Legal/Finance
Exclusion of liability clauses: a cautionary note
29th May 2008
Care needs to be taken when considering an exclusion of liability clause in standard terms of business.
By Simon Arthur, Partner, Business Services Group, Horsey Lightly
By Simon Arthur, Partner, Business Services Group, Horsey Lightly
SUPPLIERS of services often attempt to exclude a wide range of potential losses in their standard terms of business. However, draft this too widely and you may be left with nothing at all to rely on.
Whether or not an exclusion of liability provision is enforceable is determined by a reasonableness test set out in section 3 of the Unfair Contract Terms Act 1977. Section 3 applies to all contracts where one party contracts as consumer or in a business-to-business arrangement where the condition is contained in the supplier’s standard terms of business.
If the condition fails to pass the reasonableness test, it may be struck out by the courts.
The recent case of Regus (UK) Ltd v Epcot Solutions Ltd [2007] involved the rental of serviced office space by a small IT training company. In short, the air conditioning system was defective and Regus failed to conduct vital repairs.
Epcot refused to pay the fees due to Regus and, in addition, claimed for damages. Regus sought to rely on an exclusion of liability provision in its standard terms of business.
The judge at first instance held that an exclusion clause which left no effective remedy at all could not pass the reasonableness test under section 3.
Given that a company’s advances and setbacks are generally measured in financial terms, the judge supposed, a limitation clause that excluded a very wide range of financial losses would effectively deprive a company claimant of any real remedy for breach of contract.
However, the court of appeal reversed this decision and held that the exclusion clause in question did not prevent a claim in relation to the diminution in value of the services provided. In other words, the condition did not fail the test as it did not purport to exclude the principal measure of loss for the breach.
Notwithstanding the court of appeal’s decision last month, caution should be taken if you are intending to rely on an exclusion clause where excluding financial losses would effectively deprive a claimant of any real remedy.
In particular, any exclusion of financial losses should be considered very carefully and should never attempt to exclude all financial loss.
It may be better to consider an overall cap on financial liability, rather than to seek to exclude various heads of financial loss but again, this should be considered very carefully in terms of its reasonableness in the circumstances of the particular transaction.
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