It is common for a commercial agreement to seek to limit a party’s liability. Such a limitation is often calculated as a percentage of the amount of money paid under the contract.

This doesn’t mean you can get out of having to pay. That’s what someone recently argued before a trial judge. They received goods under the contract but refused to pay. They argued their liability was zero since they had paid nothing and their liability was therefore nothing.

That’s a perverse interpretation: relying upon your own failure to pay to excuse you from having to pay. This initial ruling was reversed on appeal. For the lawyers out there, the High Court reversed it and it didn’t even get as far as the Court of Appeal.

In that case, Costcutter had ordered goods for P&H to deliver to convenience stores. Costcutter used its buying power to get discounted prices which it passed on to the store owners. In return, it charged a 1% handling or service fee. There were service problems with delays to the deliveries. This led to a dispute with the owners of the stores.

The contract contained a standard limitation of liability provision:

“…the total liability of either party shall in respect of all acts, omissions, events and occurrences whether arising out of any tortious act, breach of contract or statutory duty or otherwise arising in any particular Contract Year in no circumstances exceed a sum equal to five (5) times the Service Charge paid by the Retailer to the Consultant in respect of the Contract Year immediately prior to the Contract Year in which such claim was made.”

The store owners argued they had no obligation to pay for the goods delivered and/or their liability was capped at five times the service charge, which was nothing. The High Court reversed this. It said the obligation to pay for goods / services under a contract is a primary obligation. A limitation clause covers a secondary obligation, which is to compensate for breaching the contract. So, the store owners had a primary obligation to pay for the goods they received, subject to any counterclaim or action to set-off. This wasn’t saved by the secondary limitation provision.

What next?

As ever, check your contracts are drafted properly. In particular, revisit the payment and liability provisions. Common sense says you have to pay for goods/services you receive. This ruling reinforces that from a legal perspective. You might be able to bring a counterclaim that the goods/services weren’t as you expected. But you can’t rely upon your failure to pay to avoid your obligation to pay.

If you need advice, contact me f.jennings@teacherstern.com or +44 (0) 20 7611 2338.

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