstances, it would not always be clear to the customer that completion had occurred and therefore when it was obliged to make payment, and when, for a variety of reasons, payment on the day of completion may be impractical.
Finally, the judge also determined it was “exorbitant” that the consequences of any slight delay in payment or deduction meant that Phoenix was absolved from any liability.
For those reasons the judge determined that the clause failed to satisfy the reasonableness requirements of UCTA.
Practical considerations when drafting exclusion clauses
The judge’s reasoning in this case as to why the exclusion clause was ineffective provides guidance as to what parties should and should not do in a practical context:
1. Parties should be wary of drafting clauses which are far beyond market standard. The judge in this case queried why an anti-set off clause was not used instead, which is commonly used and has a different rationale and effect to the clause here.
2. The party which drafts the exclusion clause must make sure that it is clearly highlighted to the party it is contracting with and not “tucked away in the undergrowth” of standard terms and conditions. The consequences of a failure to comply with any obligation should be clearly expressed.
3. Clauses which are “exorbitant” in relation to the ultimate consequences (such as in this case, the removal all rights of redress in relation to the quality of the goods and services provided) are likely to be ineffective.
The case sets out the importance of ensuring that any exclusion clauses are not so onerous as to fall foul of UCTA, and that any unusual clauses are not buried in the fine print in the hope of avoiding the other party’s attention. Instead, these provisions should be clearly visible and any unclear consequences should be clearly highlighted. A high level of care must be taken when drafting a set of terms and conditions. However, if both parties are of similar bargaining power such clauses are likely to be heavily negotiated and are therefore less likely to be contested on the basis that they do not adhere to the UCTA reasonableness requirements.