Chubb Fire Ltd v Vicar of Spalding [2010] EWCA Civ 981 (20 August 2010)

Chubb supplied a fire extinguisher system to a church. The system's activation caused extensive damage. The court found Chubb's standard limitation clause, restricting liability to the modest contract price, was unreasonable under the Unfair Contract Terms Act 1977.

Facts

Chubb Fire Limited (‘Chubb’) supplied and installed a CO2 gas fire extinguisher system in the organ loft of St Mary and St Nicholas Church, Spalding, for a price of £74.50 plus VAT. The contract was made on Chubb’s standard terms and conditions. Clause 6.5 of these terms sought to limit Chubb’s liability for any loss or damage ‘howsoever arising and notwithstanding any negligence on its part’ to a sum not exceeding the contract price. In 2004, building contractors working in the church accidentally activated the extinguisher system, releasing pressurised CO2 gas which caused significant physical damage to the church fabric, costing over £245,000 to repair. The church’s insurers brought a subrogated claim in negligence against Chubb, who sought to rely on the limitation clause.

Issues

The central legal issue on appeal was whether the limitation of liability clause (Clause 6.5) satisfied the requirement of reasonableness as set out in section 11 of the Unfair Contract Terms Act 1977 (‘UCTA’). The High Court at first instance had held that the clause was not reasonable.

Judgment

The Court of Appeal unanimously dismissed Chubb’s appeal, affirming the High Court’s decision that the limitation clause was unreasonable and therefore unenforceable.

Reasoning of the Court

Lord Justice Aikens, giving the leading judgment, analysed the reasonableness of the clause by reference to the guidelines in Schedule 2 of UCTA. The key factors in the court’s reasoning were:

• Unequal Bargaining Power: The court stressed the ‘very unequal bargaining position’ between Chubb, a large specialist company, and the Parochial Church Council (PCC), who were ‘lay people’ without commercial or legal expertise. The contract was concluded on a ‘take it or leave it’ basis, with no opportunity for negotiation.
• Proportionality of the Limitation: The limit of liability to the contract price of £74.50 was described as ‘derisory’ when compared to the potential financial loss that could be caused by the system’s failure or accidental discharge. The very purpose of the equipment was to prevent catastrophic damage, making a clause that eviscerated liability for such damage inherently suspect.
• Insurance: The court considered that the question of insurance was not decisive on its own. However, it held that where a supplier in breach seeks to rely on a limitation clause which effectively forces the customer’s insurer to bear the entire loss without recourse, this weighs against the reasonableness of the clause. Aikens LJ stated:
  

  ‘The question of the availability of insurance is not, on its own, a pointer either towards or away from the reasonableness of a clause. However, if a supplier, who is in breach of contract and negligent, is seeking to rely on a limitation clause which would, in effect, mean that the customer’s insurers will have to bear the whole loss without recourse to the supplier, then to my mind that is a factor which weighs against the conclusion that the clause is a fair and reasonable one to have been included in the contract.’

• Industry Practice: While Chubb argued the clause was standard industry practice, the court was not satisfied with the evidence presented. It found no proof that the church could have contracted with another supplier on better terms, or that such a stringent limitation was a universal and accepted practice for this type of work.

Implications

This decision is a leading authority on the application of the UCTA reasonableness test to limitation of liability clauses in business-to-business (B2B) contracts. It clarifies that even in a commercial context, the courts will not automatically enforce standard terms where there is a significant disparity in bargaining power. The case underscores that a clause limiting liability to a trivial sum, especially when the supplier’s purpose is to prevent substantial loss, is highly likely to be found unreasonable. It serves as a warning to large organisations that they cannot always rely on standard form limitation clauses to avoid liability for their negligence when dealing with smaller, less commercially sophisticated entities.

Verdict: The appeal was dismissed. The court upheld the High Court’s decision that the limitation of liability clause was unreasonable and therefore unenforceable.

Source: Chubb Fire Ltd v Vicar of Spalding [2010] EWCA Civ 981 (20 August 2010)