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Court of Appeal upholds 'reasonable' widely-drafted exclusion clause

A widely-drafted exclusion clause in the standard terms of a fire protection system provider was not unreasonable, and therefore should be upheld, the Court of Appeal has confirmed.19 Jun 2018

The unanimous judgment confirms the High Court's finding that a widely-drafted clause will not automatically be unreasonable under the 1977 Unfair Contract Terms Act (UCTA). It also confirms that the court will usually uphold commercial contracts entered into by parties of equal bargaining power, according to commercial litigation expert Jonathan Fortnam of Pinsent Masons, the law firm behind Out-Law.com.

"The decision is another in the trend that makes it very clear that the courts are very likely to uphold clauses that have been freely agreed between parties of equal bargaining power," he said.

"As a result, it's really important to review each clause prior to entering into the contract, rather than subsequently trying to persuade the court that a clause that's been signed up to is unreasonable. Exclusions in B2B contracts are likely to be upheld, and businesses potentially face a difficult task arguing that the statutory controls defeat what has been agreed," he said.

Hall Fire designed and installed a fire protection system at Goodlife's factory premises in Warrington in 2002. In 2012, a fire broke out at the factory, which Goodlife claimed was caused by a failure or malfunction of the system. Goodlife made a negligence claim against Hall Fire. Hall Fire raised a preliminary issue that the exclusion of liability clause in its standard contract terms excluded any negligence claim.

In April 2017, the High Court upheld the clause against Goodlife's claim that it breached the reasonableness requirement in UCTA. In particular, the judge found that the clause was not particularly unusual or onerous, and was fairly and reasonably drawn to Goodlife's attention. It was therefore properly incorporated into the contract. The judge also found that Hall Fire had shown that the clause was reasonable, by reference to the UCTA guidelines and relevant case law.

On appeal, Goodlife argued that the clause was particularly unusual by referring to the High Court judge's finding that it was at "the most far-reaching end of the spectrum" in terms of excluding Hall Fire's liability, albeit not a 'blanket' exclusion clause. It argued that the very fact that the clause was so unusual meant that the notice had to be "over and above the norm", and that it was not sufficient that Hall Fire had expressly referred to the terms in its quotation for the work.

The Court of Appeal could find no reasons to interfere with the judge's conclusions, either on the "particularly onerous and unusual" point or on the notice requirement. Lord Justice Coulson, giving the judgment of the court, noted that it was "neither particularly unusual nor onerous for Hall Fire fully to protect themselves against the possibility of unlimited liability arising from future events" in the context of a one-off supply contract. He also noted that Hall Fire had indicated that it would have been willing to pursue an alternative arrangement with Goodlife, which would have involved some insurance cover and an increase in the contract price.

On the issue of notice, Lord Justice Coulson noted that the relevant clause was not "buried away in the middle of a raft of small print", but rather was "one of the standard conditions which were expressly referred to on the front of the quotation and which were printed in clear type". Hall Fire had in fact drawn the clause to the attention of Goodlife "in almost apocalyptic terms", meaning that a potential buyer "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".

The appeal court then went on to consider the "reasonableness" of the clause with reference to UCTA and the statutory guidelines. It found that the parties were broadly equal in terms of their bargaining positions, that Goodlife received no inducement to agree to the clause and that notice was fairly and reasonably given. There was no evidence that the fire protection system was "manufactured, processed or adapted to Goodlife's order"; and the clause expressly provided for an alternative to Hall Fire's basic tender involving insurance, it said.

Lord Justice Coulson said that the insurance point was ultimately "one of the most important elements in the court's consideration of reasonableness".

"The first two parts of [the clause] limit Hall Fire's liability very significantly," he said. "But the third part of the clause went on to say that, if Goodlife wanted that liability to be reinstated, it would cost them more, but would give rise to insurance, and therefore protection for losses which would otherwise be excluded."

"I also agree with the judge that the third part of [the clause] was not an empty offer. It did not merely tell Goodlife something they already knew. It was reiterating that Hall Fire did not assume a liability for future events if Goodlife did not put in place the necessary insurance. It stressed the necessity of that insurance. It would have concentrated Goodlife's mind as to what insurance cover they already had, so that they could decide whether that cover needed to be enhanced or modified as a result of Hall Fire's alternative offer," he said.