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Beware of exclusion clauses in standard terms and conditions

The High Court recently ruled in Regus (UK) Ltd v Epcot Solutions Ltd (2007) (EWHC 938) that an exclusion clause widely used in business-to-business contracts claiming to exclude all liability for any breach of contract was unenforceable.

The case involved a contract between the parties for the provision of serviced office accommodation on the written standard terms of Regus (the party providing the accommodation).  Regus’ terms & conditions excluded liability for all loss of business, loss of profits and other financial or consequential loss.

The contract also contained a term providing that Regus would not be liable for any losses arising from mechanical breakdown, unless and until it had been given a reasonable opportunity to remedy the fault. The claim related to a defective air conditioning system and the fact that it was not repaired by Regus. The court found that Regus had been negligent in not maintaining and checking the air conditioning system and that Regus could not postpone the repairs on the grounds of cost and profitability. 

Epcot was therefore entitled to claim damages. However in its contract Regus’ exclusion of liability provisions sought to exclude claims for loss of business, loss of profits, loss of anticipated savings or damage to data, third party claims and consequential loss. The court held that the exclusion clause was caught by section 3 of the Unfair Contract Terms Act 1977 (“UCTA”) and that because of this it would only be effective to the extent that it was reasonable. The court considered whether the clause was “reasonable” within the meaning set out in the UCTA. In doing so, the court considered the following factors:

• The relative bargaining strength of the parties
• The possibility of meeting the customer’s requirements via alternative means
• Whether the customer was induced to agree to the term
• Whether the customer knew or reasonably would have known of the term 

The court concluded that whilst Regus was reasonable in seeking to exclude liability for loss of profit and consequential loss, the exclusion clause as a whole was not reasonable as it deprived the claimant of any remedy at all for Regus’ failure to provide the services that had been contracted for. The court decided that the exclusion clause was not effective and Epcot could recover damages due to the air conditioning failures.

Parties who rely on clauses excluding or limiting their liability in contracts must be able to show that the clause is reasonable as set out in the UCTA. 

How can businesses make their exclusion clauses enforceable?

• State clearly what heads of loss it is intended should be limited or excluded.  Do not be too broad in its exclusion of liability: The claimant should have some remedy.
• Ensure the clause is clear and unambiguous.
• Ensure that any overall cap on liability does not produce an illusion of a remedy.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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