Enforceability of exclusion clauses – Court of Appeal decision

In a recent judgment, the Court of Appeal has provided some useful guidance on how the courts might approach the enforceability of exclusion clauses: Regus (UK) Limited v Epcot Solutions Limited [2008] EWCA Civ 361. The exclusion clause in this case purported to exclude liability for various items of consequential loss, including loss of business and loss of profits. The Court of Appeal overturned the High Court's ruling that the clause was unreasonable and of no effect. It concluded that the clause satisfied the reasonableness test under UCTA based on a number of factors, including that the customer was well aware of the term and indeed used a similar exclusion of liability in its own business.

The Court of Appeal's decision will be welcomed by businesses who automatically exclude and/or limit liability for financial loss in their standard terms. The case does however highlight the need to draft exclusion and limitation clauses very carefully.

Background

The defendant (Epcot) entered into a contract with the claimant (Regus) for the provision of serviced office accommodation. A dispute arose regarding problems with the air conditioning in Epcot's suite and Epcot stopped paying the service charges. Regus sued for the unpaid charges and Epcot counter-claimed damages for loss of profits and opportunity to develop its business. The High Court found that Regus was in breach of contract in providing defective air conditioning and that Epcot was entitled to recover damages subject to the provisions in Regus's standard terms and conditions which excluded certain liabilities.

The exclusion clause in question purported to exclude liability for various items of consequential loss including loss of business and loss of profits. It also stated "We strongly advise you to insure against all such potential loss, damage, expense or liability." The High Court held that the clause was unreasonable and was of no effect because it deprived Epcot of any remedy at all for Regus's failure to provide a basic service such as air conditioning.

The judge concluded that it would be "unfair for no remedy at all to be available to customers of Regus…for serious failures in service over what may be a contract for a significant period". The judge also held that as it was not open to the court to sever a clause which failed to meet the requirements of UCTA, the whole of the exclusion clause had no effect.

Appeal

The Court of Appeal allowed Regus's appeal. It said that the judge was wrong to conclude that Epcot was left with no remedy and pointed out that "the obvious and primary measure of loss for a breach of such a kind is the diminution in value of the services promised". It rejected Epcot's argument that the exclusion clause was unreasonable because it was expressed to operate "in any circumstances" which, Epcot had argued, meant that the clause on its face excluded liability for fraud or for deliberately damaging the customer's business. The Court of Appeal said that parties contract with one another in the expectation of honest dealing and therefore it would be an error to construe the words "in any circumstances" as intended or effective to exclude liability for fraud or malice.

The Court of Appeal concluded that the clause satisfied the reasonableness test under UCTA based on a number of factors including:

• In principle it was entirely reasonable for Regus to restrict damages for loss of profits and consequential losses from the categories of loss for which it will become liable when in breach of contract.
• Epcot's managing director was an "intelligent and experienced businessman" who accepted in evidence that he was well aware of Regus's standard terms when he entered into the contract.
• There was no inequality of bargaining power (largely because of Epcot's alternative suppliers).
• The availability of insurance to Epcot – although no evidence had been adduced on the issue, the Court of Appeal considered that it would probably have been easier for each customer to insure himself against business losses than for Regus to insure all of its constantly changing customers in respect of their own business interests.

The court also held that the exclusion clause could, in any event, be severed from a related limitation clause (which was not suggested to be unreasonable), and on which Regus could have relied. This was on the basis that the clauses were independent of each other and served different purposes.

Comment

The appeal decision will be welcomed by businesses who automatically exclude and/or limit liability for financial loss in their standard terms. The reasonableness of the exclusion clause will of course depend on the circumstances of the individual case. The fact that the customer clearly understood the exclusion clause and had a strong bargaining position, together with the court's view that it was reasonable for the customer to insure against indirect losses, clearly led the Court of Appeal to conclude that the clause was reasonable.

Although in principle it is reasonable for businesses to restrict damages for loss of profits and consequential losses arising out of a breach of contract, the case highlights the need to draft exclusion and limitation clauses very carefully. In particular:

• Care should be taken when using phrases such as "in any circumstances" to ensure that the supplier is not purporting to (i) exclude liability for categories of conduct (e.g. fraud) that the law does not permit to be limited or (ii) leave the customer without any remedy at all. It is sensible to deal with such matters expressly to avoid giving a customer any scope for argument on this issue.
• Elements of the exclusion/limitation should be separated into sub-clauses rather than using a single all-embracing clause as it may be possible for an unreasonable exclusion clause to be severed to leave the other "reasonable" parts intact.