A case involving two commonly occurring legal issues under a complex, long-term supply agreement: (1) incorporation of terms / battle of the forms and (2) exclusion of warranty of fitness for purpose and liability for economic loss held unreasonable under UCTA.
- The buyer’s awareness that the seller considered that its standard terms applied, coupled with the buyer’s course of conduct whereby it not only failed to object, but also promptly paid invoices on such terms, meant that the seller was entitled to rely on such conduct and to assume that its terms applied throughout.
- The seller failed however to show that its UK terms, excluding both the warranty of fitness for purpose and liability for loss resulting from any defect of any kind in the goods, were reasonable under the Unfair Contract Terms Act 1977 (UCTA) in the context of the particular arrangement between the parties.
Case Name & Citation: Balmoral Group Limited v (1) Borealis [UK] Limited (2) Borealis AS and (3) Borealis A/S  EWHC 1900 (Comm)
Date of Judgment: 25 July 2006
Background: Between 1997 and 2002, Balmoral (the buyer) made nearly 400 purchases from Borealis UK, then later from Borealis Norway or Borealis Sweden (the seller) of large quantities of a substance called borecene used to manufacture the buyer’s oil tanks. Within a short period of service, such tanks started to split causing substantial losses to the buyer who claimed under sections 14(2) and 14(3) of the Sale of Goods Act 1979 (SGA) that the borecene was not fit for purpose and that as a result of this unfitness its borecene-made tanks failed.
The buyer failed to establish that the borecene supplied by Borealis was of unsatisfactory quality and not reasonably suitable for the purpose of making its tanks. However, Mr Justice Clarke did proceed to consider which party’s terms would have applied if the finding had been different, and also the reasonableness of such terms.
An application for permission to appeal to the Court of Appeal has been filed, but is yet to be heard.
(1) Whose standard terms applied?
From 1994 onwards, the seller rendered invoices with its standard terms either on the back or as one of the pages of the invoice. The contracting party was initially Borealis UK during which period the seller claimed that its UK terms were incorporated into all its contracts. When manufacturing shifted to Borealis Norway and Borealis Sweden, with Borealis UK acting as commercial agent, the seller contended that its General Terms and Conditions were incorporated into all relevant contracts. The buyer argued that the seller’s terms were never incorporated.
From December 1995, the buyer’s purchase orders referred to its standard terms. The buyer’s standard terms contained a warranty that the goods would be of satisfactory quality and fit for the purpose made known by the seller.
The seller’s UK terms provided that:
“13(A) The Seller warrants that the Goods will comply with the Seller’s standard specification for the Goods at the date of the contract. If any of the Goods do not conform to that warranty the Seller will at its option
- replace the goods found not to conform to the warranty; or
- take such steps as the Seller deems necessary to make the Goods conform to the warranty; or
- take back those Goods found not to conform to the warranty and refund that part of the purchase price.”
“13(C) Save as provided in sub-clause (A) hereof
- all conditions and warranties whether express or implied by statute, common law or otherwise howsoever, as to the quality or fitness for any of the goods or their correspondence with description are hereby expressly excluded to the fullest extent permitted by law, and
- the Seller shall be under no liability for any loss or damage (whether direct, indirect or consequential) howsoever arising which may be suffered by the Buyer by reason of any defect of whatsoever kind in the goods.”
“13(E) In any event the Seller’s liability in respect of any defect in the Goods shall not exceed the purchase price of the Goods.”
The seller’s General Terms and Conditions provide that
“6.1 Borealis does not assume any responsibility for Products being suitable for any particular purpose unless Borealis in writing has approved such suitability.”
“6.3 Borealis’ accumulated liability… for whatever reason including but not limited to delays, defect and shortfall shall at the option of Borealis be limited to either an exchange of the defective Products for non-defective Products or a refund of the invoiced value of the said Products.”
The buyer contended that it was neither fair nor reasonable for the seller to include terms that exclude liability for breach of the core obligations of satisfactory quality and fitness for purpose.
(1) Whose standard terms applied?
In reaching his conclusion that the seller’s standard terms had applied throughout, Clarke J identified the relevant test as being “whether that which each party says and does is such as to lead a reasonable person in their position to believe that those terms were to govern their legal relations”.
The seller made it clear to the buyer at the start of the parties’ dealings that prices were “subject to normal terms and to current conditions of sale”. The buyer had also received an invoice with the seller’s terms on the back. This invoice was reviewed and signed by the managing director of the relevant division of the buyer, before payment was made. This process was repeated by the buyer for all subsequent invoices. The seller was therefore reasonably entitled to assume that the buyer had accepted the applicability of the conditions.
