Exclusion zones

The Court of Appeal has overturned a High Court decision last year, when a standard term in a supply agreement was found to be unreasonable and therefore invalid (BSj 0807). The case involved software training firm Epcot Solutions, which rented serviced offices from Regus. The contract included an exclusion clause, which provided that Regus would not “in any circumstances have any liability for any loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third-party claims or any consequential loss”.

Epcot complained about the offices, particularly lack of air-conditioning, said to affect its servers, and began to withhold service charges. Regus served a notice of suspension of services and issued proceedings for unpaid service fees. Epcot responded by claiming lost profits caused by the poor office accommodation.

The High Court held that Regus had breached the contract, and was also negligent because it had not done urgent repairs to the air-conditioning. The Court of Appeal was not in a position to review that finding. The question was what loss Epcot could claim for.

Under the 1977 Unfair Contract Terms Act (UCTA), an exclusion clause in a standard agreement is unenforceable if it is unreasonable. Reasonableness is assessed through factors including: relative strength of the parties’ bargaining positions; whether the customer was induced to agree to the clause; whether the customer knew (or should have known) of the existence of the clause; whether the party suffering loss had been able to insure itself against such loss.

It was up to Regus to show that the clause was fair and reasonable in the circumstances. The High Court decided that it had failed to do this. The Court of Appeal disagreed with the High Court – the exclusion clause excludes claims for loss of profits and consequential losses generally. It does not deprive Epcot of any remedy whatsoever. On the assumption that, for the sake of argument, the service fees reflected the market value of the services promised, the loss suffered could be measured by asking how much less valuable the same services would have been if the offices had not been air-conditioned (or had been only partially air-conditioned). Assessment of such a loss will depend on the circumstances of the case and the most efficient method of assessment.

Customers were explicitly advised to insure against loss of profit. The appeal court decided the exclusion clause meet the reasonableness requirement.

Regus argued that it could not be expected to know how much lost profit a breach could cause its various customers – and that the customer was in a better position to insure against loss of profits. Regus’s standard terms explicitly advised the customer to get insurance. In short, the appeal court considered that Regus had shown that the exclusion clause met the reasonableness requirement under UCTA.

The Court of Appeal also found that it was reasonable in principle for the supplier to exclude damages for loss of profits and consequential losses. Epcot’s manager was an experienced businessman and the firm used similar exclusion clauses in its business. Indeed, Epcot had sought to renegotiate terms of the contract but not the exclusion clause.

The key issue, with standard business-to-business contracts, is that the terms must be reasonable in the circumstances. However, the ruling is important if only to reinforce the long-held view that exclusion clauses, such as in this case, are enforceable in appropriate circumstances. The courts will be loath to interfere with the contractual intentions of informed business parties. Key points are:

• don’t be overambitious – it’s better to have effective limitation on liability than an ineffective attempt to avoid liability entirely;

• a strong recommendation on the customer to obtain insurance will assist in showing that a limitation on liability is not unreasonable.