In its recent decision in Goodlife Foods Limited v Hall Fire Protection Limited ( EWCA Civ 1371) the Court of Appeal held that a particularly broad exclusion clause in a contract relating to a fire suppression system was reasonable within the framework of the Unfair Contract Terms Act 1977. In doing so, the court discussed various factors which will be taken into account when deciding whether a term is reasonable. Most notable of these facts was that the parties were of equal bargaining power and that the appellant had been warned to take out the necessary insurance to cover the excluded liability.
The appellant, Goodlife, was a producer of frozen foods. The respondent, Hall Fire, produced automatic fire sprinkler systems. In 2001 Goodlife sought a quote from Hall Fire for the provision of a fire suppression system for Goodlife's multi-purpose fryer. Hall Fire supplied a quote which expressly referred to and attached Hall Fire's terms and conditions. Clause 11 read:
11. 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 HFS 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. Please ask for the extra cost of the provision of this cover if required. (Emphasis added.)
Clause 19 then made clear that the cost of insurance was excluded from the contract price. Further, at the top of the quote was an express note that the terms and conditions "do not provide for the imposition of any form of damages whatsoever".
In April 2002, some time after receiving the quote, Goodlife sent Hall Fire a purchase order. On Hall Fire's acknowledgement of the order, it again provided the terms and conditions. Accordingly, the terms and conditions became express terms of the contract and the fire suppression system was installed.
Around 10 years later, in May 2012, a fire originated at Goodlife's fryer which caused around £6.6 million in damage and business interruption losses. Goodlife's insurers issued a negligence claim against Hall Fire alleging that the cause of the damage was a defect in the system which meant that the fire was not suppressed as it should have been. Hall Fire argued that the exclusion clause operated such as to exclude any liability for this damage. Goodlife argued that the exclusion clause was void under the Unfair Contract Terms Act because it was a 'blanket' exclusion. The incorporation and reasonableness of Clause 11 were tried as a preliminary issue.
At first instance, the judge found that Clause 11 was not unusual or onerous, even though it was at "the most far-reaching end of the spectrum" when compared with other industry standards. The judge also found that the clause had been fairly and reasonably drawn to Goodlife's attention because the terms and conditions had been clearly referred to on the quote, and the impact of the exclusion was clearly set out in legal and commercial terms. The judge was also influenced by the fact that Goodlife was a professional commercial business and that small and medium-sized enterprises would normally have to negotiate and consider terms and conditions in their supply contracts.
In issue were three questions:
- Was Clause 11 particularly unusual or onerous?
- Even if so, was it fairly and reasonably brought to the attention of Goodlife? and
- If Clause 11 was incorporated into the contract, was it unreasonable (and therefore ineffective) as a result of the operation of the Unfair Contract Terms Act?
As to the first question, the court found that the answer was no. Context was paramount; just because the clause was an exclusion clause did not mean that it was either onerous or unusual. Hall Fire had provided the system for a modest sum (£7,490) on a one-off basis; there was no ongoing relationship or monitoring obligations. In that context, it was reasonable for Hall Fire to protect itself in the broadest manner possible from potentially unlimited liability for an indefinite period. Goodlife had had the opportunity to increase Hall Fire's liability by taking out insurance and had failed to do so.
As to the second question, the court found that the answer was yes. The clause had not been hidden in small print, nor was it illegible; rather, it was one of a set of clearly printed terms and conditions to which the quote had expressly referred. The note at the top of the quote was also informative for the court – its "almost apocalyptic" terms should have tipped Goodlife off, and if they had not, nothing would have. Goodlife also never argued that it had not read or understood the terms, and the court noted that more than a year had elapsed between the sending of the quote and Goodlife's purchase order, which was plenty of time for Goodlife to have digested the implications and taken advice.
Accordingly, even if the clause had been particularly onerous or unusual, it would still have been incorporated into the contract by virtue of the notice given.
As to the third question, the court found that the answer was no. The court was particularly persuaded by the fact that the parties were of roughly equal bargaining power and that Goodlife could have gone elsewhere to contract for a similar system had it wanted to. As noted above, the parties had apportioned risk appropriately and had done so freely.
Further, the fact that the insurance in the second part of Clause 11 had been offered was one of the most critical factors for the court. While it was true that Hall Fire had attempted to exclude liability for the vast majority of damage which might arise from its own defective performance, it had offered to accept that liability if Goodlife wished to pay extra for the insurance. The invitation for Goodlife to consider taking out this insurance should have focused Goodlife's mind on the exclusion of liability and whether its existing insurance was adequate. It made the broad exclusion of liability "abundantly plain". Additionally, Goodlife's insurers – and not Hall Fire – were best placed to know what was required to adequately cover Goodlife in all eventualities.
This case reinforces the principle that the court will always attempt to uphold a bargain freely agreed between the parties, particularly where the parties are commercial entities of roughly equal size and bargaining power. Therefore, parties should not assume that they will automatically be able to rely on the Unfair Contract Terms Act to challenge a wide-reaching exclusion clause if it becomes necessary.
The case is also a reminder that the interpretation of limitation clauses is highly contextual. As such, practitioners should be wary of copying clauses or assuming that a clause which sufficed in one situation will necessarily work in another.
It also emphasises that standard terms and conditions should always be sent to counterparties before an order – if necessary with clear indications of any exclusions or other similar clauses.
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