From the frying pan to the fire: don’t get burnt by an onerous exclusion clause

• United Kingdom

• Commercial litigation

21-06-2018

A recent Court of Appeal judgment has provided an excellent reminder of the value of properly drafted exclusion clauses (even when considered to be “unusual” or “onerous”) which have been brought to the attention of the contractual counter-party (Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371).

Background

The defendant (“Hall Fire”) supplied and installed a fire suppression system into factory premises belonging to the claimant (“Goodlife”), for the sum of £7,490.  Around ten years later, in 2012, a fire caused by an industrial frying machine caused substantial damage to the premises as well as losses caused by interruption to business, in the total sum of around £6.6 million.  Goodlife claimed that Hall Fire’s system had failed to put out the fire, and sought to recover its losses from Hall Fire.

Due to the passage of time, it was common ground that Goodlife’s claim for breach of contract against Hall Fire was statute barred, but that it could pursue a claim in negligence against Hall Fire.  In its defence, Hall Fire sought to rely on an exclusion clause within its standard terms and conditions (“the Terms”) upon which it claimed the contract was concluded.  The clause in question stated:

“we exclude all liability for, 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 [Hall Fire] for whatever reason. In the case of the faulty components, we include only the replacements, free of charge, for those defective parts. As an alternative to our basic tender, we can provide insurance to cover the above risk. Please ask for the extra costs of provision of this cost if required.” (“the Exclusion Clause”).

Goodlife challenged the enforceability of the Exclusion Clause on the basis that it was particularly unusual/onerous, had not been fairly and reasonably brought to its attention; and that in the event it was incorporated into the contract, it was not “reasonable” in accordance with the Unfair Contract Terms Act 1977 (“UCTA”).  Section 2(2) of UCTA states that, “[…] a person cannot so exclude or restrict his liability for negligence except in so far as the term […] satisfies the requirement of reasonableness.”

HHJ Stephen Davies at first instance held that the Terms had been incorporated into the contract, despite a severe lack of documentary evidence on either side.  He went on to consider the construction of the Exclusion Clause, concluding that it was neither particularly unusual nor onerous, had been reasonably and fairly brought to the attention of Goodlife and had been incorporated into the contract, although he did rule that under section 2.1 of UCTA, the purported exclusion for death and personal injury was invalid. Goodlife appealed on the issues of incorporation and reasonableness.

Dismissing the appeal, Coulson LJ agreed that the Exclusion Clause was neither particularly “onerous” nor “unusual” in the context of the contract.  Given that the contract was for a relatively modest sum, and Hall Fire had no continuing connection with the installed equipment, it was entirely reasonable for Hall Fire to protect itself from potential unlimited liability arising from future events.  The Exclusion Clause had been fairly and reasonably brought to Goodlife’s attention – it was not buried in a “raft of small print”.  Instead it was a standard condition which had been expressly (if not directly) referred to in Hall Fire’s quotation.  Goodlife had had a good deal of time to consider the Terms between receipt of the quotation and formation of the contract (the negotiation of which had taken over a year). The judge accordingly found that even if the Exclusion Clause was “onerous” or “unreasonable”, given that it had been properly brought to the attention of Goodlife, it would still have been incorporated into the contract.

The appeal judge found that both parties were broadly equal in terms of their contractual bargaining positions and there was no inducement for Goodlife to enter into the contract.  It was highly relevant that the Exclusion Clause contained an offer of insurance whereby Goodlife could have opted to pay an additional sum to include the protection otherwise excluded, which offer was not pursued. In light of this, the Exclusion clause was held to be reasonable pursuant to UCTA. 

Impact of the decision

All three Court of Appeal judges agreed that the court should be “slow to intervene” in cases concerning a commercial contract between parties of broadly equal bargaining power.  The decision is in keeping with the trend of findings in recent UCTA cases, which have upheld terms freely agreed between the parties, particularly where one party could have contracted elsewhere but opted not to do so.  This then serves as a useful reminder for commercial parties who ordinarily conduct business on one party’s standard terms. 

Most businesses will seek to contract on their own standard terms – ensuring that your terms, and not those of the counter-party, are incorporated is obviously desirable.  But parties should still carefully consider the counter-party’s terms in case a court later concludes that they govern the contract.  As a minimum, parties should be clear that any terms deemed to be unacceptable to it are expressly stated so in pre-contract negotiations.  In supplier contracts where the customer does not have its own standard terms, the need to carefully consider the possible impact of any exclusion and limitation of liability clauses is even more important – this case makes clear that far reaching clauses which on the face of it may appear unreasonable, are still likely to be upheld by the court in appropriate circumstances. 

When seeking to incorporate an enforceable exclusion clause within standard terms, businesses should try to ensure that the clause is in keeping with the context of the contract and the goods/services supplied and that the counter-party to the contract has been given fair and reasonable notice of the clause, particularly where it could be construed as unreasonable or onerous.  This could be something as simple as referencing the clause during negotiations or pre-contractual documentation.