Exclusion Clauses

The doctrine of privity poses particular problems for exclusion clauses in contracts. 

Exclusion or limitation clauses may exclude or limit the liability, for a specific breach or negligent act, of a contracting party to those it contracts with. 

It is sometimes desirable to extend an exclusion clause to parties outside the contract. For example, a company may wish to protect contractors that it employs.  On the whole, however, privity of contract acts to restrict the effect of such clauses on third parties.

A manufacturer of cladding and roofing materials sells its products through builders’ merchants, under a contract of sale which excludes liability for consequential loss and limits liability in any event to the amount paid to them for their materials.

Part of their cladding cracked after it had been installed on a building.  The building owner, the employer under the building contract, sued the contractor who, in turn, sued the cladding subcontractor, and so on down the contractual chain until the action reached the manufacturer.

At the same time, the owner brought an action against the engineer who designed the building. 

Insurance Policies Must Comply with the Governing Law

Under English law, the principle that a contract must not contain agreements which are contrary to law applies equally to a contract of insurance.  This can cause insurers to have to pay out very much larger sums than they anticipated:

A factory building was substantially damaged by fire, causing extensive collapse. The local authority required the reconstruction of the fire-damaged factory to comply fully with current Building Regulations. The factory had been partially demolished by the fire to ground level but parts of the structure were still largely intact.  The building could – but for the Building Regulations – have been rebuilt, retaining the parts of the factory which were still intact, to the original standard of construction.  This would have complied with the regulations current at the time the building was built but not those current at the time of the fire damage.

The local authority pointed out that, where a building was to be reconstructed from within eight metres of the ground, the Building Regulations would apply to the whole of the fabric including the retained part and that the retained part would have to be brought up to current Building Regulation standards. The result was, to all intents and purposes, that the factory had to be rebuilt as a brand new building.

This increased the claim on the insurance by about £1m. The insurers, an American company, were not familiar with this peculiarity of English Building Regulations and had not foreseen, in setting the premium for the insurance, their exposure to this risk.  They nevertheless could not insist that they had a right to limit cover to the cost of reconstruction to a standard below that required by statute and so accepted that they would have to pay for a new building which complied fully with the Building Regulations but which was otherwise the same as that which had been fire damaged.

Building Insurance

There is clearly a distinction between a building component wearing out naturally and failure due to a defect.  When seeking insurance cover it is necessary to be clear which eventualities are to be covered.

Several USA school roofs failed in sub-zero temperatures within two or three years of the expiration of the ten-year warranty period.  The contractor had assured his client that the roofs had service lives of 15-20 years.

The roofing was in pvc sheets, which shattered in sub-zero temperatures.  Pvc roofing contains plasticizer, as otherwise it would be rigid and lack the elasticity and plasticity required to accommodate movement without fracture. 

Plasticized pvc, to retain its flexibility, needs stabilisers and inhibitors – otherwise the volatile plasticizers will gradually be lost.  These roofs failed after the expiration of the warranty period but sooner than expected, due to gradual plasticizer loss.

The school board sought to recover from their insurers.  The insurers accepted liability for consequential damage but not for the cost of replacing the defective roofs themselves, arguing that the loss did not arise from a fortuitous incident.[1]  The insurers contended that the failure was inevitable at the time of construction, and therefore not covered by the policy. 

It was found, as a matter of fact, that failure was not inevitable – two such roofs having survived.  Further, the terms of the policy did not expressly exclude liability in these circumstances.

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[1] A loss is ‘fortuitous’ if it happens by chance or accident, occurring unexpectedly or without known cause.

Product Insurance

Technological developments make reliance on design advice from manufacturers, suppliers and specialist contractors increasingly necessary.  Employers all too readily look to the insurance policies of the traditional design consultants.  It would be advisable for these consultants, where they rely on specialist advice obtained from others, to advise on the need for each party to hold suitable insurance cover.

