Retention of Title and Limitation of Liability

Terms and conditions (“T&Cs”) are the bedrock of any commercial agreement. Whilst parties to commercial agreements are looking to establish and cultivate productive and profitable relationships, they are also concerned with limiting their risk of loss in the event of a dispute and/or insolvency of the other party. It is, therefore, wise to make sure that you get your T&Cs recorded in writing and that this document is clear and certain because any ambiguities can result in decisions being made in quite the opposite direction to which you had envisaged when you entered into the agreement. Once you have your standard T&Cs in place you should make sure they are reviewed on a regular basis in order to ensure that they do what they are meant to and that is protect you.

Retention of Title

The recent insolvency proceedings of corporate giants such as Carillion and Toys “R” Us are a reminder of how even the mighty can fall. Suppliers of goods/stock to those companies may be concerned with the Retention of Title (“RoT”) provisions in their T&Cs.

The RoT clauses that suppliers in similar positions should be checking their T&Cs for provide that title of the goods does not pass to the recipient until payment for those goods has been received in full by the supplier who retains legal ownership of the goods until this payment has been received. Furthermore, suppliers should also make sure that they are entitled to enter any relevant premises so that they may recover the goods from the party that has failed to pay. If a party has become insolvent, arranging and paying for deliveries to return stock is not going to be a priority, and in some cases a possibility, for them, so suppliers need to be able to go in and retrieve the items they own.

When a company enters insolvency proceedings the appointed administrators have a duty to gather in monies due to the company and to safeguard any company assets. Goods and stock held by the company will be sold off to generate cash to enable it to pay off its creditors. Without an agreement specifying otherwise, there is a risk that administrators may operate on the basis that goods in the company’s possession are legally owned by the company and therefore it is entitled to maximise any income, where it can, to improve the company’s financial position. The burden would then be on the supplier to prove that title did not pass and that it is the rightful owner of the goods. This exercise can be costly and involve significant effort.

Limitation of Liability – Royal Devon

Each party to a commercial contract will seek to limit the degree to which it is liable for breach of the contract.  This is part of the agreement process but it is an area that requires careful negotiation and clear drafting to record the parties’ intentions without any ambiguity. This is something that is not always a straightforward task as was highlighted by the recent case of Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] (“Royal Devon”). In this case the High Court (“HC”) and, later, the Court of Appeal (“CA”) were asked to consider the limitation of liability clauses of a contract for the provision of an internal computer system which was alleged to be defective. The value of the contract was in the region of £5 million, however, the Trust claimed damages for breach of contract in the sum of £7.9 million. The key wording of the limitation clause was:

“9.2 The aggregate liability of the Contractor … shall not exceed:

9.2.1 for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price; or

9.2.2 for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim”

The court was asked to decide whether there was just one aggregate cap that was determined by the timing of the defect; or two separate caps (i) one for any defects occurring in the first year – capped at the Total Contract Price and (ii) another for any defects occurring in subsequent years – capped at the lower amount of the Contract Charges paid in the previous 12 months.

At the first instance the HC found there was just the one cap, however, on appeal the CA pointed out that the high value work would have been carried out in the early stages when any defects would have been more likely to have costly consequences and therefore the cap ought to be the greater one of the Total Contract Price. In the years following the work carried out should have been lower value and, therefore, less costly.

The CA’s decision has the potential to place a party in a position where it is liable for twice the amount of the Total Contract Price, which seems harsh and some might say does not sit comfortably with good business practice. However, “Dura Lex Sed Lex” (“the law is harsh, but it is the law”) so take care not to find yourself in the same position as the defendant in Royal Devon.

The Corporate and Commercial team at Hughes Paddison are here to help you with all your business needs so give us call on 01242 574244 or contact Jon Rathbone.