The Court of Appeal has recently upheld a High Court decision that a term limiting a defendant’s liability for negligence in the supply of a fire suppression system had been properly incorporated into the contract and that it met the test of reasonableness under the Unfair Contract Terms Act 1977 (“UCTA”): Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371.

The clause in question was contained in Terms and Conditions that were referred to in and attached to the defendant’s quotation. The clause was held to be incorporated into the contract on the basis that it was not particularly unusual or onerous and, in any event, had been fairly and reasonably brought to the attention of the claimant.

The court held that there was no basis to find that the clause was unreasonable as, amongst other factors, the parties were of equal bargaining power, the claimant had its own insurance, and the claimant had been given an option of contracting without the clause but at a higher price.

The judgment emphasises the increasingly hands off approach taken by the courts to contracts agreed between commercial entities of equal bargaining power. As the Court of Appeal commented, “the trend in the UCTA cases decided in recent years has been towards upholding terms freely agreed, particularly if the other party could have contracted elsewhere and has, or was warned to obtain, effective insurance cover”.

Whilst the decision does not establish new principles, it is a useful review of the law on exclusion and limitation clauses and indicates the current trend of judicial analysis in such cases. For more information on such clauses see our contract disputes practical guide on liquidated damages, limitation and exclusion clauses.

Background

The claimant was a company which produced frozen foods. The defendant was a company trading in automatic fire sprinkler systems for use in commercial, industrial and retail developments. The two companies were of a similar size, with annual turnovers of £2.7 million and £4.8 million respectively.

The claimant sought a quotation from the defendant for a fire detection and suppression system. The defendant provided the requested quotation, along with a copy of its standard Terms and Conditions. The quotation included an express reference to the Terms and Conditions and a warning that they “did not provide for the imposition of any form of damages whatsoever”.

The parties entered into a contract for the installation of a fire suppressant system for £7,490. A fire broke out in the claimant’s factory ten years later. The claimant’s insurers brought a subrogated claim to recover losses of around £6.6 million for property damage and business interruption on the basis that the system installed by the defendant was defective.

The defendant sought to rely on clause 11 of the Terms and Conditions which stated:

“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….

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.”

The High Court tried as preliminary issues the questions of whether (i) clause 11 had been incorporated into the contract and (ii) it was reasonable for the purposes of UCTA. It found in favour of the defendant on both issues. The claimant appealed to the Court of Appeal.

Decision

The Court of Appeal dismissed the appeal (Coulson LJ giving the lead judgment, which with Moylan and Gross LJJ agreed).

Incorporation into the contract

The Court of Appeal upheld the High Court’s finding that clause 11 was incorporated into the contract as it was not particularly unusual or onerous and had in any event been brought fairly and reasonably to the claimant’s attention.

Coulson LJ referred to the “well-established principle of common law” that, even if a party knows that a tender it has received contains standard conditions, a condition which is “particularly onerous or unusual” will not be incorporated into the contract unless it has been fairly and reasonably brought to the receiving party’s attention. Coulson LJ noted Bingham LJ’s observation in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 that “the more outlandish the clause, the greater the notice which the other party, if he is to be bound, must in all fairness be given”, describing this as a helpful distillation of the relationship between the degree of onerousness and the degree of notice required.

He noted also that the mere fact that the clause in question is a limitation or exclusion clause does not, in itself, mean that it is onerous or unusual; everything turns on the context. In recent times, he said, clauses which have limited a specialist supplier or sub-contractor’s liability to the (often modest) amount of the contract price, or excluded liability for indirect loss or loss of profit, have not been regarded by the courts as particularly onerous or unusual.

In this case, Coulson LJ said, it was not accurate to describe clause 11 as a blanket exclusion clause. It included a warranty for defective components, and could therefore be described as a “stringent limitation of liability”. In terms of the context, this was a one-off supply contract for a modest sum and the defendant had no maintenance obligations after it had installed the system. Therefore it was not particularly unusual or onerous for the defendant fully to protect itself against the possibility of unlimited liability arising from future events, especially as the defendant had indicated a willingness to accept wider liability, subject to putting in place insurance arrangements and a higher contract price.

These conclusions were borne out by evidence of the terms and conditions of other fire suppression suppliers. Even if clause 11 was at the far end, it remained within the spectrum of clauses which could not be regarded as particularly onerous or unusual. In this regard, Coulson LJ agreed with the judge that there was little difference between clause 11 and a clause which limited liability to a small sum.

On the issue of notice, again Coulson LJ considered that the judge was plainly right in his conclusions. Clause 11 was not buried in the small print, but was expressly referred to on the face of the quotation provided by the defendant, and indeed its potentially wide-reaching effect was identified in “almost apocalyptic terms”. Any buyer who read such wording should then have read on through the Terms and Conditions and would have thus encountered clause 11. It would be “commercially unrealistic” to say that the clause had not fairly and reasonably been brought to the claimant’s attention.

Reasonableness under UCTA

Under section 2 of UCTA, a person can only exclude or restrict their liability for negligence insofar as the term or notice satisfies the requirement of reasonableness set out in section 11. The burden is on the party seeking to establish reasonableness.

Section 11 provides that the term must be fair and reasonable having regard to the circumstances where were, or ought reasonably to have been, known or contemplated by the parties when making the contract. Where the term seeks to restrict liability to a specified sum, the court will have regard in particular to the resources that could be expected to be available to meet the liability, and the availability of insurance. Section 11 refers also to a non-exhaustive list of guidelines at schedule 2 of UCTA, including the relative strength of the parties’ bargaining positions, whether the customer could have entered into a similar contract with another supplier without the relevant term, and whether the customer knew or ought reasonably to have known of the existence and the extent of the term.

Coulson LJ referred to a number of authorities which stress the courts’ reluctance to interfere with contractual provisions agreed between parties of equal strength and bargaining power. He also noted that many of the authorities stress the importance of insurance as a factor going to reasonableness.

Considering first the schedule 2 guidelines, Coulson LJ noted that the parties had broadly equal bargaining positions. There were two factors which favoured the defendant, namely: that the claimant could have found a supplier who was prepared to contract on a less stringent basis; and that the claimant ought reasonably to have known of the relevant term.

Turning to insurance, Coulson LJ described this as being “at the heart of the reasonableness issue in this case”. This was a critical factor in favour of the defendant, both because the claimant was best-placed to put in place the necessary insurance, and because of the express alternative offered in clause 11.

The court also rejected the claimant’s submission that clause 11 should be considered unreasonable because the defendant was seeking to avoid its core obligation of providing a proper fire suppression system. The contract had to be looked at as a whole; the supply of the system could not be looked at in isolation from the terms on which the defendant was prepared to supply and install it. The principle referred to above, that the court is reluctant to interfere with terms freely agreed between the parties, was particularly relevant here. Both parties knew that the defendant was not taking on an open-ended liability relating to the installation. That was, Coulson LJ commented, an entirely reasonable allocation of risk in a contract worth £7,490.