The buyer contended that its own standard terms applied because it had faxed an order to the seller containing a reference to its terms and conditions. This argument was dismissed by Clarke J. At the time that this fax was sent, the seller had already supplied material and given quotes for further supply to which, as the seller was entitled to assume, its UK terms and conditions applied. The buyer did not state that it intended to treat the seller’s quotes as no longer linked to the seller’s conditions, and did not provide a copy of its conditions.
Clarke J’s assessment of prior authority on this point was that:
- where parties have dealt with each other more than once or twice, it may not be too critical to the incorporation of standard terms that those terms be set out in a contractual document, nor that the document containing the terms relied on has preceded the making of every contract; and
- the sequence of events is important. An invoice following a concluded contract effected by a clear offer on standard terms which are accepted, even if only by delivery, will or may be too late. But, if there has been no reference to rival terms, the appearance of terms on the back of every invoice and the acceptance of delivery of goods without objection may indicate acceptance of terms.
(2) Reasonableness under UCTA
Although Borealis were successful in the ‘incorporation’ of their terms, this did not ultimately assist it because Borealis failed to satisfy the court that its UK terms satisfied the requirement of reasonableness under UCTA.
The provisions of the seller’s UK terms excluded the core terms implied by the SGA of satisfactory quality and reasonable fitness for purpose, and denied the buyer any redress if the goods are defective, save that in the event of a failure of the goods to comply with the seller’s standard specification, the buyer could recover the price of the goods.
In arriving at such a decision, Clarke J considered the Guidelines for application of the reasonableness test set out in Schedule 2 of UCTA, concluding that:
- in terms of the strength of the bargaining positions of the parties, on the question of price they were on at least an equal footing, with the buyer successfully negotiating on price, whereas in respect of the terms of the contract, they were not on an equal footing as the seller was only prepared to supply borecene on its terms;
- the buyer received no specific inducement to agree the exclusionary provisions; and
- the buyer knew that the seller’s terms were set out on the back, or on a page, of the invoices.
Additional factors that Clarke J considered to be material were:
- the reality of the buyer’s consent to the terms that were not the subject of any negotiation, and were presented on a take it or leave it basis. The buyer’s scope for sourcing the product elsewhere was also limited, but the buyer’s assent to the terms was found not to be “more apparent than real”, given the number of occasions on which the buyer had either signed documents incorporating those terms or had failed to object when the seller explained that they were going to apply;
- the supply of product with a latent defect was not so remote a possibility that it ought not to be considered in determining the reasonableness of the exclusion, and in such circumstances a blanket exclusion of any liability would be prima facie unreasonable (see Britvic Soft Drinks Ltd v Messer UK  EWCA Civ 549; Bacardi-Martini Beverages v Thomas Hardy Packaging Ltd  EWCA Civ 549);
- the level of damage that could have been suffered by Balmoral if the borecene should have proved unfit for the purpose of manufacturing oil tanks. Requiring the buyer to bear the entire risk of a latent defect in the seller’s product was not an appropriate allocation of risk. The seller had extensive insurance in place and could have spread the cost of that insurance and of any exposure not covered by insurance over a wide number of buyers.
The court finally considered whether UCTA would apply to the contracts with the seller in Norway and Denmark, given that such contracts were governed by the laws of those states. Clarke J concluded that the contracts were international supply contracts for purposes of UCTA s26, such that UCTA did not apply to them. If it had done however, the seller’s General Terms and Conditions would not have satisfied the requirement of reasonableness. The General Terms and Conditions were more favourable than the UK terms since the implied condition as to satisfactory quality was not excluded and there may be an implied warranty of fitness for purpose if the seller has approved the suitability of the product in writing. However, it was not suggested that this had occurred and the term of fitness for purpose had also been excluded.
Commentary and practical implications: In considering the application of UCTA, Clarke J highlighted the inherent difficulties of applying the concept of fairness and reasonableness in the context of a commercial arrangement between parties such as Borealis and Balmoral. In so doing, he followed a recent line of cases where the courts have expressed a certain reluctance to get involved in UCTA-related challenges, including Granville Oil v Davis Turner  2 Lloyd’s Rep 356, SAM Business Systems Ltd v Hedley & Company  EWHC 2733 (TCC) and Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317.
Despite such judicial reluctance to interfere in a commercial deal, on balance, the Court decided in this case that it needed to. The decision illustrates that certain terms in business-to-business contracts are at risk of falling foul of the provisions of UCTA. In particular, a blanket exclusion of liability contained in standard terms that have not been the subject of negotiation is liable to be held unreasonable. It should particularly be noted that in this case the Court carefully considered all the UCTA “guidelines” in assessing whether the potential liability had been reasonably allocated. It is therefore clear that much attention must be paid to all factors relating to the appropriate apportionment of risk and liability in commercial contracts in order to maximise the prospect that any limitation will be found to be reasonable.
IMPORTANT NOTICE: This case review provides general information and does not constitute legal advice. Always consult a suitably qualified Bird & Bird lawyer on any specific problem or matter.