Consequential loss: Who picks up the pieces?

 

A situation that comes up over and over again is that of liability for consequential loss, or in plain English, who has to foot the bill for a customer’s losses when equipment, supplied by an installer from a supplier, fails within its warranty period.

 

Example: Dave’s Ice Sculptures

Dave is a full-time ice sculptor who sells his artworks to hotels, restaurants and clubs for high fees. He asks Mike, a qualified electrician and NAPIT member, to upgrade the electrics in his workplace so that he can install additional freezer units to store his sculptures. Mike agrees, and carries out the work using sockets purchased from Dodgy Sockets Ltd, a reputable local supplier. The sockets come with a three year warranty in favour of the customer, Dave.

One night, around two years after the upgrade, the specialist sockets fail and all of Dave’s painstaking work melts into a series of puddles. Dave wants to recover not only the cost of replacing the sockets, but also the loss of income he has suffered as a result of his ice-sculptures melting. He contacts Mike, saying that under the warranty and Mike’s contract with Dave, Mike is responsible for all of Dave’s losses.

Mike tries to sue Dodgy Sockets Ltd, but is told that under Dodgy Sockets Ltd’s standard terms of sale, only the cost of providing replacement sockets is covered, not the cost of refitting the sockets, and definitely not any losses caused to Mike’s customers.

 

The contracts between the parties

This scenario is all too familiar to many NAPIT members. When you supply goods to a customer from a supplier, the contractual position usually looks like this:

 

Supplier     ---------------------->      Installer       ------------------>        Customer

                       CONTRACT 1                       CONTRACT 2

 

As you can see, the customer has no direct contractual link with the supplier. Equally, the supplier doesn’t have any direct contractual liability to the customer. Their contractual liability is to you.

The problem is that your rights to make a claim against the supplier under Contract 1 are usually a lot less extensive than the customer’s rights to claim their loss from you under Contract 2.

Contract 1

Contracts between suppliers and installers are “business to business” contracts. They usually incorporate the supplier’s standard terms and conditions, which will almost certainly limit the supplier’s liability as much as possible. There are some basic minimum standards that can’t be excluded by contract (for example, the goods must be of a satisfactory quality, and any limitations of liability in standard T&Cs must be “reasonable”). For the most part, though, the law assumes that you and the supplier are bargaining on an equal footing and so any terms agreed between you will be upheld.

Contract 2

Your contract with the customer will usually be on your terms and conditions. However, when the customer is a “consumer”, they have the benefit of additional statutory protection when contracting with you as a “business”.

Amongst other things this means that your terms must be “fair” and must not create a “significant imbalance” between your rights and the rights of the consumer. You cannot limit your liability for supplying defective, mis-described or incorrectly installed goods.

This can mean that, if you are not careful, you will be caught in between the customer, who has a right to claim for their losses against you under your terms and conditions or their statutory rights, and the supplier, who does not have an obligation to pay you for those losses.

What can you do?


1. Rely on the warranty

The first thing to do is to check the terms of the warranty. This could give either you or your customer, as the end-user, a separate right to claim losses directly from the supplier.

There are two issues with relying on a warranty. Firstly, it’s likely that the warranty will itself be limited to certain losses (such as the cost of replacement sockets in our example). Also, in many cases it’s up to the person who has the benefit of the warranty (usually the customer) whether they choose to go after the supplier under the warranty, or you under your contract, or both of you. Even if the warranty does cover the customer’s losses you could still get caught in the cross-fire.


2. Limit your liability to the customer as much as possible

Although the statutory protections for consumers don’t allow most forms of limitation of liability, there are still a few contractual terms that are allowed:

You can exclude liability for “business losses” as long as you define what “business losses” are, and as long as it is reasonable to do this. In the example above, Mike could have agreed with Dave before starting work that he wouldn’t be liable for any business losses caused by any failure of the sockets.

You can exclude liability for losses that were caused by the consumer themselves, and you can also state that you will charge a reasonable amount for dealing with problems that have arisen as a result of the consumer’s actions.


3. Increase your rights against the supplier 

In theory, you should also be able to negotiate with your supplier to ensure that you can pass any claims due to faulty goods up the contractual chain. However, the reality is that unless you are a large business, the supplier is likely to ignore any request to amend its standard terms.

You can argue that those terms are not “reasonable” (and the fact that they are standard terms increases the supplier’s obligation to be reasonable), but in order to do so you would have to take the claim to Court.


4. Insurance

If you think that there is a high risk (for example, if a customer tells you that the socket you are installing is crucial to the successful running of their business) you may want to consider taking out appropriate insurance, and working the cost of that insurance into your contract with the customer.

This is a difficult situation to be in, As always, the key is to read the small print – yours and the supplier’s – and to think through any particular risks before agreeing to do the work.

If you're interested in any of the topics raised in this article, or for further information, please contact Catherine Gritt. Alternatively, you can call to speak to one of our team on 0115 9888 777.

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