Introduction

Property insurers often train their sights on the suppliers of defective plant and equipment in order to recoup losses suffered by reason of a defect in the plant and equipment supplied. A common refrain from such suppliers is "we are not an insurer" followed by a defence relying on its standard terms and conditions that seek to exclude or significantly limit liability.

In a recent decision the TCC has upheld a widely drafted exclusion clause. The court provided useful guidance on when broadly drafted exclusions incorporated into a contract may satisfy the reasonableness requirement in the Unfair Contract Terms Act 1977 (UCTA). In doing so, the court had regard to the fact that the supplier would have been expected to obtain insurance for the losses suffered and marks a divergence from previous decisions.

The claimant, Goodlife, produced frozen foods from a premises in Warrington. Food was cooked utilising an industrial frying machine before being frozen. The production line was protected by a fire suppression system supplied and installed by the defendant, Hall, in 2002. Hall's quotation for the supply and installation of the fire suppression system attached its standard terms and conditions, clause 11 of which purported to exclude "all liability, loss, damage or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems … for whatever reason" (part 1). It also provided for replacement, free of charge, of defective or faulty parts (part 2) and offered the opportunity for Hall to provide insurance to Goodlife against the risk of the suppression system failing (part 3).

On 25 May 2012 a fire occurred, which caused property damage and business interruption losses in excess of £6m. It was alleged that a defect in the installation of a compression joint of the suppression system prevented it from conveying suppressant media to the production line to extinguish or suppress the fire.

Goodlife brought a claim against Hall for negligence (any breach of contract claim had long since become time barred). Hall defended the claim, relying upon the exclusion contained within their standard terms and conditions. Goodlife argued that the exclusion clause was unreasonable under UCTA.

Decision

The relevant events took place some 15 years prior to the hearing and Goodlife was unable to disclose any documentary evidence relating to the formulation or performance of the contract other than produce a copy of the defendant's quotation.

Both parties adduced evidence on whether hall's terms and conditions had been sent to Goodlife with the original tender. Hall contended that it had sent a copy of its standard terms and conditions to hall. Hall denied that contention. In the light of Goodlife's lack disclosure, and the vague recollections of their witnesses, Hall's evidence of what was provided was preferred.

Goodlife argued that before the question of whether the exclusion clause had been incorporated into the contract, it was necessary to interpret the scope of the exclusion clause and then consider the law on the incorporation of what are said to be unusual or onerous conditions. However, the court held that by sending its quotation which said that Hall's terms and conditions would apply, and by attaching its conditions to that quotation, Hall's terms and conditions were incorporated into the contract.

Obiter, the judge held that had the standard terms and conditions not been sent to Goodlife with the quotation, they would not have been incorporated into the contract (despite the defendant's quotation referring to them). This follows Edward-Stuart J's comments in Transformers and Rectifiers v Needs [2015]1 that standard terms and conditions will not be incorporated unless that party has given the other party reasonable notice of those terms and conditions. What constitutes reasonable notice will differ from case to case, however, the judge cited three reasons in support of his obiter comments, namely:

(a) the lack of previous dealing;

(b) Goodlife not being in the fire protection business; and

(c) the standard terms were:

(i) not industry standard, even though were not unusual; and

(ii) lengthy, wide-ranging, widely-drafted with no express reference to the quotation.

On the subject of whether the exclusion clause was reasonable for the purposes of UCTA, the court restated a number of helpful principles:

  • The time for determining reasonableness was at the time the contract was made. That is not influenced by the seriousness of the loss actually suffered;

  • The guidelines on Schedule 2 of UCTA are not exhaustive for the purpose of determining what is reasonable and it is not closed;

  • Whilst the availability of insurance is a factor, it is not determinative;

  • The option of allowing a party to contract without a limitation clause but with a price increase can also be a factor that can be taken into account; and

  • The party seeking to rely upon an exclusion clause had the burden of proving that it was reasonable.

Goodlife relied on case law, such as Charlotte Thirty Ltd v Croker Ltd2, where wide exclusion clauses were held to be incompatible with UCTA. They argued that the clause deprived Goodlife of protection to which it would otherwise be entitled to under the law.

Hall argued that the first part of clause 11 was reasonable and necessary to protect Hall from unlimited claims where: (i) the contract price was modest, (ii) the potential liability was significant, (iii) insurance was available to cover the risk and (iv) the approach taken to limit liability is commonplace in the suppression system market.

The judge held that the clause was reasonable. In his view, Goodlife needed protection against loss from fire in the event of the system failing. However, a claim against Hall would only assist if the failure arose from Hall's negligence and Hall had sufficient assets to meet the loss. Clause 11 reminded Goodlife of the importance to take out insurance (if it did not already have sufficient property and business interruption insurance already) with Hall offering to assist in this regard.

The loss to which the clause related and protection was needed was one which a prudent SME could be expected to insure against.

The judge distinguished the claim from other decisions on the basis that apart from the cost of putting right a defect with the system (which Hall was required to carry out by part 2 of the clause) "the only likely loss would result from a fire not being prevented by the fire suppression system, in respect of which the customer almost certainly would and certainly should be covered by insurance anyway".

In the decisions relied on by Goodlife, the exclusion clauses held to be unreasonable required the buyer "to abandon its right of recourse in circumstances where the nature and extent of any loss and damage was infinitely variable in terms of cause, effect and amount, and where that loss and damage could not sensibly all be covered by insurance". It was held that the types of loss (i.e. the cost of rectifying a problem with the system or a potentially catastrophic fire) were in the parties' contemplation at the time of the contract, satisfying the requirement at section 11(1) of UCTA.

Conclusion

The decision provides useful guidance as to circumstances where a broadly drafted exclusions may be reasonable under UCTA. This decision, as with many relating to standard terms and conditions, is fact dependant. It nevertheless suggests that such clauses may well be considered reasonable in contracts for the supply of goods intended to protect against commonly insured risks (i.e. fire, flood, theft, subsidence etc) where, apart from the cost of putting right a defect with the goods, the only other likely loss would result from a failure of such goods and, in respect of which, the purchaser almost certainly should be covered by insurance.

This decision is unlikely to be welcomed by customers (and their property insurers) seeking to make recoveries for catastrophic losses that could or should have been prevented. Whilst it is important to remember that the question of whether an exclusion clause is reasonable will, ultimately, depend upon the particular facts of the case.

This decision may give comfort to suppliers of fire suppression systems (and their liability insurers) and possibly the suppliers of other plant to be installed in buildings such that, in circumstances where risks should ordinarily be covered by insurance, the common refrain may ring out louder and clearer…much to the chagrin of those who acceded to their standard terms and conditions.