When is it Reasonable to Exclude Liability for Breach of Contract?

The interpretation of contractual clauses is regularly before the courts, perhaps none more so that exclusion causes. The Court of Appeal has given important clarification as to when exclusion clauses are reasonable and, therefore, valid.

In Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371, the standard contract terms of a specialist fire suppression contractor (the seller) included an exclusion clause. At issue was whether this clause was incorporated into the contract between the parties and, if so, whether it was reasonable under the Unfair Contract Terms Act 1977 (UCTA). UCTA applies to determine the enforceability of clauses which seek to restrict or exclude business liability in the majority of supply contracts. UCTA provides, in short, that any attempt to exclude or restrict liability for death or personal injury is void and that any attempt to exclude or restrict liability for other loss is subject to the ‘reasonableness test’ [2].

The exclusion clause excluded the seller from any liability in the event the system failed. Importantly, the seller also urged the buyer to take out fire insurance to cover the risk. The system failed resulting in a major fire. The claimant claimed compensation for breach of contract, arguing that the system was defective and the exclusion clause was invalid for lack of reasonableness.

Two distinct issues were raised in the appeal:

• Was clause 11 particularly unusual and/or onerous; and even if it was, was it fairly and reasonably brought to the attention of the buyer?
• If clause 11 was incorporated into the contract, was it unreasonable (and therefore ineffective) as a result of the operation of UCTA?

The clause was not a blanket exclusion clauses, and the court said that the mere fact that the clause in question is a limitation or exclusion clause does not of itself mean that it is onerous or unusual. Everything turns on the context.

The Court then provides a useful analysis of the reasonable test under UCTA, including the Schedule 2 UCTA ('Guidelines' for application of reasonableness test) which, for the most part, were in the seller’s favour and point towards the reasonableness of the clause, as follows:

• The parties were broadly equal in terms of their bargaining positions.
• THe buyer received no inducement to agree to clause 11. However, as the judge expressly found at paragraph 79 of his judgment, the Buyer could have gone elsewhere and found a supplier who was prepared to contract on a less stringent basis. That was therefore a factor in favour of the Seller’ case that the clause was reasonable. It also distinguishes this case from Balmoral v Borealis.
• The buyer ought reasonably to have known of the existence of the terms for the reasons which I have summarised in paragraphs 53-55 above. Notice was fairly and reasonably given. That is another factor in favour of the seller’s case that clause 11 was reasonable in all the circumstances.
• This is not a clause that excluded or limited liability on the operation of a condition.
• There was no evidence that the goods were manufactured, processed or adapted to the buyer’s order.

Furthermore, the standard terms clearly setting out the exclusion clause “were expressly referred to on the face of and sent with the quotation” to the buyer many months before. The clause was not buried in small print.

Notably, the appeal court found that the issue of insurance was “at the heart of the reasonableness issue in this case”. Insurance was a neutral factor as argued by the buyer – it was an important consideration in favour of the seller and the reasonableness of the exclusion clause. The Court of Appeal therefore ruled the exclusion clause to be reasonable, and the seller was not liable to pay compensation.

What does this mean?
Exclusion clauses are not invalid in and of themselves, they are subject to the reasonableness in the context in which they exist. It is important for businesses to take into account various factors before making a judgement as to whether or not a particular exclusion clause is, or is not valid.

 

 

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