The Court of Appeal has upheld the reasonableness of a wide-ranging exclusion clause, suggesting a more limited role for UCTA in commercial contracts between parties of a similar bargaining power.

Summary

We commented on the High Court decision in Goodlife Foods v Hall Fire in our Developments in Contract series of articles last year (available here). The defendant resisted a claim for losses arising from a fire, allegedly caused by the failure of one of its fire suppression systems, on the basis of a clause in its standard terms which purported to exclude its liability for negligence.

The court was asked to consider whether the exclusion clause in question was: (i) validly incorporated into the parties’ contract, and (ii) “reasonable” under Unfair Contract Terms Act 1977 (UCTA), and thus operated to exclude the defendant’s liability for losses caused by the fire. In answer to each question, the Court of Appeal upheld the High Court’s decision that it was, so that the exclusion clause operated to exclude the defendant’s liability for losses caused by the fire.

The Court of Appeal emphasised that in assessing UCTA reasonableness each clause turns on its factual and contractual context, but this decision may suggest a move towards a more limited role for UCTA in commercial contracts concluded between parties of a similar bargaining power.

Court of Appeal decision

The case concerned a fire which occurred at the claimant’s factory, causing it to suffer significant losses. The claimant sought to recover damages from the defendant on the basis that a fire suppression system, which the defendant had supplied and installed in the factory, was defective and had failed to suppress the fire. The defendant resisted the claim on the basis of a clause in its standard terms which purported to exclude its liability for negligence.

It is well-established that any conditions contained in standard terms which are "particularly onerous or unusual" will not be incorporated into the contract, unless they have been fairly and reasonably brought to a counterparty’s attention.

The Court of Appeal unanimously upheld the High Court’s decision that the exclusion clause operated to exclude the defendant’s liability for losses caused by the fire; it was both validly incorporated into the parties’ contract, and “reasonable” under UCTA (decision available here).

Giving the leading judgment, Coulson LJ discussed the relevant legal principles in admirable detail. He held that despite being wide-ranging the exclusion clause was not considered to be particularly onerous or unusual. The question of whether or not a clause is particularly onerous or unusual has to be considered in the context of the contract as a whole. Coulson LJ observed that this was a one-off supply contract carried out, for a modest sum, in 2002, in respect of which the defendant had no maintenance obligations or any other connection following installation. In those circumstances, it was neither particularly unusual nor onerous for them fully to protect themselves against the possibility of unlimited liability arising from future events. Having been fairly and reasonably drawn to the claimant’s attention (given that it was expressly referred to on the front of a quotation and printed clearly in the defendant’s standard terms), it was validly incorporated into the contract.

In considering the reasonableness (or otherwise) of the clause under UCTA, the Court of Appeal examined a number of authorities which emphasise the importance of terms freely agreed by parties of broadly equal size and status, and also considered the importance of insurance as a factor, namely the ease or otherwise with which the parties could obtain insurance in respect of the losses caused. The clause in question “has to be considered in both its contractual and factual context”.

In Goodlife, given that: (a) the parties were broadly equal in terms of their bargaining position, (b) the exclusion clause was freely agreed between the parties and reasonable notice of it was given to the claimant, and, in particular (c) the claimant’s attention was drawn specifically to the availability of insurance for the relevant damage (which the claimant obtained), Coulson LJ agreed that the exclusion clause was “reasonable” under UCTA and therefore enforceable.

Trend towards a more limited role for UCTA

Although the insurance point was “critical” in the Court of Appeal’s decision that the exclusion clause was reasonable, the fact that the clause was freely agreed between commercial parties of similar bargaining power was clearly a relevant factor. Coulson LJ cited a number of cases supporting this point, in particular Granville Oil & Chemicals Ltd v Davis Turner & Co Ltd in which Tuckey LJ said:

“[UCTA] obviously plays a very important role in protecting vulnerable consumers… But I am less enthusiastic about its intrusion into contracts between commercial parties of equal bargaining strength, who should generally by considered capable of being able to make contracts of their choosing and expect to be bound by their terms”.

Gross LJ agreeing with Coulson LJ’s decisions, emphasised the freedom of contract point. He said:

“Overall, this was a commercial contract between parties of broadly equal bargaining power. … fully cognisant of the requirement of reasonableness, I think the Court should be slow to intervene in such a case, all the more so on appeal”.

Lord Justice Gross’s comments in particular suggest a trend towards a more limited role for UCTA in commercial contracts concluded between parties of a similar bargaining power. However, UCTA should not be forgotten - until it is repealed or amended by legislation, it will still apply to business-to-business contracts (including where one party deals on its standard terms), and it can render limitation and exclusion clauses unenforceable, thereby having a potentially significant impact on the parties’ contractually agreed allocation of liability.