Excluding Liability for Latent Defects In two cases,1 the court has considered clauses, which provided that the usual 12-month defects period was instead of any other remedy for defects. This excluded liability for latent defects i.e. those arising after the defects period.

1 The Clause

In BFP v Compair, the contract stated that the defects period was:

“in lieu of any warranty or condition implied by law as to the quality or fitness for any particular purpose of the goods and save as provided in this condition the Vendor shall not be under any liability to the Purchaser (whether in contract, tort or otherwise) for any defects in the goods or for any damage, loss, death or injury (other than death or personal injury caused by the negligence of the Vendor as defined in Section 1 of the Unfair Contract Terms Act 1977) resulting from such defects or from any work done in connection therewith.”

This clause is a forerunner of clause 36.9 in MF/1 rev 6.2

2 The Business Justification

When reviewing a limitation or exclusion clause, the court considers the whole contract to see what other remedies exist. The judge in BFP v Compair said:

“It seems to me that the business commonsense intention of the agreement as a whole is that the vendors undertake to supply a machine of the specification warranted, and if they fail in that undertaking the purchasers have an initial right to withdraw from the contract and reject the machine on terms that the vendors pay for them to buy from other suppliers a machine that is up to specification. If the purchasers so choose, there will be a period when the vendors will try to bring the machine up to specification, and those efforts again may be terminated by the purchasers by rejecting on the same agreed terms. If the purchasers still do not reject when the machine fails to come up to specification, the purchasers keep the machine but on terms that they do not complain thereafter of the failure to come up to specification. The amount of the damages claimed in this action compared with the purchase price shows the good business commonsense of the contract. If the project is not successful, the purchasers have two opportunities to withdraw and buy a substitute machine of the standard warranted from another supplier at the vendor's expense, but they are not to be allowed to stand on the deal and charge the vendors enormous sums for their loss continuing for the life of the machine.”3

3 What Do Defects Clauses Do?

In BHP v British Steel [2000] May LJ said in relation to a similar clause:4

“[Orthodox] defects liability clause[s]…do not limit or exclude liability. Typically they confer additional rights and obligations requiring the contractor or supplier to undertake additional work to rectify defects which appear within a defined time after completion usually without additional payment. They may be seen as benefiting both parties…The amended clause was no longer only a defects liability clause… it contained limitations of liability.”

4 Interpreting Specific Phrases

Reviewing specific parts of the clause cited above, the court in BFP v Compair held: ‘any warranty or condition implied by law’ is restricted to implied terms; ‘save as provided for in this condition’ refers to the exclusion of negligence as defined by s1

UCTA;5 ‘defects in the goods’ means failure to come up to any express performance specification; ‘shall not be under any liability to the purchaser’ is not limited to any warranty or condition

implied by law as the words which follow “indicate an intention to go far beyond the boundaries of liability for breach of implied terms and to refer to liability for breach of express terms, tort, and other forms of liability”;6

‘tort’ is not limited to liability for breach of implied terms; ‘contract’ extends to both implied and express terms; and ‘or from any work done in connection therewith’ clearly refers to rectification and repair during

the defects period.

5 Consequences for the Parties

The buyer is provided with many opportunities under the MF/1 form of contract to test, inspect and ensure the performance of the goods against objective criteria. Each stage provides remedies such as a reduction in price payable, rejection, repair/replacement and re-testing. Latent defects become the buyer’s risk and the buyer cannot continue to complain. The supplier is required to keep the goods and plant operable for a specific period (the defects period), but not for the life of the plant. This enables the supplier to understand the extent of its liability and to agree a price that reflects this risk.

The Author

Sarah Fox of 500 Words Ltd wrote this note. She is both a fan of and experienced in reviewing the MF suite of contract including MF/1. As a speaker and trainer, Sarah helps construction specialists write simpler contracts and understand complex ones. She is also author of a series of 500-Word construction contracts.

To find out how Sarah can help you avoid disputes contact her on: 07767 342747 or by email: sarah@500words.co.uk

Footnotes 1 British Fermentation Products v Compair Reavell [1999] 2 All ER (Comm) 389 and in BHP Petroleum v

British Steel [2000]2 All ER (Comm) 133. 2 The Model Form of Contract for the design, supply and installation of electrical, electronic and

mechanical plant published by IET and IMechE, 2014 edition. 3 Paragraph 25.

4 A defects clause combined with an exclusion of further liability and a cap on all liability ‘arising out of

work not complying with the requirements of the contract.’ 5 Unfair Contract Terms Act 1977. For section 1, see Legislation. 6 Paragraph 26.