Exclusion clauses

Exclusion articlesIntroductionExclusion cla expends are gener altogether in eithery found in rents. These types of claexercisings operate to exclude or set the rights of a companionship. For example, when a bity to a contract wishes to limit their financial obligation in the event that they overstep the contract they pull up s assimilates usually include an excision clause, limiting the add together that the early(a) side can claim to a undertake total. Some successions, a party whitethorn include a provision searching to exclude all indebtedness for a certain thing that could go wrong. Exclusion clauses may also be called exemption or exception clauses. They operate for the profit of nonpareil party to an cartel. It is always difficult for commercial contract drafters to hit the sack when an excommunication clause goes too far and might be stuck break as world undue under the Unfair Contarct Terms comport 1977 (UCTA).On 15 April 2008 the tourist speak to of Appeal handed down its govern in the case of Regus (UK) Ltd v Epcot Solutions Ltd overturning a eminent motor hotel closing that had previously caused suppliers considerable concern. The accost of Appeal decision set push by means of near important positionors that may be taken into account in find out whether an exclusion clause is enforceable and to be held valid.The case refer the reliance by a supplier of assistantd office accommodation (Regus) on part of an exclusion clause in its measurement cost of worry. The part of the exclusion clause in question sought to exclude financial obligation in either circumstances for bolshy of line of credit, freeing of profits, loss of expect savings, loss of or deadening to data, trinity party claims or all consequential losings. A further clause limited Regus indebtedness for other losses, remedy or expenses to 50,000.The customer (Epcot) complained to Regus about defective air instruct in the office, and when t his was not fixed by Regus, Epcot stopped paying Regus the expediency charges due under the agreement. Regus brought proceedings against Epcot for the amounts due to it, and in response, Epcot argued that the misery to yield air conditioning amounted to a breach of contract and counterclaimed for loss of profits, loss of opportunity to develop its line and distress, inconvenience and loss of amenity.In set up to defeat part of Epcots claim, Regus had to show that the Exclusion article was enforceable in particular that it was intelligent under the Unfair bid Terms snatch 1977 (UCTA).In a gamey motor hotel judgment of May 2007, the courtroom had ruled that although in theory it was constitutionally reasonable for Regus to restrict modify for loss of profits and consequential loss, the clause was unreasonable as a whole as the exclusion was so wide that it effectively left wing Epcot without a remedy for a canonic service such(prenominal) as defective air conditioning. I t was therefore unenforceable, leaving Regus exposed.Regus appealed on the grounds that the High Court judge had been wrong to say that the Exclusion article was unreasonable under UCTA and that it should be entitled to limit its indebtedness in that way. The Court of Appeal agreed with Regus and reversed the High Courts ruling.The purpose of UCTA is to protect spotting parties (particularly consumers and military control parties contracting on other business parties normal hurt of business) from onerous contractual provisions such as exclusion and terminus ad quem of liability clauses. UCTA imposes limits on the finish to which liability for breach of contract, negligence or other breaches of duty can be avoided in a contract.Where a clause is contrary to the mandatory restrictions set out in UCTA or is deemed by the court to be unreasonable, such a clause entrust be unenforceable.Amongst other restrictions, Section 3 of UCTA is particularly important in the setting of use of business to business contracts where the supplier is dealing on its beat terms of business. This section provides that where a term seeks to exclude or restrict a suppliers liability for breach of contract, such a term shall just be enforceable to the extent that it satisfies the reasonableness test.Thus, according to Section 11(1) of UCTA, in order to pass the reasonableness test, a contract term must(prenominal) cut down a penny been. a fair and reasonable one to be include having regard to the circumstances which were, or ought reasonably to take in been, known to or in the contemplation of the parties when the contract was made.Schedule 2 to UCTA contains a non-exhaustive amount of guidelines in assessing reasonableness, which in practice the courts apply when considering reasonableness in the context of Section 3 of UCTA. Such factors include the strength of the negociate locate of the parties relative to each other, whether the customer received an inducement to a gree to a particular term whether the customer had the opportunity of entering into a alike(p) contract without the term, whether the customer knew or ought to have known of the existence and the extent of the term and whether it was reasonable at the time of the contract to expect that con variety showation with a term would be practicable.In addition, under Section 11(4) of UCTA, where a party seeks by contract to restrict its liability to a specified sum of money, the courts entrusting looks at the resources for sale to that party to meet the liability should it arise and the availability of indemnity cover.Clause 23We are not liable for any(prenominal)(prenominal) loss as a solution of our failure to provide a service as a result of mechanic breakdown, strike, delay, failure of staff, termination of our interest in the building containing the business refer or otherwise unless we do so deliberately or a negligent. We are also not liable for any failure until you have told us about it and given us a reasonable time to put it right.You agree (a) that we leave behind not have any liability for any loss, damage or claim which arises as a result of, or in connection with your agreement and/or you use of the service except to the extent that such loss, damage, expense or claim is right away attributable to our deliberate act or our negligence (our liability) and (b) that our liability ordain be subject to the limits set out in the next paragraph.We go out not in any circumstances have any liability for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss. We strongly nominate you to promise against all potential loss, damage expense or liability.We will be liable Without limit for personal injury or demolition Up to a maximum of 1 million (for any one event or series of connected events) for damage to