A recent Court of Appeal decision has rejected an attempt to challenge a broadly drafted exclusion clause under the Unfair Contract Terms Act (“UCTA”). The decision supports the TCC’s original judgment and expressly confirms a recent trend in UCTA cases in favour of upholding terms freely agreed between commercial parties, particularly where insurance is available to cover excluded liabilities and there is no significant inequality of bargaining power.
Goodlife Foods v Hall Fire Protection – A recap
For our detailed Law-Now on the original TCC judgment, please click here. In brief, Goodlife contracted Hall to supply and install a fire suppression system at its factory in Warrington. A fire occurred at the factory which Goodlife alleged ought to have been prevented by the suppression system. It brought a large claim against Hall for losses suffered as a result.
Hall defended the claim by relying, among other things, on an exclusion clause contained within its standard terms and conditions supplied to Goodlife with its quotation. The clause excluded all liability save for “the replacement, free of charge, of … defective parts. …” The clause also noted that Hall could provide insurance to cover these excluded liabilities for an extra cost if so desired.
The TCC rejected Goodlife’s challenge to this clause as failing to satisfy the reasonableness requirement under UCTA. In commercial cases, this requirement applies to exclusion or limitation clauses contained in a party’s standard terms and conditions as well as any exclusion or limitation clause with regard to liability for negligence (i.e. whether or not contained in standard terms and conditions).
UCTA sets out a number of factors to consider in determining whether a clause satisfies the reasonableness requirement. The key considerations relied upon by the TCC in upholding the clause in this case were:
The parties were of equal bargaining power and Goodlife could have contracted with other suppliers of fire suppression equipment.
Given the specific purpose of fire suppression equipment, the only loss in contemplation was a fire at Goodlife’s factory. That was a risk which Goodlife could be expected to insure against and could more easily obtain insurance in respect of.
The exclusion clause specifically alerted Goodlife to the availability of insurance to cover losses excluded by the clause.
The Court of Appeal
The Court of Appeal agreed with the TCC and in doing so noted the restrained approach to UCTA which the courts ought to take in commercial cases. As noted by Lord Justice Gross: “even where UCTA is applicable, at least in the case of commercial contracts between parties of broadly equal bargaining power, considerations of party autonomy and freedom of contract remain potent.”
Lord Justice Coulson noted a trend in favour of upholding clauses subject to UCTA: “it is certainly right, as the commentators have noted, that 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. To that extent, therefore, my views are in line with that trend.”
In dealing with the case at hand, the court agreed with the considerations emphasised by the TCC (noted above). They also dealt in more detail with an argument by Goodlife that the exclusion clause would undermine Hall’s core obligation to provide a proper fire suppression system (i.e. because Hall had no liability for the consequences of any defects). Goodlife relied in this regard on a previous case (Balmoral Group Ltd v Borealis UK Ltd) where the supply of polyethylene polymer was understood between the parties to be for use in the manufacture of oil tanks. The polymer was not, in fact, able to be satisfactorily used to make oil tanks and a clause limiting the liability of the supplier to the replacement of defective products or the price paid for them was struck down. It was said to confound the assumptions shared by the parties as to the suitability of the product.
The Court of Appeal noted that the Balmoral case could not readily be applied to Goodlife’s contract. Hall’s core obligation to provide a fire suppression system could only be ascertained with regard to the contract as a whole including the exclusion clause: “The supply of the system cannot be looked at in isolation from the terms on which Hall Fire were prepared to supply and install it.” By contrast, the assumption in the Balmoral case was that it would have been impossible for the supplier to ever comply with the contract because of a latent defect in the product. The Balmoral decision also involved a less favourable insurance and bargaining power position for the purchaser, adding to the unreasonableness of the clause in that case.
Conclusion and implications
This is an important Court of Appeal decision as to the application of UCTA to sale of goods contracts and construction contracts. Despite the trend referred to by the court, a number of recent construction and sale of goods cases (at first instance) have involved the striking down of clauses under UCTA: see our recent Law-Nows here and here for two examples. The court’s emphasis on holding parties to a bargain freely entered into and the acceptance of a trend in this direction is therefore significant.
The distinguishing of the Balmoral case may be seen as some immediate evidence of this trend. The argument that the assessment of a party’s “core obligation" needs to take into account any exclusion clauses qualifying the terms on which that obligation will be performed could equally have been said to apply in that case. It seems that arguments of this kind will now be more difficult to maintain.
Overall, the court’s decision confirms that the availability of insurance and the ability to contract with others (i.e. bargaining power) remain the most important factors affecting the reasonableness of an exclusion clause under UCTA. Contractors and suppliers whose works or products, when defective, give rise to readily identifiable losses, insurable by their customers, are likely to be well placed to defend widely drafted exclusion clauses in their standard terms and conditions.