Unfair Terms & Exclusion Clauses: The Limits Of Reasonableness

The English Court of Appeal has recently reversed the High

Court decision in Regus (UK) Ltd -v- Epcot Solutions

Ltd, and in doing so has given welcome comfort to service

providers who undertake services on standard terms, and their

liability insurers.

At first instance the defending service provider was held to

be (a) in breach of contract to a business customer by failing

to provide the required contractual services; and (b) unable to

rely on an exclusion clause in its standard terms, which

purported to exclude liability for loss of business, loss of

profits and other financial loss. The judge had concluded that

the clause did not satisfy the requirement of reasonableness in

the Unfair Contract Terms Act 1977 ("the Act")

because, in his view, it would effectively deprive the customer

of any remedy whatsoever, because those types of loss were the

only losses suffered.

The Court of Appeal, however, has now ruled that the

customer was not in fact left without any remedy. The customer

was still entitled to claim damages for the diminution in value

of the services promised. The exclusion clause was held to be

reasonable, and therefore enforceable, because the customer was

aware of the standard terms in the contract and had itself used

a similar exclusion clause for indirect or consequential

losses. Moreover, the customer had actively negotiated many

other clauses of the contract yet had not felt the need to

renegotiate the exclusion clause. Additionally, the customer

had the same bargaining power as the supplier.

Commercial Impact:

This Court of Appeal decision follows the generally

permissive approach of English courts towards exclusion and

limitation clauses in standard contracts between commercial

parties. However, it also goes to show that the interpretation

of the reasonableness test is very much fact-dependent, and

that while courts will generally enforce similar terms in

business-to-business relationships, service providers should

still be wary. Even in business relationships, courts will

scrutinise an exclusion or limitation clause to ensure that the

requirement of reasonableness under the Act is satisfied.

As a reminder, under the Act the reasonableness of such a

clause will be assessed in light of (a) the strength of the

parties' respective bargaining positions; (b) the

opportunity for the customer to negotiate with competitors who

do not have a similar clause; and (c) whether the customer knew

or ought to have known of the existence...