A consistently thorny issue for IT systems/services suppliers and their customers is uncertainty over the operation of exclusion and limitation clauses. The recent Court of Appeal decision in Regus (UK) Limited v Epcot Solutions Limited will provide comfort for IT suppliers and continues a trend that sees the courts not interfering with clauses that have been negotiated by experienced businessmen. However, there appears at the same time to be a misunderstanding about the availability of insurance, which is a relevant factor.
The Court of Appeal held that the exclusion clause in Regus’ terms and conditions satisfied the test of reasonableness under the Unfair Contract Terms Act (UCTA). One of the reasons why the Court found in favour of Regus was that Regus’ customers were better placed than Regus to insure themselves against their business losses. This article will comment on whether this was a valid finding and, if not, how that might impact on future decisions.
Regus provided serviced office accommodation to Epcot in a building at Heathrow. Having renewed their contract with Epcot, Regus decided to close its Heathrow location and offered Epcot alternative accommodation at their premises at Stockley Park. Epcot found the air conditioning at the new premises inadequate, to the extent that it was making some of their staff feel unwell; complaints were also received from Epcot's clients.
Issues between the parties remained unresolved with Epcot eventually withholding fees. Regus sued for the outstanding fees and Epcot counterclaimed, alleging that the poor air conditioning amounted to a breach of contract, also claiming amongst other things, loss of profits and loss of opportunity to develop its business. Regus relied on two sub-clauses in its terms and conditions - one excluding certain liabilities and one limiting its liabilities.
First instance decision
The High Court judge found that the air conditioning was defective as a result of Regus’ negligent failure to carry out repairs. The judge also held that Regus was not entitled to rely on its exclusion sub-clause on the basis that it amounted to a total exclusion of any remedy and was therefore unreasonable and unenforceable under UCTA. As a result he struck out the whole clause, refusing to leave intact the limitation of liability sub-clause even though he thought that such a sub clause might be reasonable in principle.
Court of Appeal decision
The Court of Appeal overturned the High Court’s decision that the exclusion sub-clause left Epcot without a remedy on the basis that Epcot’s loss from the defective air conditioning was in truth the diminution in value of the service contracted for, which was not a loss excluded by the sub-clause.
Rix LJ went on to consider whether the limitation of liability sub-clause was reasonable in the circumstances, taking into account the following factors:
- Epcot’s managing director was an “intelligent and experienced businessman”
- He was aware of Regus’ standard terms when he entered into the contract and had contracted before on identical terms
- He had used a similar exclusion of liability for indirect consequential losses in his own business terms
- Epcot had sought to renegotiate terms of the contract frequently and energetically, although not the exclusion clause in issue
- There was no inequality of bargaining power despite Regus being a bigger enterprise. Epcot made good use of the fact that there were competitors to Regus in the Stockley Park area
- The clause advised Regus’ customers to protect themselves by insurance for losses with which it was concerned and it was probably easier for Regus' customers to insure themselves against business losses, than for Regus to do so.
Accordingly, the Court found that the requirement of reasonableness was satisfied.
Availability of insurance
The first instance judge had heard no evidence about the availability of insurance, so regarded that factor as neutral. In contrast, Rix LJ thought it would probably have been easier for each of Regus’ customers to insure itself against business losses, than for Regus to insure all of its constantly changing customers in respect of their own losses. While, given the limitation of liability of £50,000, Regus would only be insuring up to that level, but “would hardly be in a position to give proper information to underwriters about the businesses concerned; and the customers themselves may not have been willing to accept an uninsured position in excess of £50,000.”
Rix LJ relied on the comments of Lord Diplock in Photo Production Limited v Securicor Transport Limited 1980. He held that it is generally more economical for the person by whom the loss would be directly sustained to insure against the loss, rather than to be covered by the other party’s liability insurance. The fact that the Photo Production case involved a reasonably obvious property risk encouraged Rix LJ to say that it was even more appropriate for a loss of business risk to be left to the customer (Epcot) to insure, the customer having full autonomy over whether, how and at what price he wishes to insure against such losses.
The Court of Appeal was clearly right to reverse the first instance decision. The factors taken into account (even ignoring the availability of insurance) logically led to the conclusion that the exclusion clause was reasonable. However, the comments on the availability of insurance and which party should obtain it do not reflect commercial reality.
The Court thought that a supplier/service provider's indemnity insurer will want to know details of all of the insured’s customers before providing indemnity cover. What in fact happens (for example in relation to IT professionals, who contract with multiple clients in different business areas) is that in arranging indemnity cover, the prospective insured is not required to give intimate details of all of its clients, but is usually required to provide information on the gross fees earned in recent years and whether a significant proportion of those fees derives from one or a few clients. The insurer will also commonly ask for a breakdown of the fees earned in specific business areas and also whether work is carried out on standard terms and conditions signed by every client. Answers to such questions in an insurance proposal may lead to further enquiries by the insurer before placement of cover. However, the insurer will rarely make it a condition that the Insured’s terms must always be incorporated. So, in fact, the supplier/service provider will often have insurance which covers its liability to its customers.
From the customer’s angle, it may be difficult for a customer to obtain cover for its business losses over and above the supplier/service provider’s limit of liability. An example in an IT context is where the purchaser of an IT system may well find it difficult to obtain cover (or it may not be commercially viable to do so), for losses which flow from his supplier being in breach of contract in not providing a system which is up to specification or fit for its purpose. Further, the parties would have had to have discussed during the pre contractual negotiations who would bear specific business losses in the event of a breach of contract or negligence, in order for the customer to know what insurance he requires beyond that limit of liability. This will rarely happen.
In summary, although the Court of Appeal appears not to have taken on board the commercial reality about availability of insurance, on the Regus case it is unlikely to have made any difference to the result. However in future decisions, particularly where there is evidence as to the availability of insurance, it may well be that as a factor in deciding reasonableness it will be a more neutral one than the Court of Appeal currently thinks it is.