Exclusion and limitation of liability may become one of the sticky negotiation points when two business parties are entering into a commercial contract. With the assumption that two parties in a B2B relationship have equal bargaining power, the discussion on liability exclusion and limitation may resemble a tug of war: one side (usually the goods or services supplier) tries to exclude as much liability as possible while the other (usually the customer) tries to narrow down the exclusion and limitation scope.
The Unfair Contract Terms Act 1977 ("UCTA") applies to both ends of the negotiating table. If your company unreasonably excludes or limits its liability, such exclusion or limitation may become unenforceable and the likelihood of litigation is high. On the other hand, if your company accepts a blanket exclusion or limitation of liability and such exclusion or limitation is deemed "reasonable", then you might end up having no recourse when loss or damage arises.
UCTA contains a non-exhaustive list of guidelines in assessing reasonableness, which have been applied by the courts when considering the reasonableness test in relation to the exclusion of various types of liability. What is considered as "reasonable" depends on the context and how the courts apply the guidelines, as demonstrated in the recent case Goodlife Foods Ltd v Hall Fire Protection Ltd. In this case, the Court of Appeal upheld the High Court's ruling that a wide liability exclusion clause which excluded any negligence claims was "reasonable" under UCTA.
The facts of the case
The food manufacturer Goodlife had their property damaged and suffered business interruption losses amounted to approximately £6 million, as the consequence of a fire at their premises in 2012. Hall Fire was the fire-suppression system provider who designed, installed and commissioned the fire suppression system for Goodlife at the said premises. Goodlife brought a negligence claim against Hall Fire for its fire damage and losses.
Hall Fire's defence relied on its standard Terms and Conditions, which included the following exclusion clause:
"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 argued that such exclusion was not reasonable.
The High Court ruled that:
- the exclusion of liability for death and personal injury was unlawful under section 2(1) of UCTA. However, severing this unlawful part would not affect the validity of the rest of the clause.
- the remainder of the clause (including the exclusion of negligence liability) was valid: (1) the parties were of equal bargaining power; (2) the only likely risk for Goodlife was fire, for which it was reasonable to expect Goodlife (as the party at risk) to arrange for an appropriate insurance cover; and (3) both parties were aware of the clause.
The Court of Appeal agreed with the High Court's judgment, observing that in this particular case, insurance and risk allocation was a "critical factor in Hall Fire's favour". Accordingly,
- due to its knowledge of the premises and the business it operated in, Goodlife should be in the best position to obtain insurance to manage fire risks.
- Hall Fire had offered an alternative term at the time of the contract, under which it could provide insurance for the excluded liabilities, at an extra cost.
- the risk allocation was reasonable as the contract was delivered at a discounted and low value for an one-off installation without ongoing maintenance requirements. The industry practice also allows the supplier to limit or exclude post-installation liabilities, particularly when the customer would cover their risks with insurance.
Points to note
The case once again highlights that UCTA "reasonableness" varies on a case by case basis. Although the above judgment is specific to the facts of the case, the Courts' observation of insurance and risk allocation is note-worthy.
So next time when a liability limitation or exclusion clause lands on your desk, please don't forget the UCTA reasonableness test. You might want to consider or discuss with business departments the risks of the relevant transaction and how they are going to be allocated. As a supplier, having a "blanket" exclusion clause without careful examination is not advisable, as it might lead to unenforceability or litigation. Equally, as a customer, relying on a widely drawn exclusion and limitation clause to be held unreasonable may backfire.
For any queries on exclusion of liability, or commercial contracts in general, please contact Suzie Miles, our Commercial Associate, at firstname.lastname@example.org.
  EWCA Civ 1371.
 Trolex Products Limited v Merrol Fire Protection Engineers Limited (20 November 1991, unreported).