UK: Excluding Liability: What Are The Limits?

It is frequently the case that companies try and exclude as much liability as possible in their standard terms and conditions. The recent case of Regus (UK) Ltd v Epcot Solutions Ltd [2007] EWHC 938, which came before HHJ Mackie QC, demonstrates that there are clear limits on what can and cannot be so excluded.

Regus (UK) Limited ("Regus") supply serviced office accommodation. Epcot Solutions Ltd ("Epcot") provide professional IT training. Epcot entered into an agreement with Regus on Regus’ usual terms and conditions for the use of serviced office accommodation for Epcot’s training courses. Epcot initially rented office accommodation in Heathrow. After Regus closed this location, Epcot were offered, and accepted, alternative accommodation at Stockley Park. Epcot moved to Stockley Park and entered into a new agreement with Regus on the same terms and conditions.

The air conditioning system at Stockley Park did not work satisfactorily. Epcot made several complaints to Regus regarding the air conditioning and complained that their training courses were being adversely effected by the extreme hot and cold temperatures generated by the air conditioning. Despite these complaints, Epcot entered into a further agreement with Regus on the same terms and conditions. Epcot continued to make complaints about the air conditioning system. Regus did not take any effective steps to repair the air conditioning and negotiations between the parties failed to resolve the problem.

Regus then suspended services to Epcot and claimed unpaid fees up to the end of the agreed term. Epcot raised a number of counterclaims including damages for loss of profits, loss of the opportunity to generate profits, and for distress, inconvenience and loss of amenity suffered by reason of Regus’ failure to provide adequate air-conditioning.

Regus’ usual terms and conditions included an exclusion clause (clause 23) limiting Regus’ liability in any circumstances for "loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss." Clause 23 also limited liability in respect of other losses, damages, expenses or claims.

1. Was Regus’ failure to provide adequate air-conditioning a breach of contract?
2. Did Clause 23 restrict and/or exclude Epcot’s ability to claim for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss?

Regus had contracted to provide services to Epcot which included air conditioning. Therefore a failure to provide adequate air conditioning was a breach of contract as Regus was in breach of the obligation to provide the services it had promised. Epcot was entitled to recover damages for any loss which it had suffered subject to the effect of Clause 23.

The Judge held that Regus’ failure to provide adequate air conditioning to be negligent and did not accept Regus’ argument that it could postpone works on the grounds of cost and profitability. Clause 23 fell within Section 3 of the Unfair Contract Terms Act 1977 (the "Act") as it restricted liability in respect of a breach and was within Regus’ written standard terms of business.

The Judge also considered that although it was reasonable for Regus to restrict damages for loss of profits and consequential losses from the categories of loss for which it will become liable when in breach of contract, it was not reasonable to seek to deprive Epcot of any remedy at all for failure to provide a basic service like air conditioning. Further, Clause 23 provided an illusion of a remedy by limiting (as it is in principle reasonable to do) liability to 125% of the total fees paid of £50,000.

However, because of the broad working of the exclusion of financial losses, a business would be unable to establish the liability that Regus sought to limit. Under the Act there are a number of factors the Court may take into account when considering if the contract terms are fair and reasonable. These include the strength of bargaining position and whether the customer (here Epcot) ought reasonably to have knowledge of the existence and extent of the term. Here having applied the factors, the Judge did not consider the exclusion to be reasonable. It was too broad. It was unfair for no remedy at all to be available to customers of Regus, in circumstances where there had been serious failures in the service provided by Regus over the length of their contract. Therefore, Clause 23 was of no effect.

The appropriate measure of damages for Epcot’s breach was a percentage deduction from the fees paid by Epcot unless Epcot could show additional specific loss cause by the air conditioning letter.

Parties generally seek to exclude or limit their liability in contracts. However, a party seeking to rely on such a clause must be able to show that the exclusion/limitation clause is reasonable in accordance with the factors set out in the Act. This decision is an example of a clause being held to be unreasonable quite simply due to its broad exclusion of liability. When entering into contracts, parties need to review carefully any relevant exclusion/limitation clause is reasonable. The Courts will not always strike them down.

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