contract law case study
EcoPlumb Ltd (“EL”) agreed with Righton Ltd (RL) to supply and install a new, eco-friendly energy saving heating and air-conditioning system in RL’s factory and offices for a price of £50,000. EL’s standard form contract includes the following clauses:
1. “ The installation works will be carried out in a reasonable and workmanlike manner but no other guarantee or warranty is given regarding the system”
2. “ EL’s liability under this contract is subject to a maximum of £5000 or the cost of remedying the defects whichever is the lower”
At a meeting 2 months prior to signing the contract, EL’s representative told RL the new system should reduce their electricity bill by about 50- 75% in his opinion but they should check with head office. In fact, RL’s electricity bills have only reduced by 15% which is in line with the manufacturer’s specification of 15-30% reductions. There was nothing in the contract about the reduction in the electricity bill but RL are very annoyed and feel they were misled by EL’s representative although new environmental laws required that new heating systems in offices had to meet specific “green” targets which the new system does and RL promote themselves as an eco-friendly, green company.
The installation work is perfectly satisfactory but due to a design defect in the system’s pump, the temperature gauge does not work properly eventually resulting in RL having to close their offices and shut down production at the factory for two weeks. This resulted in £100,000 lost profits. In addition, RL have had to buy extra heaters and fans for the offices at a cost of £3000 and 2 senior managers have been off work with stress as a result of having to deal with all the staff complaints about their working environment. In addition, RL have had to pay a £10,000 fine for breach of health and safety legislation. RL could have had the same system installed for £70,000 by other plumbing companies without clauses 1 & 2 in their contracts.
RL consider EL are in breach of contract and are seeking compensation for all their losses including the lost profits, expenses, fine and the staff distress and also consider they were misled into the contract. They also want the full cost of installing a brand new system and removing the existing system which would cost £100,000 whereas it will cost £7,000 to repair the defective pump.
EL say that as the problems with the system are due to a design defect, clause 1 means that they are not liable as they are only liable for installation defects and in any event, any liability is limited to £5000 due to clause 2. In addition, they say as there was nothing in the contract about the electricity savings and any statement was just a rough guide and opinion only and that EL have no liability for this statement.
a) Advise RL as to EL’s liability regarding the system and the interpretation of clause 1 and whether EL can rely on clauses 1 & 2 in the contract
b) Advise RL as to the compensation regarding the system that may be recoverable if EL cannot rely on the clauses 1&2 in the contract
Advise RL as to whether the statement made about the electricity bills amounts to a misrepresentation and any possible remedies.