The English Court of Appeal has recently reversed the High Court decision in Regus (UK) Ltd -v- Epcot Solutions Ltd, and in doing so has given welcome comfort to service providers who undertake services on standard terms, and their liability insurers.

At first instance the defending service provider was held to be (a) in breach of contract to a business customer by failing to provide the required contractual services; and (b) unable to rely on an exclusion clause in its standard terms, which purported to exclude liability for loss of business, loss of profits and other financial loss. The judge had concluded that the clause did not satisfy the requirement of reasonableness in the Unfair Contract Terms Act 1977 ("the Act") because, in his view, it would effectively deprive the customer of any remedy whatsoever, because those types of loss were the only losses suffered.

The Court of Appeal, however, has now ruled that the customer was not in fact left without any remedy. The customer was still entitled to claim damages for the diminution in value of the services promised. The exclusion clause was held to be reasonable, and therefore enforceable, because the customer was aware of the standard terms in the contract and had itself used a similar exclusion clause for indirect or consequential losses. Moreover, the customer had actively negotiated many other clauses of the contract yet had not felt the need to renegotiate the exclusion clause. Additionally, the customer had the same bargaining power as the supplier.

Commercial Impact:

This Court of Appeal decision follows the generally permissive approach of English courts towards exclusion and limitation clauses in standard contracts between commercial parties. However, it also goes to show that the interpretation of the reasonableness test is very much fact-dependent, and that while courts will generally enforce similar terms in business-to-business relationships, service providers should still be wary. Even in business relationships, courts will scrutinise an exclusion or limitation clause to ensure that the requirement of reasonableness under the Act is satisfied.

As a reminder, under the Act the reasonableness of such a clause will be assessed in light of (a) the strength of the parties' respective bargaining positions; (b) the opportunity for the customer to negotiate with competitors who do not have a similar clause; and (c) whether the customer knew or ought to have known of the existence of the clause.

Next Steps/What Service Providers Need To Do:

Even though in this case the Court of Appeal ruled in favour of the reasonableness of the exclusion clause, service providers and their insurers must still be cautious and ensure that each clause purporting to exclude or limit liability is reasonable. Our advice is that when drafting standard terms, service providers should

  • try not to be overly ambitious: limiting liability to a reasonable sum is more likely to be effective than trying to avoid liability altogether;

  • consider, on a case-by-case basis, what it might be reasonable to exclude (e.g. loss of reputation) against what could simply be limited (e.g. lost profits); and

  • include an overall cap on liability which should be contained in a separate clause (e.g. by limiting overall losses to a reasonable sum).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.