Are exclusion clauses enforceable? Hitherto, the courts have shed little light on the matter, but a recent Court of Appeal decision makes things much clearer
There are so many issues that arise on a daily basis in construction documents for which we still have no clear view from the courts as to enforceability. Obvious examples include net contribution clauses, some of the more esoteric aspects of novation, attempts to transfer to a contractor the risk of errors in “the employer’s requirements” prepared by the employer and its design team, and so on. The list is endless. We all have a view as to the correct approach and, in some cases, those views are wildly disparate. So it is enormously helpful to have an authoritative view from the Court of Appeal on exclusion clauses, which appear again and again in the industry’s contracts.
The specific clauses appeared in Regus’ terms signed by Epcot Solutions, an IT training provider, and related to Regus’ building at Stockley Park. Epcot moved there after the closure of Regus’ Heathrow accommodation. Epcot believed that the air-conditioning system was inadequate and the premises were uncomfortably hot, resulting in staff and trainees feeling unwell. Epcot therefore withheld fees totalling about £6,600. Regus replied, giving notice that it was suspending services. Epcot relocated to a competitor’s building at the park. Regus sued. Epcot counterclaimed for £626,000 (its chief executive had “a tendency to exaggerate”, said the court). Regus defended the claim on the basis of the exclusion clauses.
The judge at first instance found that the air-conditioning was defective; Regus lacked a sound system for monitoring its contractors and ensuring that basic systems were properly maintained; its priorities were subject to its desire to save money; Regus was in breach of contract and Regus’ contract terms amounted to a total exclusion of any remedy at all and, hence, were unreasonable and unenforceable. Regus appealed.
The exclusion clauses stated:
“We are not liable for any loss as a result of our failure to provide a service as a result of mechanical breakdown, strike, delay, failure of staff, termination of our interest in the building containing the business centre or otherwise unless we do so deliberately or are negligent …
“We will not in any circumstances have any liability for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third-party claims or any consequential loss. We strongly advise you to insure against all such potential losses.
Regus sued. Epcot counterclaimed for £626,000 – the chief executive had ‘a tendency to exaggerate’.
“We will be liable … up to a maximum equal to 125% of the total fees … or £50,000 (whichever is the higher) … ”
On appeal, Epcot reduced its counterclaim to £50,000. The Court of Appeal went through Regus’ exclusion clause forensically. It concluded that it was not correct that the exclusion of certain types of loss left Epcot with no remedy for the breach because the primary measure of loss for a breach, such as inadequate air-conditioning, is the diminution in value of the services promised. These losses were untouched by the exclusion clause and a valuer could determine how much less valuable the services would have been if the suite had not been air-conditioned as opposed to provided on an air-conditioned basis – “a well-known market distinction”.
But Regus still had to show that the clause was reasonable and it succeeded in doing so. The court took account of the fact that Epcot’s chief executive was “an intelligent and experienced businessman” who had accepted Regus’ terms. He used a similar exclusion of liability in his own business. There was no inequality in bargaining power. Regus advised Epcot to look for insurance against business losses and it was reasonable for it to do that, given that Regus would not have proper information about businesses operated by its customers.
So we got a clear, sensible and very commercial approach from the Court of Appeal to the interpretation of exclusion clauses relating to business losses. It will be hard indeed for commercial parties to argue in the future that such clauses are not enforceable.
And the court also expressed its regret that a dispute about comparatively small sums led to such protracted litigation and huge expense. It expressed the hope that the parties would now settle without further unnecessary costs.
How helpful it would be for the industry at large if we could have the benefit of similarly clear decisions on other matters of commercial uncertainty in the construction industry, thus avoiding protracted argument and endless irritation and legal costs …
Ann Minogue is a partner in solicitor Linklaters