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28 June 2018

Sweeping exclusion clauses can be reasonable under UCTA

Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 (18 June 2018)

Background

Goodlife Foods Ltd (“Goodlife”), a producer of frozen food products, sought the services of Hall Fire Protection Ltd (“Hall Fire”), a supplier of fire prevention products and services for businesses, for the provision of a fire detection and fire suppression system for a multi-purpose fryer in Goodlife’s factory.

Following the outbreak of a fire at Goodlife’s premises some ten years after the supply and installation of the fire suppression system by Hall Fire, Goodlife commenced a claim for breach of contract and/or negligence against Hall Fire. Goodlife claimed that the fire, which resulted in property damage and interruption losses worth around £6.6 million, was caused by a defect in the insulation of a section of pipework, which should have carried fire suppressant to fight the fire, but did not.

In response, Hall Fire relied upon its particularly wide exclusion clause, which purported to exclude all liability in relation to any claim in negligence. The exclusion clause was drafted as follows:

“We exclude all liability, loss, damage or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by [Hall Fire] for whatever reason.”

Goodlife submitted that the enforceability of the clause was invalid as it was a ‘blanket’ exclusion clause. It was unreasonable under the Unfair Contract Terms Act 1977 (“UCTA”) as it was particularly onerous and unusual. There was also a stark warning at the start of the standard terms and conditions which Goodlife claimed was “so over the top” as to be misleading.

Hall Fire maintained that the clause was not particularly onerous or unusual because the relevant terms and conditions had been expressly brought to Goodlife’s attention before the contract was entered into. The warning, which was perhaps more severe than necessary, was intended to raise the buyer’s awareness of the terms to be considered before entering into the contract.

High Court Decision

While the court recognised that the clause essentially excluded all of Hall Fire’s liability for loss or damage suffered by Goodlife in the event that the fire suppression system failed, the court nevertheless suggested that Goodlife would, or should, have insured against this type of loss. It often makes more economical sense for the party who might sustain a particular loss to be the one to insure against that loss. The court therefore noted that it was perfectly reasonable to have the expectation that Goodlife would have entered into such an arrangement with an insurer.

The court also favoured the approach in Watford Electronics Limited v Sanderson CFL Limited where the court were reluctant to interfere with a commercial bargain struck between two parties of “broadly equal size and bargaining power” and to interfere with their freedom to contract. In that scenario the parties should be taken to be the best judge themselves when it comes to deciding whether the terms of the contract have gone beyond the boundaries of reasonableness. The court also highlighted that Hall Fire had taken reasonable steps to highlight the exclusion clause to Goodlife both before and after the contract came into effect. The exclusion clause was held to be reasonable under UCTA.

Court of Appeal Decision

On appeal, the court unanimously upheld the High Court’s decision. The main issues considered were as follows:

  • Was the exclusion clause particularly unusual or onerous?

Coulson LJ, who delivered the judgment of the court agreed with the High Court judge that the exclusion clause was neither particularly onerous or unusual in the circumstances. When considering the allocation of contractual risks under the exclusion clause it is worth bearing in mind that the agreement was a one-off supply contract, for a relatively low contract price, which was subject to a limited warranty, and did not include any ongoing maintenance obligations after the installation.

The court considered it was neither particularly unusual nor onerous for Hall Fire to seek to exclude its liability for future events. Goodlife had every opportunity to refuse to accept the clause, especially since Hall Fire had indicated its willingness to pursue an alternative arrangement with Goodlife which would have increased the contract price but involved insurance coverage.

  • Had the exclusion clause been fairly and reasonably brought to Goodlife’s attention?

When it came to the issue of notice, Coulson LJ noted that the relevant clause was fairly and reasonably brought to Goodlife’s attention and was not “buried away in a raft of small print”. It is accepted that the more unusual or onerous the term, the greater the notice which has to be given.

Hall Fire had included a stark warning, in “almost apocalyptic terms” in the opening paragraph of its standard terms and conditions, which would have been evident to Goodlife at the outset. Before entering into the contract, Goodlife “would have seen by the very first words used that, at the very least, the conditions contained terms which were emphatically not in the buyer's interests". It was concluded that Hall Fire had effectively incorporated the exclusion clause into the contract.

  • Was the exclusion clause reasonable within the meaning of Section 11 of UCTA?

Ultimately, the matter of insurance was taken to be “one of the most important elements in the court’s consideration of reasonableness”. Hall Fire had made the effort to substantiate and reiterate the fact that it would not assume any liability for future events if the buyer failed to obtain the necessary insurance cover. Goodlife had every chance to consider the chain of probabilities when they were presented with Hall Fire’s alternative offer which included insurance cover.

The Court of Appeal once again acknowledged the freedom of two parties to contract. Having entered into a contract of their choosing, commercial parties on an equal footing should expect to be bound by the terms of that contract.

Comment

It is clear that in this case the conclusions were specific to the context and in a negotiated agreement or situation where the parties are of different relative bargaining strength, there will be other matters to consider. However, the courts reaffirmed their adoption of a ‘slow to intervene’ approach in commercial contracts between parties who are of broadly equal size and bargaining power.

This case does serve as a note of caution when reviewing far-reaching clauses in standard terms and conditions, which might appear to be unreasonable and therefore unenforceable on a first glance, but might later be upheld by the court in appropriate circumstances.


This article was written by Tanya Wilkie. For more information, please contact Tanya on +44 (0)20 7203 5058 or at tanya.wilkie@crsblaw.com.

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