Exclusion clauses: High Court refuses summary judgment where UCTA "reasonableness" in issue

The High Court has dismissed a defendant's application for summary judgment on the basis of an exclusion clause in a standard form contract, as it was not satisfied that the claimant had no real prospect of challenging the reasonableness of the clause for the purposes of the Unfair Contract Terms Act 1977 (UCTA): A. F. Kopp Limited v HSBC UK Bank Plc [2024] EWHC 1004 (Ch).

The decision is consistent with previous decisions in which the court has shown reluctance to grant summary judgment when faced with a question of whether an exclusion clause is "unreasonable" under UCTA (see our blog post on a similar recent decision in Last Bus Ltd v Dawson Group Bus & Coach Ltd [2023] EWCA Civ 1297). The judge noted that, given the fact-sensitive nature of a challenge to the reasonableness of an exclusion clause, cases where summary judgment is granted are likely to be extremely rare. In the present case, there were obvious matters requiring further investigation which could only be dealt with at trial.

The decision is also of interest for the judge's comments on the interpretation of the clause, which excluded "indirect or consequential" (but not "direct") losses of profit. In the judge's view, losses of profits sustained by third parties – rather than the claimant's own losses of profits – should be regarded as "indirect or consequential". However, since he dismissed the defendant's application for summary judgment, the interpretation of the clause would be a question for trial and the judge's views should not be taken as authoritative.

Finally, the decision shows that the court may grant an order for security for costs, despite a claimant's submission that it will be unable to pay security and its claim will therefore be "stifled", if the court considers that there are third parties who stand to gain from the litigation and could reasonably be expected to fund the litigation, including the provision of security.

Background

Between 2017 and 2018, the claimant opened two bank accounts with the defendant bank: a business current account and a foreign currency business bank account. Under its terms and conditions, the bank was only liable for "direct loss of profit" and "other direct losses", but not for "indirect or consequential loss (including lost business, data, profits or losses resulting from third party claims) even if it was foreseeable".

The claimant acted as import agent for two US businesses, which were its only customers. The claimant asserted that it had informed the bank at a meeting in February 2018, ie at the time of opening the foreign currency account, that it acted as an import agent and had also explained the importance of having access to a foreign currency account owing to the nature of its business.

In its capacity as an agent, the claimant purchased electronic consumer goods at auction from an online auctioneer, FreeFlow.

As part of routine anti-money laundering "safeguard review" checks on the claimant, the bank placed an "inhibit" notice on the claimant's accounts, meaning that the claimant was unable to pay the funds owed to FreeFlow. As a result, FreeFlow cancelled the claimant's order and removed the claimant's bidding access to its auctions.

The claimant alleged in the present case that the bank's actions led to it being in breach of its obligations towards its US principals, and liable to indemnify both companies for their alleged loss of profit which flowed from the cancelled order (the amount of which was agreed in a settlement agreement between the claimant and the two companies). It alleged that the bank had breached its terms and conditions by conducting its safeguard review "unreasonably, arbitrarily and haphazardly". As such, the claimant sought damages totalling the sums owed to the two US companies under the settlement agreement.

The bank applied for summary judgment on the basis that: (i) the bank's terms and conditions excluded the alleged liability (ie the losses allegedly suffered were an "indirect" loss of profit and therefore excluded); and (ii) although the exclusion clause had to meet the reasonableness test under UCTA, because it formed part of the bank's standard terms of business, it was in fact reasonable and was therefore enforceable.

In the alternative, the bank applied for security for costs on the ground that the claimant was a company and there was reason to believe it would be unable to pay the defendant’s costs if ordered to do so.

Decision

The High Court (HHJ Hodge KC sitting as a High Court judge) dismissed the application for summary judgment and ordered the claimants to provide security for costs.

Summary judgment

The court can grant summary judgment where it considers that the relevant party has no real prospect of succeeding on the claim or defence, and that there is no other compelling reason why the case should progress to trial.

Was the loss covered by the exclusion clause?

The key question was whether, on the proper interpretation of the exclusion clause in the terms and conditions, the alleged losses were direct losses of profit, which were not excluded by the clause, or indirect losses of profit, which were excluded.

HHJ Hodge referred to the analysis of the authorities on the exclusion of "indirect and consequential loss" in 2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC) (considered here), from which he concluded that:

1. the phrase usually means losses falling within the second limb of the classic Hadley v Baxendale test for remoteness, ie those which do not arise naturally from the breach of contract but are nonetheless within the contemplation of the parties due to special circumstances known to both parties; but
2. in the absence of any express judicial consideration of the particular clause in question, it should be construed on its own wording, and in the context of the agreement as a whole and the factual background.

In assessing whether the claimant had a reasonable prospect of success, the court therefore examined whether its alleged loss fell into the first or second limb of the test in Hadley v Baxendale. In the judge's view, the loss could not fairly and reasonably be considered as arising naturally, according to the usual course of things. Rather, it arose from the special circumstances of the agency relationship between the claimant and the two US companies which (on the claimant's case, which the court accepted for these purposes) was communicated to the bank during the course of the February 2018 meeting. Accordingly, it seemed to fall into the second limb of Hadley v Baxendale, in which case it would fall within the exclusion of liability. In any event, on the wording of the exclusion clause in the context of the banking agreement and the factual background, the judge indicated that he strongly inclined to the view that the losses were indirect or consequential losses, rather than direct losses, since a "direct loss of profit" would be a loss of profit directly sustained by the claimant itself, as opposed to its liability for losses of profits sustained by the two US companies.

However, in light of his conclusions on the second issue, addressed below, the judge said that his views on the interpretation of the clause should not be treated as authoritative.

Reasonableness under UCTA? 

The claimant's case was that the clause failed the reasonableness test under UCTA. It identified a number of factors that it suggested lent themselves to a finding that the exclusion clause was unreasonable (including the relative sizes of the parties' businesses and the impact of the clause, given the nature of the claimant's business) and a number of factors that it said required further exploration (including whether similar clauses were used by other banks, and the availability of insurance).

Whilst acknowledging that, in an appropriate case, a challenge to the reasonableness of a contract term under UCTA might be capable of summary judgment, HHJ Hodge noted that, given the fact-sensitive nature of a challenge to an exclusion clause, cases where summary judgment is granted are likely to be extremely rare. He concluded in the present case that there were obvious matters that required further investigation which could only be considered at trial. Accordingly, the bank had not discharged the burden of demonstrating that the claimant had no real prospect of successfully challenging the assertion that the exclusion clause was unreasonable.

Security for Costs

In relation to security for costs, the claimant accepted that there was reason to believe it would be unable to pay the defendant's costs if ordered to do so. However, it submitted that the court should exercise its discretion against the bank's application, including because: firstly, it was the defendant's breach which led to the collapse of the claimant's business; and, second, the claimant could not pay security and so the effect of any such order would be to stifle the claim and deny the claimant access to justice.

The court rejected these submissions. It noted that the claimant's accounts showed it was not making any money before the safeguard review process started. It did not therefore accept that the claimant's financial situation was the result of the bank's conduct.

The court considered that the critical factor justifying an order for security for costs was that the present case had been brought primarily for the benefit of the US third parties, in order to enable the claimant to satisfy its legal liabilities towards them. There was no evidence of the financial standing of these companies, or of any approach to them to fund the litigation. In circumstances where they stood to gain from it, it was reasonable to expect them to fund it.

As such, the court considered it "just" to order security for costs on the premise that "stifling" would only occur if the US parties declined to fund the litigation and, if they did decline, fairness to the bank dictated that the claim should not proceed to trial.