UK: Limmitation Of Liability: Am I Being Unreasonable?

Last Updated: 27 August 2008
Article by Catherine Reeves

It is common for contracting parties to seek to limit their liabilities to each other. They do so to try to reduce their potential losses and to give certainty to their financial position in the event of a breach of contract.

However, the law recognises that there is often an inequality of bargaining power between contracting parties and seeks, through the Unfair Contract Terms Act 1977 (UCTA), to prevent parties from attempting to exclude an 'unreasonable' amount of liability. What is and is not 'reasonable' has been the subject of much debate, but the recent Court of Appeal decision in Regus (UK) Limited -v- Epcot Solutions Limited has provided valuable insight into how the court might determine reasonableness going forward.

Regus -v- Epcot

Regus, a provider of serviced office accommodation, contracted with Epcot to provide such accommodation. A dispute arose regarding problems with the air-conditioning in Epcot's suite and Epcot refused to pay certain service charges. Regus sued for those unpaid service charges and Epcot counterclaimed for damages, claiming loss of profits and loss of opportunity to develop its business.

The High Court found that Regus was in breach of contract and that Epcot was entitled to recover damages subject to Regus' standard terms and conditions. The amount of damages turned on a clause in Regus' standard terms and conditions which purported to exclude liability for various items of consequential loss, including loss of business and profits. The clause was stated to be effective "in any circumstances" and advised Epcot to "insure against all such potential loss, damage, expense or liability."

The High Court held that the exclusion clause was unreasonable because it left Epcot with no remedy for Regus' breach. Regus appealed to the Court of Appeal which disagreed with the High Court's decision. The Court of Appeal held that a clause expressed to operate "in any circumstances" was neither intended, nor effective, to exclude liability for fraud or malice (which cannot be excluded) as Epcot had contended, and therefore was not in fact all encompassing.

The Court of Appeal went on to conclude that the clause satisfied the reasonableness test under UCTA based on a number of factors including:

  • the customer (Epcot) was well aware of the term and indeed used a similar exclusion of liability in its own business;

  • there was no inequality of bargaining power;

  • it would have been easier for each customer to insure itself against business losses than for Regus to insure all of its customers.

The Court of Appeal also confirmed the principle that if two clauses are independent of each other and serve different purposes, then an unreasonable clause could be severed so as to leave a related, and reasonable, clause intact.

Implications

The Court of Appeal's decision will be welcomed by many suppliers that seek to exclude, or limit, liability for financial loss in their standard terms. However, the case does highlight the need to draft exclusion clauses very carefully.

In particular, care must be taken when using phrases such as "in any circumstances" to ensure that the clause does not exclude liability for categories of conduct which are not permitted, for example, fraud or malice. The clause must also not have the effect of leaving the innocent party with no form of remedy.

The courts do not have the power to rewrite an exclusion clause to make it reasonable, so it is prudent to separate out the different elements of an exclusion clause into sub-clauses which can be individually assessed.

The reasonableness or otherwise of an exclusion clause will always depend on the circumstances of the individual case. However, it will always be in a contracting party's interests to consider the exclusion clauses in any contract to which it is a party and, if necessary, take advice on whether the court would be likely to uphold the clause should it be subject to challenge.

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.

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