[1999] 2 Lloyd's Rep 273
Court of Appeal
This case deals with the test of reasonableness imposed by the Unfair Contract Terms Act.
Potter LJ
Introduction
1. This is an appeal by the defendant Orient Transport Services Ltd ("the appellants") against the judgment of His Honour Judge Kenny given in the Kingston County Court in which he held the appellants, who are a freight forwarding company, liable to the plaintiffs, Overseas Medical Supplies Ltd, for the loss and/or non-delivery of a quantity of medical equipment on its return journey to England from Teheran whither it had been despatched by the plaintiffs for exhibition at the Iran Med 95 Exhibition. The Judge also found the appellants in breach of their contractual duty to effect insurance of the goods on the plaintiffs' behalf so that in the event of the loss which occurred, they would be duly indemnified under such insurance. He gave judgment for the full value of the goods in the sum of £8589.66 with interest of £785.07 and the plaintiffs' costs of the action to be taxed if not agreed on Scale 2. In doing so he held that the appellants could not rely on cl 13(B) of the British International Freight Association Standard Trading Conditions (1989) ("the conditions"), which purported to limit the appellants' liability in respect of any claim arising from breach of duty on their part; the Judge held that, in relation to their duty to effect insurance, the appellants had failed to demonstrate that cll 13(B) and 29(A)(ii) of the conditions satisfied the test of reasonableness imposed by the Unfair Contract Terms Act, 1977 ("the 1977 Act").
Reasonableness
10. The treatment of various factors going to the question of reasonableness has been considered in a number of authorities from which the following observations of relevance emerge.
(1) The way in which the relevant conditions came into being and are used generally is relevant: Singer Co (UK) Ltd v Tees and Hartlepool Port Authority, [1988] 2 Lloyd's Rep 164 at p 169, applied by the Court of Appeal in Schenkers Ltd v Overland Shoes Ltd, [1998] I Lloyd's Rep 498 (a case concerning an entirely different aspect of the BIFA terms).
(2) Although not specifically applicable to cases falling within s 3 of the 1977 Act, the five guidelines as to reasonableness set out in Schedule 2 are nonetheless relevant to the question of reasonableness, while bearing in mind that the Court is dealing with a commercial and not a consumer transaction. They ought therefore to be taken into account: Stewart Gill Ltd v Horatio Myer and Co Ltd, [1992] QB 600 at p 608. Those which are relevant in this case are (a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met; (b) whether the customer received an inducement to agree to the term or, in accepting it, had an opportunity of entering into a similar contract with other persons, but without having to accept similar terms; (c) whether the customer knew or ought to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties).
(3) In relation to the question of equality of bargaining position, the Court will have regard not only to the question of whether the customer was obliged to use the services of the supplier but also to the question of how far it would have been practicable and convenient to go elsewhere: Singer v Tees at p 169 and St Alban's City and District Council v International Computers Ltd, (1995) XXI FSR 686 at p 708.
(4) The question of reasonableness must be assessed having regard to the relevant clause viewed as a whole: it is not right to take any particular part of the clause in isolation, although it must also be viewed against a breach of contract which is the subject matter of the present case: AEG (UK) Ltd v Logic Resource Ltd (unreported save by New Law on Line, Court of Appeal, Oct 20, 1995) per Lord Justice Hobhouse.
(5) The reality of the consent of the customer to the supplier's clause will be a significant consideration (ibid: see also the St Alban's City case at pp 709-711).
(6) In cases of limitation rather than exclusion of liability, the size of the limit compared with other limits in widely used standard terms may also be relevant: Sonicare International Ltd v East Anglia Freight Terminal Ltd, [1997] 2 Lloyd's Rep 48 at 55 per Judge Hallgarten, QC.
(7) While the availability of insurance to the supplier is relevant, it is by no means a decisive factor: see Singer v Tees at p 170 and The Flamar Pride, [1990] 1 Lloyd's Rep 434 at p 439.
(8) The presence of a term allowing for an option to contract without the limitation clause but with a price increase in lieu is important: see Singer v Tees at p 170. However, as suggested in Yates: Contracts for the Carriage of Goods par 7.2.25.13, if the condition works in such a way as to leave little time to put such option into effect, this may effectively eliminate the option as a factor indicating reasonableness cf Phillips Products Ltd v Hyland, [1987] 1 WLR 659.
Conclusion
20. As to those grounds, the Judge rested his decision on three broad bases. First, he expressed his view that, in principle, the actions of the appellants qua arrangers of insurance, as opposed to their activities as handlers and transporters of goods, called for separate consideration and separate treatment under the regime of the defendants' standard conditions. That was because, in circumstances where the defendants undertook, but failed to carry out, the task of providing or effecting insurance, the overall effect of cl 13(B) was that the customer lost both his goods and the very insurance designed to provide him with the full compensation for that loss, rather than the £600 ceiling imposed by the appellants, which insurance the appellants' own order form obliged him to ensure was in place. Second, the Judge found that, in the circumstances of this case, there was no real equality in the parties' bargaining position. That was because there was no realistic likelihood that the plaintiffs would do other than entrust the insurance arrangements to the appellants; in other words it was neither practicable nor convenient for them to go elsewhere. Third, the Judge considered that there was insufficient clarity in the conditions to bring home to the plaintiffs the effect of cl 13(B), namely that the limitation of £600 would apply not only if the goods were lost or damaged but so as to protect the appellants in respect of their failure to make any insurance arrangements, despite their having accepted the plaintiffs' instructions to do so, in return for an extra charge demanded and paid. In other words, there was no "reality of consent" to the effect of the clause.
21. Finally, the Judge regarded the imposition of a standard limitation of £600 to goods in respect of which ex hypothesis the plaintiffs were concerned to obtain much higher cover, as "derisory". The Judge did not suggest any higher figure. Nor did he say that, in respect of an agreement to effect insurance as the plaintiffs' agent, an alternative formula more closely related to the value of the goods might be appropriate. However, there was no obligation on him to do so. The burden of proof of reasonableness lay upon the appellants in the case. Their position was that of a trading organization which, under a single contract had agreed to combine at least two activities or functions in respect of which the nature of the work undertaken, the incidence of risk as between the parties, and the effect of a breach of duty by the appellants were all of different character, yet were treated without distinction as subject to a single limitation of liability of only £600. Whereas it may be that, in relation to certain "package" services, a broad brush approach to limitation of liability will be reasonable, and indeed may largely be dictated by the type of insurance cover available in the market to the supplier, the Judge held that, in this case, such an approach was unjust and inappropriate for reasons which he clearly and comprehensively stated.
21. In my view, the judgment of Judge Kenny was a careful one in which he considered and weighed the various considerations in a manner which is not open to any substantial criticism. I would dismiss this appeal.