THE RECENT HIGH COURT CASE OF J MURPHY & Sons Ltd v Johnston Precast Ltd [2008] is a useful example of important principles on: incorporation of standard terms; the implication of terms requiring a supplier to warn a customer of potential problems with the purposes to which the product will be put; responsibility for losses caused by competing causes; and the severability of exclusion clauses.
Johnston, the defendant supplier, manufactured and supplied a pipe to Murphy for use in water mains works. The pipe was installed by Murphy. Part of the pipe failed, causing substantial flooding. Murphy paid signifi cant damages to Thames Water, its own customer, and sought to recover its losses from Johnston. In the proceedings it asserted that four separate causes had led to the failure of the pipe, three of which were the responsibility of Johnston.
The Court dismissed the claim, deciding that there were two contributory causes to the burst pipe, and that Johnston was responsible for neither. In dismissing the claim, the Court analysed a number of interesting issues.
INCORPORATION OF STANDARD TERMS
There was a dispute between the parties as to the applicable terms and conditions. The sequence of events was as follows:
- An order for the pipe had been sent by the customer to the supplier by fax. The fax referred to the customer’s standard terms, stating that they were ‘overleaf’. However, no terms were attached.
- The supplier responded to the fax with an order acknowledgment that sought to apply its own standard terms.
- The supplier commenced production based on the order from the customer, and/or its own order acknowledgement.
The judge decided that the contract was concluded on receipt by the supplier of the customer’s order. From that point, both treated the other as a contracting party. There was agreement as to parties, price, the scope of works, applicable British standards and the working pressure of the pipes.
However, the judge decided that the customer’s standard terms had not been effectively incorporated into the contract – the terms had not been sent to the supplier and there was no evidence that anyone on either side had paid any attention to this. He concluded that:
‘… as so often happens in the commercial world, those dealing with the projects… had little or no interest in what might justifiably be called the small print’.
The judge noted that, if he was wrong that a contract was concluded on the customer’s order, the supplier’s order acknowledgment (including its standard terms) constituted a counter-offer accepted by treating the seller as the contractual supplier of the goods.
CAUSATION
To recover damages for breach of contract the claimant must establish that the defendant’s breach caused the losses that have been sustained. The first stage is the simple ‘but for’ test: ‘But for the defendant’s breach, would the damage have occurred?’ If the answer is yes, meaning that the loss would have happened in any event, the loss was not caused by the breach of contract and is not recoverable from the defendant.
However, the ‘but for’ test is inadequate where there are two or more causes of loss, where those causes co-operated together but only one of them is attributable to a breach of contract by the defendant.
In these circumstances, liability is established if the causes were of at least approximately equal efficacy, as in Heskell v Continental Express Ltd & anor [1950]. The defendant was responsible for the first but not the last of sequential failures, and was found liable to pay damages. The court noted that intervening events should not act as a ‘piece of good fortune for the wrong-doer’.
It is often difficult to judge whether two or more causes are of approximately equal efficacy. In the present case, the judge stated that the courts should take a tough line on contract-breakers, describing efficacy as an elastic concept. The judge stressed that a defendant would struggle to demonstrate that a breach of contract causative of loss was suffi ciently unimportant to escape liability. The defendant could be liable to pay damages, even if ‘in the round’ there was a more significant cause.
A SUPPLIER’S IMPLIED DUTY TO WARN
In supply contracts, if the customer makes their purpose for the goods known to the seller, the seller is obliged to make sure the goods provided are fit for that purpose, provided that it is reasonable for the buyer to rely on the seller’s expertise. This term is implied by s14(3) of the Sale of Goods Act 1979, but can be excluded by agreement.
Here, the judge further noted that a supplier has an implied duty to warn a customer that its product may not perform satisfactorily if installed or used in the manner in which the customer intends. The duty would be breached if the seller knew, or ought reasonably to have known, of potential problems and failed to warn the customer of its concerns. The decision follows a number of cases in which the courts have held that a contractor owed a duty to warn a customer of design defects that they believed to exist, or that they ought, as reasonably competent contractors, to have suspected. The present case, the judge decided, was analogous to those cases.
