The Unfair Contract Terms Act 1977 in the Court of Session

Langstane Housing Association Ltd. v Riverside Construction (Aberdeen) Ltd., Ramsay & Chalmers and others [2009] CSOH 52 is the first case dealing with the Unfair Contract Terms Act 1977 ("UCTA") to be decided by the Court of Session for a number of years. That, of itself, makes it worthy of some comment. In Langstane, Lord Glennie decided a number of points based on sections 16 and 17 of UCTA. The section 16 point considered whether a 'Net Contribution Clause' in a contract between an owner of a building and a consulting engineer was a term which sought to exclude or restrict the latter's liability for breach of duty. The second issue concerned whether the owner could be deemed to be a 'customer' of the consulting engineer for the purposes of section 17 of UCTA where the contract concluded between the owner and the consulting engineer incorporated provisions from a set of standard terms drawn up by the Association of Consulting Engineers.

Section 16(1) of UCTA specifically applies controls to: –

"…a term of a contract, or a provision of a notice given to persons generally or to particular persons, [which] purports to exclude or restrict liability for breach of duty arising in the course of any business or from the occupation of any premises used for business purposes of the occupier…"

Meanwhile, the terms of section 17(1) of UCTA are to the effect that: –

"Any term of a contract which is a consumer contract or a standard form contract shall have no effect for the purpose of enabling a party to the contract—

(a)  who is in breach of a contractual obligation, to exclude or restrict any liability of his to the consumer or customer in respect of the breach;

(b)  in respect of a contractual obligation, to render no performance, or to render a performance substantially different from that which the consumer or customer reasonably expected from the contract;

 if it was not fair and reasonable to incorporate the term in the contract."

Section 17(2) defines a “customer” in section 17(1) above as a party to a standard form contract who deals on the basis of written standard terms of business of the other party to the contract who himself deals in the course of a business.

Thus, sections 16 and 17 of UCTA focus on clauses which seek to exclude or restrict liability in respect of any breach of a delictual, contractual or statutory duty. Of course, it is not always straightforward to identify an exclusion or restriction of liability clause. Whether a contractual term is an exclusion clause or not, is a question of fact, not law and one requires to examine the substance of the provision, rather than its label (Phillips Products Ltd. v Hyland  [1987] 2 All E.R. 620 at 626f – g per Slade LJ).  For example, not all provisions which are essentially exclusion or limitation clauses in substance will begin with the words ‘X shall not be liable to Y in respect of Z’ or ‘X’s liability to Y in respect of Z is limited to A.’ For example, in Thomas Witter Ltd v TBP Industries [1996] 2 All E.R. 573,  it was held that an entire agreement clause may amount to an exclusion or limitation clauses, depending on its terms.

Langstane is one of those cases where the provision which was subjected to scrutiny was not specifically referred to as an exclusion or limitation of liability clause. The case concerned the partial collapse of subjects located in Aberdeen which Langstane had purchased. Langstane brought an action to recover damages in respect of the losses which they had suffered as a result of that collapse. They claimed that the collapse had been caused as a result of the breach of contract and/or negligence of the contractors, of the architect and of the consulting engineers. Ramsay & Chalmers were the consulting engineers. The contract concluded between the consulting engineers and Langstane was governed by the Association of Consulting Engineers Conditions of Engagement, B (1) (“the ACE Conditions”). Clause B8.2 of the ACE Conditions amounted to a ‘Net Contribution Clause’ as follows: –

"Subject to B8.1 but notwithstanding otherwise anything to the contrary contained in this Agreement, such liability of the Consulting Engineer for any claim or claims shall be further limited to such sum as the Consulting Engineer ought reasonably to pay having regard to his responsibility for the loss or damage suffered as a result of the occurrence or series of occurrences in question, on the basis that the Lead Consultant, all Other Consultants and all Contractors and Sub-Contractors shall be deemed to have provided contractual undertakings on terms no less onerous than those set out in B2.3 to the Client (whether or not they shall have been so provided to the Client) in respect of the carrying out of their obligations and shall be deemed to have paid to the Client such proportion which it would be just and equitable for them to pay having regard to the extent of their responsibility."

Clause B8.1, which is referred to in the opening words of clause B8.2 is a "Limitation of Liability" clause which bears to limit the liability of Ramsay & Chalmers to a sum to be inserted at A.10 of the Memorandum of Agreement. The Memorandum of Agreement is a blank form attached to the ACE Conditions which is intended to be completed by the contracting parties. One of the issues for decision was whether the above clause represented an attempt by Ramsay & Chalmers to exclude or restrict its liability for its negligence/breach of duty in terms of section 16 of UCTA. Other relevant issues for consideration were the contractual interpretation of provisions of the contract and the incorporation of the above terms from the ACE Conditions. Indeed, the lion’s share of Lord Glennie’s judgment was concerned with these two matters. However, for the purposes of this blog, the examination of the case is limited to UCTA.

