This case considers:
- Limitation of liability and the potential role that the Unfair Contract Terms Act has.
- Extent that “maintenance services” extends to deal with design defects.
- Bargaining power of the parties and the use of standard terms.
Summary of the Case and Key Facts
Benkert UK Ltd (a printing factory owner) engaged Paint Dispensing Ltd (PDL) under a maintenance contract to service two ink-dispensing machines biannually. On 10 November 2009 a clip (a “Jubilee clip”) on a hose detached, allowing flammable solvent vapour to escape and ignite. A factory fire ensued causing circa £29.7 million in agreed losses. Benkert’s insurers paid the loss and brought a subrogated claim against PDL, alleging that PDL’s maintenance engineer breached the contract (and was negligent) by failing to warn Benkert that the plastic clips posed a fire risk or to recommend replacing them with safer fittings.
The maintenance contract – on PDL’s standard terms – contained a strict limitation of liability clause (Clause 5.3.1/5.3.2) stating that PDL’s total liability (contractual or tortious) was capped at the “Basic Charge” (in practice £3,225.06) and excluding all indirect or consequential losses. Benkert argued that PDL’s breach caused the fire and that, had PDL warned it, Benkert would have replaced the clips and avoided the loss. Benkert’s insurers further contended that the tiny liability cap was unreasonable under s.24 of the Unfair Contract Terms Act 1977 (UCTA) and so should be set aside.
PDL defended on two fronts. First, it denied any breach or negligence: it argued the contract only required repair/maintenance of defects (not redesign of equipment), so it owed no contractual or tortious duty regarding the clip design. Second, PDL asserted that the liability cap was a negotiated commercial term, reasonable between two sophisticated parties. PDL noted that Benkert was a large company with legal advice, and that the clause was clearly presented (in bold capital letters) and never challenged. PDL also pointed out that it held £5 million public liability insurance (against personal injury/death), but maintained that this was irrelevant to the fairness of the contractual cap.
Judgement
First instance (Lord Tyre): Lord Tyre held that PDL was liable for Benkert’s losses. He found that PDL (through its engineer) had breached the maintenance contract by failing to recommend replacing the combustible clips, thus causing the fire. PDL was also held vicariously liable for the engineer’s negligence. However, applying the contract terms, Lord Tyre enforced the limitation clause: PDL’s loss was capped at £3,225.06 (the annual charge) – a tiny fraction of the total loss. He effectively found in favour of Benkert on liability but held the clause restricted damages to the contractual price.
Inner House (Appeal, CSIH 55, Dec. 2022): The Inner House (Lords Carloway, Woolman, Pentland) allowed PDL’s cross‑appeal. It overturned the Outer House on liability: the court held that the maintenance contract did not oblige PDL to redesign equipment or advise on the clip safety. A properly maintained Jubilee clip was not a “defect” to be repaired, but rather a design choice. Thus, PDL had not breached the contract or owed a separate duty of care concerning the clip design. Benkert’s claim against the engineer was procedurally unfair (the engineer had not been given proper notice of the criticism), and on the facts no contractual or common‑law duty was established. In short, the Inner House found no liability at all for the fire damage.
Even so, the court addressed the UCTA challenge to the clause. It held that Scottish UCTA (identical on these points to English UCTA) applied and reaffirmed the statutory reasonableness test (Schedule 2 factors). On those factors the cap passed muster. The court emphasized that Benkert was a large, sophisticated company with access to legal advice, who knew or ought to have known about the clause. The limitation clause was prominent and underlined in the short contract, and Benkert’s finance director (an experienced commercial person) was aware of its terms. The parties had equal bargaining power and Benkert had ample opportunity to negotiate the clause but did not. Importantly, the court held it was “entirely unrealistic” to expect PDL to insure against catastrophic losses for each customer. PDL’s £5 million liability insurance did not cover such losses and was irrelevant to the clause’s fairness. Benkert itself had insured against fire losses (indeed, its insurers paid the claim). The court concluded that requiring PDL to carry extreme coverage would force up costs for all customers; it was far more practical for Benkert to self‑insure.
The Inner House therefore found the limitation clause reasonable under UCTA. It upheld the clause and dismissed Benkert’s appeal. In the resulting order, the appeal was refused and PDL’s cross-appeal allowed: PDL was not liable for breach or negligence, and the contractual cap (the Basic Charge) was effective. (In other words, Benkert’s claim failed on both liability and limitation grounds.)
Key Lessons and Commercial Considerations
Negotiate and highlight unusual terms: This case underscores the importance of drawing attention to onerous clauses. A clearly drafted, conspicuous liability cap was upheld; by contrast, courts have struck down “hidden” clauses. For example, in Phoenix Interior Design Ltd v Henley Homes plc [2021] EWHC 1573, a buried, one‑sided clause was held unreasonable. Businesses should ensure caps or exclusions are prominent and, if necessary, explicitly negotiated or agreed (especially in standard-form contracts).
Clarity on obligations (maintenance vs design): PDL succeeded by showing that its contractual scope was limited to maintenance/repair of defects. Service providers should carefully define whether maintenance includes redesign or safety reviews. In Benkert the Inner House drew a firm line: a supplier of maintenance services did not automatically owe a duty to change a design feature (like a clip) unless the contract expressly said so. This highlights a legal risk where boundaries between service and design duties are unclear.
Bargaining power matters under UCTA: The court gave considerable weight to the parties’ relative resources and negotiation ability. In Benkert, both sides were commercial entities of equal strength, so the contract was treated as a genuine bargain. In practice, smaller parties or consumers have a better chance of upsetting a limitation clause. Companies should assess at the contracting stage whether a counterparty is likely to challenge a cap as “unreasonable.”
Insurance and risk allocation: The decision makes clear that having large liability insurance does not by itself render a low contractual cap unreasonable. Instead, courts ask who is best placed to insure the particular risk. Here, Benkert (the factory owner) was in a better position to insure against fire damage, whereas PDL’s cover was for different risks. Commercial parties should consider in advance how risks align with insurance: if a supplier limits its liability severely, the customer must ensure it carries adequate cover for the gaps. Likewise, suppliers should only limit to amounts they can reasonably insure.
Review standard terms and insurance mandates: Insurers and companies should note that limitation clauses now receive close scrutiny. An insurer paying on behalf of an insured may be subrogated (as here), so insurers may impose conditions on their clients’ contracts. After Benkert, insurers might insist that clients negotiate higher caps or contributory clauses if the potential insured losses are not covered by the supplier’s liability.
Commercial context prevails: Courts remain reluctant to “rescue” parties from bad commercial bargains. As noted by commentators, in arm’s-length deals between experienced businesses, limitation clauses are often upheld. Businesses should thus actively negotiate any term that allocates substantial risk, rather than expecting the courts to override it later.