Further, the judge decided that the duty to warn a customer continues – at least for a period – after a contract has been concluded. In the present case, the judge said that the duty existed from the time the contract was concluded to the completion of post-installation testing, almost a year later.
SEVERABILITY OF EXCLUSION CLAUSES
Commercial contracts invariably contain clauses seeking to exclude or limit liability for their breach. Such clauses, if incorporated into a contract through standard terms that have not been individually negotiated, only apply if reasonable, under the Unfair Contract Terms Act (UCTA) 1977. Whether or not an exclusion or limitation is reasonable is fact-dependent. UCTA 1977 sets out a number of factors the courts should consider when deciding whether an exclusion or limitation clause is reasonable, including:
- the relative bargaining position of the parties;
- whether the customer knew, or ought to have known, of the term in issue; and
- whether the goods were manufactured, processed or adapted to the special order of the customer.
The supplier in the present case sought to rely on an exclusion clause contained in its standard terms and conditions. It comprised three separate limbs. The first limb required the customer to satisfy itself, using its own skill and judgment, that the pipe being supplied was fit for its intended purpose. The second was a wide-ranging exclusion clause, which, amongst other things, purported to prevent claims 29 days after delivery, no matter how defective the pipe. The third sought to prevent the exclusion clause applying to liabilities that could not be lawfully excluded under UCTA 1977.
The customer successfully argued that the second limb was unreasonable and unenforceable under UCTA 1977. It further contended that the fi rst limb was also unenforceable, relying on the authority of Stewart Gill Ltd v Horatio Myer and Co Ltd [1992] to argue that, if an exemption clause is found to be unreasonable, the court should strike it out in its entirety and not attempt to break it down (or indeed rewrite it) so that it can pass the test of reasonableness.
The Court dismissed this submission, concluding that, for the purposes of UCTA 1977, a lengthy exclusion clause was capable of being broken down and considered in its constituent parts if, on analysis, those diff erent parts were performing separate functions. That was the eff ect of the earlier decisions in Regus (UK) Ltd v Epcot Solutions Ltd [2008] and Watford Electronics Ltd v Sanderson CFL Ltd [2001]. The judge doubted that the Stewart Gill case was concerned with severance at all. Instead, it was concerned with whether or not the courts could exclude certain words in a clause.
CONCLUSION
Failure to send standard terms is a common problem, particularly when they are printed on the reverse of an order or acknowledgment sent by fax or e-mail. Often, only the front page is sent to the other contracting party. It is unlikely that unsent terms will be incorporated into the contract, unless incorporated through previous course of dealings.
The implied duty to warn a customer of any potential problems that may arise from the intended installation or use of the product is fertile territory for disputes. The implied duty could be expressly excluded, provided that to do so is reasonable.
The case is a useful reminder that lengthy exclusion clauses should be clearly broken down into distinct sub-clauses, each performing specific functions. That will ensure sub-clauses found to be reasonable will survive if others prove unenforceable.
AT-A-GLANCE GUIDE
- Standard terms printed on the reverse of an order are unlikely to be binding if only the front page is sent to the customer by fax or e-mail.
- A supplier has an implied duty to warn a customer that its product may not perform satisfactorily if installed or used in the manner in which the customer intends.
- The implied duty extends to information received after a contract has been concluded.
- The duty would be breached if the seller knew, or ought to have known, of potential problems and failed to warn the customer of its concerns.
- Losses sometimes arise from one or more co-operating causes, only one of which is attributable to the defendant.
- A defendant will be liable in these circumstances, if the causes were of approximately equal efficacy.
- Clauses in standard terms excluding or limiting liability are subject to a statutory reasonableness test.
- Such clauses often comprise several sub-clauses. If one sub-clause fails the reasonableness test, other separate sub-clauses may survive.
By James Maton, partner, and Jonathan McDonald, trainee solicitor, Edwards Angell Palmer & Dodge UK LLP.