High Court finds clause in supplier's standard terms and conditions was unreasonable for purposes of Unfair Contract Terms Act 1977

In a recent decision, the High Court found that a supplier's standard terms and conditions had been incorporated by reference into the contract, but an exclusion clause in those terms and conditions failed to satisfy the requirement of reasonableness under s.11 of the Unfair Contract Terms Act 1977 ("UCTA"): Phoenix Interior Design Ltd v Henley Homes plc [2021] EWHC 1573 (QB).

The decision does not create new law but demonstrates the importance of ensuring that any particularly onerous or unusual exclusions are well sign-posted in any standard terms and conditions, and their consequences are made obvious. This is a useful reminder for commercial parties seeking to include limitation or exclusion clauses in their standard terms and conditions.

It also acts as a reminder of the need to ensure that the counterparty is provided with any relevant standard terms, and to ensure that the terms are properly incorporated into the contract. Where a contractual document refers to terms being attached or overleaf, parties should make sure the terms are to be found where stated.

Background

The claimant was an interior design company that had been engaged by the defendants (a property development group) to provide: (a) furniture and fittings; and (b) interior design advisory services in relation to a new apartment hotel in Scotland. The defendants had previously engaged the claimant on various other matters prior to the hotel project.

The claimant gave a presentation to the defendants at an in-person meeting, at which printed copies of its standard terms and conditions were available. Subsequently, the claimant sent the defendants a revised proposal via email. The proposal document stated that the claimant's standard terms and conditions were "overleaf", but this was not the case. Rather, the terms and conditions were contained in a separate file, albeit attached to the same email.

The claimant then prepared two further revised proposal documents, which were accepted by the defendants. Although the documents were said to be "subject to terms and conditions overleaf", no terms accompanied the documents.

The relationship between the parties broke down and the defendants withheld the balance of fees due under the contract. The claimant pleaded that it had performed its obligations under the contract and was therefore entitled to be paid the balance of its fees. The defendants disputed this, saying the last 50% of the price was payable only on completion, and the claimant's performance under the contract was so defective that completion had never occurred. It also counterclaimed for damages (or to set off any amounts owed to the claimant) as a result of the claimant's alleged breaches.

Under clause 8.1 of its standard terms and conditions, the claimant had warranted that the furniture and fittings would correspond with their specification. However, clause 8.2.3 provided that the claimant would 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" (ie completion).

Among other issues, the court considered: (a) whether the claimant's standard terms and conditions were incorporated into the contract; and (b) if they were so incorporated, whether clause 8.2.3 was effective under UCTA (ie whether it satisfied the requirement of reasonableness under s.11(5)).

Decision

The High Court (Freedman J) found that the terms and conditions had been incorporated by reference, but the claimant had failed to establish that clause 8.2.3 satisfied the requirement of reasonableness.

Incorporation

Freedman J found that the claimant's standard terms and conditions had been incorporated by reference for a number of reasons including: (i) he was satisfied that the defendants had been handed a hard copy of the terms and conditions at an in-person meeting, on the reverse of the quote; (ii) the defendants had also received a copy of the terms by email; and (iii) although the signed version of the contract did not attach the terms and conditions, despite saying they were "overleaf", the acceptance of the order subject to the terms and conditions "obviously referred back to the standard terms" of which the defendants had previously been given notice.

It would therefore have been clear to a reasonable person signing the revised proposals that they were "subject to those terms despite the absence of the terms overleaf".

This conclusion was "reinforced" by a number of factors, including that the defendants' acceptance of the contract specifically acknowledged that the contract was subject to the terms and conditions". All of the above would have sufficed to find the terms had been incorporated, but the position was stronger still because of the previous dealings between the parties when terms and conditions were sent (despite the defendants' lack of attention paid to them at the time).

Reasonableness under UCTA

However, despite finding that the standard terms and conditions had been incorporated into the contract, the judge found that clause 8.2.3 did not meet the test for reasonableness under s.11(5) of UCTA. The claimant had failed to discharge the onus on it to show that clause 8.2.3 was reasonable and the clause was therefore ineffective. The key reasons why the judge came to this conclusion were:

• This type of clause is not common and the claimant had provided no good explanation for why an anti-set off clause (which is common) would not have sufficed.
• This unusual clause was "tucked away in the undergrowth" of the standard terms and conditions, with no particular highlighting of the consequences of "even the slightest delay in payment". The consequences of the clause were not obvious and "the Court has to be careful not to confuse the kind of knowledge referred to in Schedule 2 with the knowledge which appears after hours of forensic examination in contested litigation." (Schedule 2 of UCTA sets out the matters to which regard is to be had when assessing reasonableness, including whether the customer knew or ought reasonably to have known of the existence and extent of the term.)
• The clause was "potentially exorbitant" on the basis that the slightest delay or deduction would bar all rights of redress against the claimant regarding the quality of the goods.
• The uncertainty surrounding when the due date for payment (being completion) had taken place as a matter of fact created real difficulties in the application of the clause. The judge described the question of whether completion had occurred as "a question of degree and evaluation" noting that "it is very often not easy to say when completion has taken place".
• The fact that there were limited rights under a separate sub-clause allowing for the replacement of the goods or for a refund following payment in full (if notified within a reasonable time) was no answer. The risk for the customer was that: (a) it gave up the right to withhold payment until completion if it paid before the time of completion; and (b) the seller/supplier might not perform under that sub-clause once paid and so the customer would lose its leverage to encourage the seller/supplier to complete.
• Criterion (d) in Schedule 2 of UCTA, which provides that "where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable", was either on point or analogous. The findings outlined in the judgment "including the difficulty of identifying the precise moment of completion and the timing of the payment" might render it unreasonable at the time of contracting to expect that it was not practicable to comply with the requirement to pay the balance on the day of completion.