Suppliers are more likely to have insurance against the risk of their products being found not to be fit for purpose than for design.  Thus, where a supplier is brought into the design process, it would be advisable to check that suitable insurance is in place. 

A difficulty with a supplier and their insurers has recently arisen because of the supplier’s contribution to the design of a building. 

The product they supplied was not fit for its purpose because it was wrongly selected, not because it was badly made or due to faults in the materials used.  The supplier had been involved in the design development and, through the advice they gave, had directly caused the error in selection of the component they supplied.  Their insurance did not provide indemnity for errors in the design of the buildings which used their products but would indemnify them for errors in the design of the products themselves.  The sum in dispute is large and the supplier is resisting the claim because his insurance is inappropriate.  Had the nature of their insurance been looked into earlier, appropriate insurance cover could have been obtained.

Civil Liability (Contribution) Act 1978

The Civil Liability (Contribution) Act provides, subject to certain other provisions, ‘any person liable in respect of any damage suffered by another person may recover contribution from another person liable in respect of the same damage.’ [1]  
Subject to the exact meaning of ‘the same damage’ this gives a wide scope for actions for damages being brought against architects, engineers and the like by people they have not even met – let alone contracted with.

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[1] The Civil Liability (Contribution) Act 1978, s.1 (1).

Law Reform (Contributory Negligence) Act 1945

The architect’s, engineer’s, builder’s etc. liability to the employer for negligence may be reduced to the extent that the employer has also been negligent and, in so doing, has contributed to the damage suffered.  This arises under the Law Reform (Contributory Negligence) Act 1945.

Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage [1]

It is well established that this applies to claims in tort.  It may apply to a breach of a general duty of care under a contract, which duty is the same as would exist in common law, but it most probably is not applicable to a claim in respect of a breach of a strict contractual duty: ‘Provided that this subsection shall not operate to defeat any defence arising under a contract’.[2]

It does not alter the effect on any claim of the Statute of Limitations:

Provided that where any contract or enactment providing for the limitation of liability is applicable to the claim, the amount of damages recoverable by the claimant by virtue of this subsection shall not exceed the maximum limit so applicable.[3]

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[1] 130 Law Reform (Contributory Negligence) Act 1945 (8 & 9 Geo. 6 c. 28) s. 1 (1).

[2] Law Reform (Contributory Negligence) Act, 1945 1945 (8 & 9 Geo. 6.) c 28 s.1 (1) (a).

[3] Law Reform (Contributory Negligence) Act, 1945 1945 (8 & 9 Geo. 6.) c 28 s.1 (1) (b).

Privity of Contract

A well-established principle of contract law is that only the parties to the contract can make claims against it. 

Dunlop sold tyres to Dew & Co., with a term in the agreement that Dew would not sell more cheaply to anyone else, and that Dew would not enter into a contract with anyone else except on the same terms.  Dew sold tyres to Selfridge at the stipulated terms, but Selfridge sold them more cheaply.  Dunlop brought an action against Selfridge, which failed on the basis that Dunlop had no contract with Selfridge, and was not a party to the contract which had allegedly been breached.

Presumably Dunlop could have taken an action against Dew, who in turn could have taken action against Selfridge.[1]

Clearly, it is fair that people should not incur obligations in respect of contracts to which they are not party and which offer them no benefits.  However the principle of ‘privity’ does mean that it is difficult to enter a contract that benefits a third party without taking out a separate contract with the third party. 

Woodar contracted to sell some land to Wimpey for £850,000 on the understanding that £150,000 would be paid to a third party on completion.  Wimpey backed out of the deal without paying any money, leaving Woodar to make a claim under the contract.  This they could not do, because Wimpey pointed out that Woodar would have no claim on the £150,000 (privity), and the beneficiary of this money would have no claim as there was no contract in place to support it.[2]

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[1] Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.

[2] Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277, [1980] 1 All ER 571.