On the face of it, the Net Contribution Clause does appear to purport to restrict the consulting engineer’s liability for losses which are sustained by Langstane as a result of the former’s breach of duty or negligence.  However, on behalf of the consulting engineers, the Dean of Faculty argued that the Net Contribution Clause did not purport to exclude or restrict such liability. He argued that it simply sought to ensure that the consulting engineers were only held liable for the consequence of their own breach of duty and were not held liable, by the doctrine of joint and several liability, for the breaches of duty or negligence of the other contractors and consultants working on the project. Thus, insofar as the doctrine of joint and several liability might otherwise apply (e.g. in the event that another contractor became insolvent) under the common law or the package of contracts entered into by each of the parties, the Net Contribution Clause sought to prevent Langstane from recovering the full extent of their loss from the consulting engineers inasmuch as that loss exceeded the proportion of that sum for which the consulting engineers were themselves responsible in law. Lord Glennie agreed with this argument in the following terms: –

"It seems to me that there is considerable force in this argument. The operative part of the Net Contribution Clause provides that the liability of the Consulting Engineer should be limited to

"such sum as the Consulting Engineer ought reasonably to pay having regard to his responsibility for the loss or damage suffered as a result of the occurrence or series of occurrences in question …"

That does not bear to exclude or restrict his own liability for his own fault or breach of duty. The point is incapable of further elaboration. Accordingly, clause 16(1) does not apply so as to impose a "fair and reasonable" test in the present case."

Thus, clauses which seek to limit a contractor’s liability for damages for breach of duty to the extent of the counterparty’s losses for which the contractor was responsible in law do not technically fall within the compass of sections 16 or 17 of UCTA. Instead, they seek to protect the contractor from common law rules or doctrines or contractual provisions which might serve to render that contractor liable for sums which are greater than the sums for which they themselves are responsible in law (such as the doctrine of joint and several liability).

Another point raised in the case was whether Langstane were dealing with the consulting engineers on the basis of the latter’s written standard terms of business. This was a germane matter since section 17(1) of UCTA covers clauses in a standard form contract or consumer contract which exclude or limit a party’s liability to a consumer or customer for breach of a contractual obligation and section 17(2) defines a “customer” as a party to a standard form contract who deals on the basis of written standard terms of business of the other party to the contract who himself deals in the course of a business. It was crucial that Langstane be deemed to be a ‘customer’ in order for the controls in section 17 of UCTA to be engaged. However, Lord Glennie rejected the argument that Langstane qualified as the ‘customer’ of the consulting engineers:

"I do not think that it can be said in the present case that [Langstane] were dealing on the basis of the written standard terms of business of the [consulting engineers]. I say this for two reasons. First, the ACE Conditions are not the [consulting engineers’] standard terms of business. They are drafted and promulgated by the Association of Consulting Engineers and used, I understand, widely within the profession. There is, so it seems to me, an analogy to be drawn from the approach of Pearson J in Tersons v Stevenage Development Corporation [1963] 2 Lloyd's Rep 233. Secondly, it is by no means clear that, in the context of the relationship between the parties as a whole, it was the [consulting engineers] rather than [Langstane] who put forward the ACE Conditions… One has to look also at the letter of appointment to the Panel of Consultants on 16 May 1995, in terms of which it was [Langstane] who put forward the ACE Conditions. It does not seem to me that section 17 has any application to the present case."

Applying the case of Tersons, the above excerpt from the judgment of Lord Glennie is undoubtedly correct. In Tersons, in the context of a contra proferentem argument, Pearson LJ said that in his opinion that maxim had little if any application to the case before the court, since the General Conditions were not a partisan document or "an imposed standard contract", but were a general form in common use prepared and revised jointly by various representative bodies including the Federation of Civil Engineering Contractors, and would naturally be incorporated in contracts of the kind under consideration. On a somewhat tangential digression, it should perhaps be noted in passing that the words 'written standard terms of business' in UTCA have also generated litigation in the context of English law. Section 3 of UCTA (which applies for the purposes of English law) also makes reference to 'written standard terms of business'. In Commerzbank AG v Keen [2007] IRLR 132, Mummery LJ in the Court of Appeal ruled that an employment contract was not susceptible to review under section 3 of UCTA in England since when a bank entered into a contract of employment with an employee, that contract was not one which had been entered into on the bank's written standard terms of business. The bank was not in the business of entering into contracts of employment.

Finally, although the matter was irrelevant, his Lordship came to the conclusion that he would have found the Net Contribution Clause to be fair and reasonable had this been a point which arose. In his view, the clause was not unusual or onerous. Lord Glennie expressed the following opinion:-

"Certainly it is a term which places a burden on [Langstane] if they wish to litigate. Further, it clearly transfers to [Langstane] the risk that one of its contracting parties might become insolvent. But… it is [Langstane] who choose their contracting parties and it is [Langstane] who can, no doubt at a price, insist that their contracting parties carry appropriate insurance. Further, as became clear in… evidence… it is a term which has become the subject of argument amongst parties using the ACE Conditions and, possibly, amongst parties using other forms as well. The clause was first introduced, as I understand it, into the 1984 Conditions (1988 revision) by Amendment Sheet No 6 in September 1993. Accordingly, by the time that the [consulting engineers] submitted their proposal for the project at 411/2 Union Street in March 2001, the clause had been in circulation for over seven years. Anyone who contracted on the basis of the ACE Conditions, and was interested in what they said, would have been well aware of the existence of the Net Contribution Clause and, if not aware of its introduction in 1993 by way of that Amendment Sheet, would have been aware of its inclusion in the 1995 Conditions and in the 1998 revision. Accordingly, I see no basis upon which it can plausibly be argued that [consulting engineers] ought to have drawn [Langstane’s] attention specifically to the clause or that, because they did not, that clause was not incorporated into the contract between the parties."

Again, that must be correct. What is interesting, however, is that the rationale for ruling that the Net Contribution Clause was not susceptible to review ab initio under UCTA as an exclusion or limitation of liability clause also played an indirect role in, and exerted influence on, Lord Glennie's reasoning for finding it to be fair and reasonable; that is to say, the notion that the clause was not onerous in its nature – in the sense that it simply sought to clarify that the consulting engineer would not be required to pay sums in damages in excess of those for which they themselves were personally responsible.