OVERSEAS MEDICAL SUPPLIES LTD. v. ORIENT TRANSPORT SERVICES LTD.

A contractual limitation of liability must satisfy the statutory requirement of reasonableness in relation to the particular breach for which it is invoked. A single limit may reasonably govern loss or damage during carriage yet be unreasonable when applied to a failure to arrange the insurance intended to compensate for that loss.

Reasonableness depends on the clause as a whole and the circumstances at contract formation. Relevant matters include bargaining strength, practical alternatives, the reality of the customer’s consent, the proportionality of the limit and whether a genuine option existed to obtain greater liability cover. The party relying on the limitation bears the burden of proving reasonableness.

A freight forwarder agreed to transport medical equipment to and from an exhibition and to arrange insurance for the round trip. It failed to arrange the insurance, and the equipment was lost or not delivered on its return journey. Its standard conditions purported to limit liability to approximately £600, although the loss recoverable under the intended insurance was £8,589.66.

The Kingston County Court held that the limitation was probably reasonable for a direct claim concerning loss of the goods, but unreasonable when applied to the separate breach of the obligation to arrange insurance. Judgment was entered for the customer for the full loss and interest.

The freight forwarder appealed. The central issue was whether clauses 13(B) and 29(A)(ii) satisfied the reasonableness requirement imposed by sections 3 and 11 of the Unfair Contract Terms Act 1977 when applied to the failure to arrange insurance.

1. Appeal dismissed unanimously. Lord Justice Potter, with whom Lord Justice Mantell agreed, held that the trial judge had applied the correct principles and had reached a conclusion which was neither plainly wrong nor open to substantial criticism.

2. An appellate court should accord the utmost respect to a first-instance assessment of statutory reasonableness. Such an assessment requires a range of considerations to be weighed. The appellate court should intervene only where the judge proceeded on an erroneous principle or was plainly and obviously wrong, applying George Mitchell Chesterhall Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803.

3. The reasonableness of the limitation had to be assessed in relation to the particular breach. Arranging insurance was materially different from handling or transporting goods. If the forwarder failed to arrange the promised insurance, the customer could lose both the goods and the insurance intended to provide full compensation. A uniform limit of about £600 could therefore be reasonable for carriage loss yet unreasonable for failure to insure.

4. The relevant circumstances did not establish equality of bargaining power or a practical alternative. The forwarder offered a specialist package service, and it was neither practicable nor convenient for the customer to arrange insurance elsewhere. Although the customer knew formally of the standard conditions, the conditions did not bring home clearly that the same low limit protected the forwarder if it entirely failed to arrange insurance. There was consequently no sufficient reality of consent to that effect.

5. The purported option under clause 29(D) to obtain increased liability on payment of an additional charge did not establish reasonableness. The forwarder produced no adequate evidence of its policy, practice, insurance arrangements, comparable industry terms or the genuine availability and operation of that option. The statutory burden of proof rested on the forwarder.

6. The trial judge was entitled to regard the £600 limit as derisory when applied to goods for which substantially higher insurance had expressly been requested. He was not required to devise an alternative limit. The order was that the appeal be dismissed with costs.

1. Court of Appeal (Civil Division): The freight forwarder’s appeal was dismissed with costs. The county court’s conclusion that the limitation was unreasonable when applied to the failure to arrange insurance was upheld.
2. Kingston County Court: His Honour Judge Kenny held the freight forwarder liable for failing to arrange insurance. He found that clauses 13(B) and 29(A)(ii) did not satisfy the reasonableness requirement of the Unfair Contract Terms Act 1977 in relation to that breach. Judgment was entered for £8,589.66, interest and costs.