Exclusion and limitation clauses in professional services contracts held reasonable under UCTA

Summary: Contracts for professional services frequently cap liability at the contract price and exclude all indirect or consequential losses. The High Court has confirmed that such a clause in a contract between a demolition/recycling business and a planning consultant was reasonable under the Unfair Contract Terms Act 1977. In the context, lost profits were probably too remote to be recoverable at all, but if not would be excluded anyway as they would fall within the second limb of Hadley -v- Baxendale. Further, a time bar clause stating that all claims had to be "filed" within a year - which was badly worded as the language did not mirror court procedure - should be construed as a requirement for notice to be sent with a clear summary of the facts, contractual terms and statutory provisions relied on in relation to each claim. It, too, was reasonable for UCTA purposes.

Background: The case of Elvanite Full Circle Ltd -v- AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1191 (TCC) involved a two-acre site in an industrial area in Colchester acquired by the claimant. The claimant engaged the defendant to prepare and submit an application for planning permission to recycle waste at the site, the idea being that it would then sell the site to the waste contractor, SITA, at a substantial profit. The application was delayed; planning permission was granted late; negotiations with SITA failed; and when the claimant was unable to sell the site to anyone else it brought a claim for lost profit. The claimant was unable to show that the delay was due to the defendant's breach of contract and also failed to prove its loss. However, the judge made various comments on the exclusion/limitation clauses in the contract which are worth noting.

The judge took as his starting point the key principles in Watford Electronics-v- Sanderson CFL Ltd [2001] EWCA Civ 317 that, when "experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement" they should be taken as "the best judge of...commercial fairness" and the court should interfere only where one has taken unfair advantage of the other, or a term is so unreasonable that it could not have been properly understood or considered. Both parties were relatively substantial and there was nothing to suggest that one took advantage of the other. The claimant understood the terms, did not object to them, and had been given no inducement to accept them. Other service providers were readily available. Moreover, clauses of this type are common in services contracts. The clauses did not therefore fall foul of UCTA. Looking at each in turn:

• Exclusion through effluxion of time: This clause provided that "all claims...shall be deemed relinquished unless filed within one (1) year...". As a matter of principle, it is perfectly possible to shorten the usual six year limitation period by agreement. However, the wording came in for some criticism. In the High Court, proceedings are commenced when a claim form is issued in accordance with CPR 7.2(1), and it is inaccurate to talk of "claims" being "filed". "Filing", in the CPR, presupposes that proceedings have already been commenced. In the Technology & Construction Court (TCC) especially, the parties have to go through a lengthy process before proceedings, which is started by sending the Letter of Claim under the TCC Pre-Action Protocol. Even though this clause, as an exclusion clause, had to be construed strictly and contra proferentem - so that the benefit of any ambiguity would be given to the claimant - it could not be construed as requiring proceedings to be issued within a year. A better construction would be that it envisaged "a properly particularised Letter of Claim", as required by the Pre-Action Protocols, involving, at the very least, a clear summary of facts on which each claim is based, and identifying the principal contractual terms and statutory provisions relied on. The word "filed" itself denotes a degree of formality. Therefore, a letter in which the claimant gave "preliminary notice of our intention to bring a claim" without any further details did not comply with this clause.
• Exclusion of indirect/consequential damages: It is well established that loss of profit can constitute direct loss, depending on the nature of the obligations in the contract. The defendant argued that in this case the loss of profit was too remote to be recoverable at all, either because the defendant did not know at the time the contract was made that the proposal was to sell the site, or, alternatively, because the losses resulted from a failure to sell to a specific purchaser who was not known to either party at that time. The judge thought that this argument had force, especially since the losses were "entirely bound up with the particular position of SITA, the only party who even commenced negotiations to buy the site..." However, if this was wrong, the loss would constitute indirect loss within the second limb of Hadley -v- Baxendale rather than direct loss. The key obligation was to act with reasonable skill and care in completing the planning application and any loss of profit caused by a breach would be indirect because it did not arise naturally out of the alleged delays - "instead it arises out of the alleged profitability of the site, which was not the subject of the contract between the parties." In the judge's view, this exclusion was reasonable.
• Cap on liability: The defendant capped its total liability at "the total compensation actually payable...for the services or £50,000 whichever is less." This was recognised by the court as a common approach in professional services contracts, particularly where the services are only a small part of a much larger project, and not inherently unreasonable (except, perhaps, in cases like Ampleforth -v- Turner and Townsend [2012] EWHC 2137 in which the cap of £111,000 was unreasonable in the light of an obligation to insure to a level of £10m). No evidence was adduced about insurance so the assessment was made on the usual UCTA principles above.

The claimant's case failed on causation and quantum. In any event its claim would have been excluded as no Letter of Claim had been issued within a year; loss of profit would have been excluded anyway; and if these conclusions were wrong damages would have been limited to the price paid.

Please click on the links below for the other articles in the February 2010 commercial contracts newsletter:

• No exemplary damages awarded for breach of confidence
• Construction of confidentiality clauses: commercial agreements and employment contracts distinguished
• Payment on contractual termination "not a penalty"
• Delay: make sure your contract provides a remedy
• Repudiatory breach and the importance of context when assessing impact
• Commercial Agents Regulations: meaning of "continuing authority to negotiate"