A valid and effective exclusion clause will operate to limit or exclude damages that may be claimed if a breach of contract occurs. In all types of business to business contracts, carefully drafted clauses that seek to limit or exclude liability can serve as an effective tool to manage contractual exposure, provided they satisfy the ‘fair and reasonable’ threshold test under the Unfair Commercial Practices Act 1977 (“UCTA”). The good news is that the boundaries of what can/ cannot be excluded under contract are now clear on settled legal principles. However, the correct application of these principles to specific situations can still be a delicate balancing exercise. Whilst the UK Courts are generally reluctant to trespass into commercial negotiations between contractual parties of equal bargaining power, the correct reach of certain exclusion clauses within the borderlines of these legal boundaries has often led to costly litigation. Two recent decisions from the UK Court of Appeal provide an indication of the relevant factors which help shape the parameters of such clauses. Whilst these decisions were not dealing with contracts in the Technology sector as such, they are of equal significance and applicability in that area.
Goodlife Foods Ltd v Hall Fire Protection Ltd (“GoodLife”)
In GoodLife, the Court of Appeal considered the applicability of an exclusion clause in a commercial contract governing the supply and installation of a fire suppression system into factory premises. The Respondent’s (Hall Fire) product allegedly failed to contain a fire which caused substantial damage and loss to the Appellant (GoodLife Foods Ltd). The Appellant alleged that the Respondent’s product was defective in failing to suppress the fire, which led to property damage and business interruption estimated at GBP £6.6 million. However, the standard conditions of the Respondent’s supply contract contained the following exclusion wording:
“We exclude all liability, loss, damages 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 or components provided by [Hall Fire] for whatever reason. In the case of faulty components, we include only for the replacement, free of charge, of those defected parts. As an alternative to our basic tender, we can provide insurance to cover the above risks...”
The Appellant raised a common law negligence claim and sought to revoke this clause on the grounds that: (i) it was unusual/onerous; (ii) had not been fairly and reasonably brought to its attention; and (iii) in the event it was incorporated into the contract, it was not “reasonable” in accordance with UCTA.
The Court of Appeal upheld the first instance decision and dismissed the appeal. In examining whether the exclusion clause could be incorporated into the contract, the Court considered a number of relevant factors.
- The limitation of liability was mentioned in the opening paragraph of the Respondent’s conditions. The clause had been fairly and reasonably brought to the Appellant’s attention – it was not buried in a “raft of small print”. In rather scathing terms, Lord Justice Coulson reasoned that: “…. the warning …. was cast in almost apocalyptic terms …. if that did not alert them… then nothing would have done”.
- The Respondent was providing a one off service and would not be supplying ongoing maintenance or other support. The contract was for a relatively low cost product installation and it was commercially reasonable for the Respondent to attempt to limit its commercial exposure under that supply contract.
- The Respondent did present the Appellant with the option of insurance at an additional cost to enable them to accept a wider liability.
- The length of time taken to approve the contract led the Court to conclude that the Appellant had sufficient time to query or negotiate the terms and conditions.
First Tower Trustees Ltd, Intertrust Trustees Limited v CDS (Superstores International) Limited (“First Tower”)
This decision, which was handed down one day after GoodLife, concerned the enforceability of a misrepresentation exclusion clause. The Appellant (a landlord) had misrepresented to the Respondent (tenant) that it had no knowledge of environmental problems affecting the property, when in fact it was aware of asbestos problems. The Court found in favour of the Respondent and held that the concerned exclusion clause did not satisfy the requirement of reasonableness and consequently, the Appellant’s did not limit their liability for the misrepresentation. The Court reasoned that contractual misrepresentation is a paradigm “vitiating factor” which undermines the validity of a contract. As such, appropriate control mechanisms are needed to ensure that any such contractual terms excluding liability for misrepresentation are fair and reasonable.
Comment and insight
Whilst the decisions in GoodLife and First Tower led to differing outcomes for the concerned parties, there are a number of parallels from the two decisions that should provide future insight in navigating the boundaries of valid and enforceable exclusion clauses. Drawing upon the reasoning of the Courts in these decisions, we recommend that parties seeking to rely upon exclusion clauses should consider the following issues:
i. Be mindful of the status of the other side
In First Tower, the Court emphasised that the “level of sophistication” of a contracting party was relevant in determining whether a term is effective to prevent the party from obtaining a remedy for misrepresentation. This appears to be an extension of the general principle whereby the Courts are reluctant to interfere in contracts where the parties are of equal bargaining power. If there is a clear inequality then the party attempting to rely upon an exclusion clause should take additional steps to ensure that the party subject to the exclusion clause is aware of the nature and consequences of that clause.
ii. Do not attempt to “bury the exclusion clause in a raft of small print”
The mere fact that a clause excludes or restricts liability will not mean that it is onerous or unreasonable. However, as emphasised by the Court in GoodLife; ‘particularly onerous or unusual’ clauses in standard conditions will not be treated as forming part of a contract unless they are brought to the other party’s attention. This conclusion is consistent with earlier case law that the more ‘outlandish the clause the greater the notice which must be given’. In brief, the counter-party to the contract must be given fair and reasonable notice of the clause, particularly where it could be construed as unreasonable or onerous.
iii. Carefully assess the scope of any ongoing maintenance and support
The party seeking to rely upon the exclusion clause should carefully consider the scope of any continuing contractual obligations, such as routine maintenance and support. This was a relevant factor in GoodLife as the Court recognised that if the scope of the contract was limited to the supply and installation with no ongoing obligation such as routine maintenance then it would be entirely reasonable for that party (i.e. the supplier) to protect itself from potential unlimited liability arising from future events. On this rationale, companies should carefully balance the commercial benefits of increased revenue from providing ongoing product support against the potential exposure that this may bring in the form of increased liability.
iv. Other practical measures
Whilst the above factors flow directly from the analysis of GoodLife and First Tower, there are some additional practical commercial measures that industry should consider when attempting to rely upon an exclusion clause:
- Any contractual terms excluding or limiting liability should be consistent with the context of the contract and the goods or services supplied.
- Ensure that the exclusion clause does not undermine a fundamental industry standard, such as in the context of drug supply/ services contracts: good clinical practice (GCP); good manufacturing practice (GMP); or good distribution practice (GDP).
- Draft the exclusion clause in clear and unambiguous wording. Be precise as to what elements are subject to the exclusion. If a clause is open to interpretation or the scope is unclear, it may be decided against the party seeking to rely on it. The Courts are reluctant to get involved in situations where a party has simply made a ‘bad bargain’. However, if there is uncertainty as to what the parties agreed and/or if the clause excluding or limiting liability is shown to be unfair or unreasonable then the Courts will step in.