In May 2007, the High Court decided, in the case of Regus (UK) Limited v Epcot Solutions Limited, that the exclusion of liability clause in the supplier’s standard terms of business was unreasonable under the Unfair Contract Terms Act 1977 (UCTA).
The Court of Appeal recently reversed this decision, stating that the first instance judge was mistaken in concluding that the clause left the customer without any remedy. The clause still allowed the customer a remedy in damages for breach of contract - here the diminution in the value of the services provided. The Court also decided that the clause met the requirement of reasonableness under UCTA, allaying concerns about the first instance decision, which had called into question the effectiveness of many suppliers’ standard exclusion clauses.
The relevant section of the exclusion clause restricted any liability for “loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss.”
According to UCTA, reasonableness will be assessed through several factors including:
- The relative strength of the parties’ bargaining positions,
- Whether the customer had received an inducement to agree to the clause,
- Whether the customer knew or should have known of the existence of the clause,
- Whether the party suffering loss had been able to insure itself against such loss.
The court decisions
In the first instance decision relating to the agreement to supply serviced office space, the court held that the supplier was in breach of contract, as the air conditioning in the property leased to the customer was defective and therefore the customer was entitled to recover damages for any loss it suffered as a result. The court also decided that the exclusion clause in the agreement did not satisfy the requirement of reasonableness under UCTA because, whilst the supplier had reasonably excluded damages for loss of profit and consequential losses, the clause did not allow the customer any remedy for the supplier’s failure to provide adequate air conditioning. Unable to sever or rewrite it, the High Court held the entire exclusion clause to be void.
The Court of Appeal reversed this decision, stating that the first instance judge was mistaken in concluding that the clause left the customer without any remedy. The clause still allowed the customer to sue for damages for breach of contract, which was here the diminution the value of the services provided. This could be measured by evaluating how much the services had dropped in value because of the lack of air conditioning.
Also, the Court of Appeal held that:
- It was reasonable in principle for the supplier to exclude damages for loss of profits and consequential losses,
- The customer’s manager was an experienced businessman and the customer used similar exclusion clauses in its own business,
- The customer had frequently sought to renegotiate terms of the contract but not the exclusion clause,
- There was no inequality of bargaining power between the parties,
- The exclusion clause advised customers to insure themselves against the losses that it excluded.
The court decided that the last section of the clause, dealing with the limits of liability, was independent from the rest of the clause. This is because the last section was a limitation clause rather than an exclusion clause, so serving a different purpose. If the first part of the exclusion clause had been unreasonable, it could have been severed, leaving the final part intact.
The decision means that suppliers may, in appropriate circumstances, continue to exclude liability for financial losses in their standard terms of business. Such exclusions are not guaranteed to be held reasonable (and will continue to be scrutinised under UCTA) but the court will be loath to interfere with the intentions of informed business parties.