Will Your Exclusion Clause Satisfy the Reasonableness Test?

It is only natural for businesses to attempt to limit their potential liabilities when entering into commercial contracts, especially when there is a large amount at stake. However, as many people are aware, the degree to which this is possible is carefully restricted by The Unfair Contract Terms Act 1977 (UCTA). Any business seeking to rely on exclusion clauses would therefore be well advised to find out when UCTA will apply in order to minimise the risk of a successful challenge before the courts.

There has been much debate over the years as to the exact scope of UCTA and, to a certain degree, the recent decision by the court at first instance (although subsequently overturned) in Regus v Epcot Solutions Limited has put the debate back in the headlines.

Section 3 of UCTA addresses the relationship where one of the parties to a contract deals as a consumer or on the other party's written standard terms of business and states that:

· Any term which excludes or restricts his liability for breach of contract; or

· Claims to be entitled to render a contractual performance substantially different from that which was reasonably expected of him; or

· Claims to be entitled to render no performance at all………

………is enforceable only to the extent that it satisfies the reasonableness test.

Reasonableness Test

In order to satisfy the reasonableness test, a contract term must have been "... a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made." (section 11(1), UCTA)

Schedule 2 of UCTA sets out additional guidelines in determining reasonableness, including factors such as having regard to the relative bargaining positions of the parties involved, whether the customer received an inducement to agree to the term, whether the customer knew or ought reasonably to have known of the existence of the term, if the exclusion is subject to compliance with a condition and whether the goods were adapted to the special order of the customer.

Regus v Epcot Solutions Limited

In March 2003, Regus (UK) Limited ("Regus") agreed to provide Epcot Solutions Limited ("Epcot") with serviced office accommodation at a business centre near Heathrow. Epcot was a company involved in IT training and intended to use these facilities to run IT training courses. An agreement was entered into on Regus's standard business terms, which included a clause limiting Regus's liability in the event of certain financial losses being suffered by Epcot (clause 23).

Clause 23 provided:

(1) 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 are also not liable for any failure until you have told us about it and given us a reasonable time to put it right.

(2) You agree (a) that we will not have any liability for any loss, damage or claim which arises as a result of, or in connection with, your agreement and/or your use of the services except to the extent that such loss, damage, expense or claim is directly attributable to our deliberate act or our negligence (our liability); and (b) that our liability will be subject to the limits set out in the next paragraph.

(3) 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 loss, damage expense or liability.

(4) We will be liable:

· without limit for personal injury or death;

· up to a maximum of £1 million (for any one event or series of connected events) for damage to your personal property;

· up to a maximum equal to 125% of the total fees paid under your agreement up to the date on which the claim in question arises or £50,000 (whichever is the higher), in respect of all other losses, damages, expenses or claims.

By June 2003, Epcot had complained of the air conditioning being unreliable and a dispute developed. Epcot stopped all payments to Regus, so Regus subsequently sued on the basis of unpaid service charges whereupon Epcot counterclaimed damages for loss of profits, loss of opportunity to develop its business, distress, inconvenience and loss of amenity.

High Court's decision

At first instance, the High Court ruled in favour of Epcot, judging that there was a clear breach of contract and that clause 23 had failed the test of reasonableness under UCTA as it deprived Epcot of any remedy. Clause 23 was therefore held to have no effect and Epcot was entitled to recover damages for the losses it suffered as a result of the air conditioning failures. This decision was subsequently overturned by the Court of Appeal.

Court of Appeal

The Court found that clause 23 was in fact reasonable given that it did not exclude an obvious remedy available to the claimant, that being "the diminution in value of the services promised". In other words, the loss could be determined by assessing to what extent the value of the services had diminished due to the lack of air conditioning.

Various other factors to which the court gave weight included the fact that the managing director of Epcot was well aware of Regus's standard terms when the contract had been entered into. Secondly, Epcot had attempted to renegotiate the contract in various places and had not proposed any changes to clause 23. In addition, the Court deemed that there was no inequality of bargaining power between the parties and cited that clause 23 had specifically advised Regus's customers to protect themselves by insurance against the losses that it excluded.

Conclusion

Despite the decision of the Court of Appeal, to some people, the decision at first instance will certainly represent a warning to any suppliers who automatically exclude financial losses in their standard terms of business. Others may take the view that the Court of Appeal followed previous decisions in this area and has effectively endorsed wide exclusions of financial losses. However, the latter view may possibly be premature. Given the very limited number of remedies available to Epcot and the fact that Regus refused to remedy its breach despite repeated requests from Epcot, it will come as no great surprise if there is an appeal to the House of Lords. Whatever the outcome of the case in question if it does proceed upwards to the final instance, it is fair to say that any question of reasonableness in relation to exclusion clauses will always depend upon the individual circumstances of the case.