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• Regus (UK) Ltd v Epcot Solutions Ltd

Introduction

The case of Regus v Epcot concerned the enforceability and reasonableness of exclusion clauses contained within the standard terms of Regus.

Background

The case of Regus v Epcot concerned the enforceability and reasonableness of exclusion clauses contained within the standard terms of Regus.

Regus is a supplier of serviced office accommodation – in this case at both Heathrow and Stockley Park locations. Epcot was a customer of Regus, firstly at the Heathrow offices, and later at the Stockley Park offices.

The litigation arose out of a defective air conditioning system and also from the closing of the Heathrow offices with the subsequent need for Epcot to relocate its business to the Stockley Park site, leading to considerable losses being suffered by Epcot due to relocation expenses and the expenses of renewing stationery which had been printed with the Heathrow address.

The court was therefore asked to determine whether there had been a breach of contract and if so whether the exclusions clauses contained in the contract were effective under the Unfair Contract Terms Act 1977 (UCTA).

UCTA

Section 3 UCTA provides that a party can only exclude or restrict his liability in respect of a breach of contract where "the contract term satisfies the requirement of reasonableness".

Section 11 is used to determine the reasonableness of a contract term. The term should be "a fair and reasonable one to be included having regard to the circumstances which were, or ought to have been, known to or in the contemplation of the parties when the contract was made".

Initial Hearing

The decision of the London Mercantile Court was that the air conditioning unit was defective and therefore constituted a breach of contract. As there had been a breach of contract Epcot would be entitled to damages. Regus then tried to rely upon its standard terms and conditions which contained an exclusion and limitation of liability clause. The court considered the two key clauses were:

Clause 23(3) which excluded all liability "in any circumstances", including "any consequential loss" except for where Regus had acted deliberately or recklessly.

The first instance judge concluded that this clause was unreasonable "in principle and as a whole" since it provided no remedy whatsoever in a case such as the present one. The clause is drafted in such a broad manner that there is no remedy provided at all.

Clause 23(4) is a limitation of liability clause which provides that where there is loss (apart from personal injury, death or damage to the customers property) such loss will be limited to 125% of the fees paid under the agreement, or £50,000 (whichever is the higher).

The judge concluded that although effective, the clause would be hard to implement since the exclusion of liability is so wide that it would be impossible for Epcot to prove any damage to which the limitation could apply.

The Court therefore concluded that Regus' standard terms dealing with liability amounted to a total exclusion of any remedy at all and was therefore unreasonable and unenforceable under UCTA.

Regus was given leave to appeal this decision.

The Appeal

On appeal clause 23(3) was held to be the most contentious. The judge held that clause 23(3) was not unreasonable since the customer had not been left without any remedy whatsoever, contrary to the first instance decision, since there still existed a prima facie measure of loss for the breach of contract based upon the diminution in value between an air conditioned office and a non-air conditioned office. The term was held to be reasonable since it could be shown that Epcot knew of its existence, and that there was no inequality of bargaining power since the history of negotiations between the parties made this clear. It was held that Regus had fulfilled its obligation under section 11(5) UCTA to prove that the contract term on which it was seeking to rely was in fact reasonable under the Act.

Although not specifically raised at the initial trial, it was stated by the judge that "it is not open to the court to sever a clause which fails to meet the requirements of the Act" and accordingly the whole of clause 23 was declared to be of no effect. On appeal it was held that clause 23(4) was independent of clause 23(3) and therefore, in the event that clause 23(3) was in fact unreasonable, clause 23(4) would continue in force since it is a limitation clause and not an exclusion clause, thus serving a very distinct purpose.

Conclusion

The court, in its initial decision, looked unfavourably upon the standard terms of Regus on the basis that they did not provide a remedy to Epcot in the event that there was a breach of contract or loss was suffered. Regus' acceptance of liability amounted to a 'sham' since there was not any acceptance of liability at all.

On appeal the court assessed the background to the case and the course of negotiations and dealings between the parties over their long business relationship. On this basis the terms were not unreasonable, and in fact, if they had been unreasonable, they were severable so as to preserve the other subsections of the clause in question.

After an initial worry for those drafting standard terms after the initial hearing, the court seems to have given business efficacy to the terms and has asserted a more business friendly approach. From this case the key points that influenced the Court of Appeal's decision when apply section 11 of UCTA and so should be consider when drafting an enforceable exclusion or limitation clause were:

• In principle it is reasonable to restrict damages;
• Sub clauses can be severed therefore if one is ruled unenforceable the others may continue to provide protection;
• The courts are more likely to enforce such clauses between businesses, as there is a greater equality in bargaining power (there was evidence that Epcot had used the availability of other competitors in its negotiations with Regus);
• The clause will be more enforceable where there is evidence that the parties are aware of them (Epcot had previously contracted on identical terms and had attempted to negotiate other terms in the contract but not the exclusion clause);
• Epcot used similar terms in its contracts;
• The exclusion clause advised Epcot to obtain insurance for the excluded losses and the judge believed this was reasonable as the customer would be best placed to obtain such insurance.