Liability Limitation Clauses ' A Sharp Lesson

• Published date: 20 January 2023
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Corporate and Company Law, Contracts and Commercial Law, Construction & Planning
• Law Firm: Shepherd and Wedderburn LLP
• Author: Mr Iain Drummond and Lindsay Robinson

The Inner House provides a sharp lesson in Benkert UK Ltd v Paint Dispensing Ltd and demonstrates that; where one party is found liable for causing damage, it does not necessarily follow that a full recovery of damages will exist where a liability limitation clause operates; even in safety critical contracts.

The facts

Benkert UK engaged Paint Dispensing to perform maintenance work on Benkert's ink dispensers twice a year. On one occasion, a clip connecting a hose to the ink and solvent drums came loose, allowing solvent vapour to leak. This led to a major fire in Benkert's factory, which caused '30m worth of damage. Benkert recovered their loss from their insurers, who then raised a subrogated action against Paint Dispensing.

Lord Tyre in the Outer House found in February 2022 that Paint Dispensing were liable for causing the fire through breach of contract. However, the court upheld Clause 5.3.1 of their contract with Benkert, which capped Paint Dispensing's liability to just over '3,225.06 - a mere fraction of the '30m Benkert had claimed. (See our earlier article - Limitation of liability clauses, printing company's '29m claim up in smoke.

Appeal to the Inner House

Benkert's insurers appealed to the Inner House, arguing that Clause 5.3.1 was an unreasonable contract term under s.24(3) of the Unfair Contract Terms Act 1977. In support of this, they maintained that:

1. The parties had an unequal bargaining position: Benkert was dependent on Paint Dispensing's expertise in dispensers and could not properly assess the potential damage that could result from faulty servicing.
2. Paint Dispensing had '5m of indemnity cover for public liability - their clause limiting liability to their annual maintenance charge of '3,225.06 falls well short of the insurance cover they had in place.

The court rejected Benkert's arguments and upheld Clause 5.3.1 as a reasonable term. Benkert was a large, well-resourced company, which was able to negotiate on an equal footing with Paint Dispensing under reliable legal advice. Benkert was aware that a fire in the factory could cause...