your personal retention Up to a maximum affect to cxxv% of the total fees remunerative under your agreement up to the date on which the claim in question arises our 50,000 (whichever is the higher), in reward of all other losses, restitution expenses or claims.The meaning of in any circumstancesCounsel for the defendant submitted that the nomenclature in any circumstances were apt to include liability for art or liability in obligingness of a deliberate attempt to damage the defendants business, this was held by the Court of Appeal to be the wrong turn up to take. shaper justness Rix StatedClause 23 as a whole does not purport to exclude liability (in the case of the losses identified in clause 23(3)) for fraud or wilful, reckless or malicious infliction of injury. Lord Justice Rix justified this approach on the following(a) basisLiability for fraud or malice or recklessness which is a species of either goes without apothegm parties contract with one other in the expectation of honest dealing.In this sence it is important to d istinguish amid an intentional breach (which may fall within the in any circumstances) and the deliberate infliction of harm (which will not). On the present facts it could be said that the actions of the claimant were deliberate in the sense that they decided not to spend money on repairs to the air-conditioning frame. But that is a long way from saying that the claimant acted with a dishonest or malicious intent to inflict harm upon the defendant.The finis of the Court of appeal on this issue suggest that the quarrel in any circumstances should not be construed literally against the context of an expectation of honest dealing. Thus the words are improbable to be held, as a matter of construction, to encompass liability in respect of the fraudulent, malicious or reckless infliction of harm.Available RemediesJudge Mackie held that clause 23 was too broad to be reasonable. He sp discontinued for a number of reasons. First, he held that clause 23 deprived the defendant of any r emedy at all for failure to provide a basic service like air conditioning in what is the business equilavant of an hotel, not the lease of flat. Secondly, he verbalize taht clause 23 provided an illusion of a remedy. On its face, clause 23 provider for a limitation of 125% of the total fees paid but when account was taken of the broad language of the exclusion of financial losses, Judge Mackie stated that a business will eb unable to establish teh liability which the claimant seeks to limit. Damages for loss of amenity was held to be frail, remote and uncertain. The possibility of such a claim did not function to persuade Judge Mackie that the clause was reasonable.The Court of Appeals dupe was that, contrary to what the High Court judge had said, certain limited remedies were in fact available to Epcot and had not been excluded by virtue of the Exclusion Clause. In particular, Epcot could seek damages for the diminution in value of the go promised. The cost of relocating to al ternative offices or the cost of replacement air-conditioning were other possible remedies.Assessment of ReasonablenessRix LJ thus went on to consider whether the Exclusion Clause was reasonable in readable of the fact that it did not exclude all remedies. Rix LJ decided that the Exclusion Clause was reasonable on the following grounds as the High Court judge had said, in principle it was reasonable for Regus to restrict damages for loss of profits and consequential losses from the categories of loss for which it would become liable when in breach of contract Epcots managing director was an intelligent and experienced businessman who was aware(predicate) of Regus standard terms when he had entered into the contract and had contracted before on identical terms Epcot had used a similar exclusion of liability for validatory or consequential losses in his own business Epcot had sought to re-negotiate terms of the contract frequently and energetically, although not the Exclusion Clau se there was no inequality of bargaining occasion. Although Regus was the larger company, Epcot made use of and took advantage of the availability of local competitors of Regus in negotiations and the Exclusion Clause apprised Regus customers to take out insurance for the losses excluded by the Exclusion Clause. Rix LJ mat up that Regus customers were better pose to tick off themselves against their business losses rather than Regus to insure its customers. This was particularly the case as Regus customers would frequently change and Regus was very unlikely to be in possession of the level of information relating to its customers which underwriters would require in order to provide insurance. In addition, leaving customers to obtain such insurance would enable them to choose whether, how and at what price they would wish to insure against business losses.What is the effect of the Court of Appeals ruling?The Court of Appeal ruling will give some comfort to suppliers who had beco me nervous about excluding all financial losses in their standard terms of business following the High Courts ruling last year. The Court of Appeal has also provided some helpful guidance as to the sort of factors it will consider in assessing reasonableness. Although the facts will vary from case to case, as can be seen from the above, factors such as the parties bargaining strength, the sophistication of the buyer and the question of who is best placed to insure the loss will all be considered. Suppliers could also receipts from including wording in their exclusion clauses advising their customers to purchase insurance for those matters in semblance to which the supplier excludes liability.Although the courts do not have power to rewrite an exclusion clause or sever words that make it unreasonable, here the Court of Appeal held that if the relevant exclusion clause had been unreasonable it could have been separate so as to level a related limitation clause intact. The two claus es, although not formally divided up up into separate subclauses, were strong-minded of each other and several different purposes. It is, however, clearly preferable for a drafter to separate out different elements of the exclusion into subclauses rather than to rely on a single all-embracing clause.The reasonableness of an exclusion clause will always depend on the circumstances of the individual case. In the Regus case, the fact that the customer clearly understood the exclusion clause had strong bargaining position and had sought to renegotiate some of the terms, together with the courts view that it was reasonable for the customer to insure against indirect losses, led the Court of Appeal to conclude that the clause was reasonable.In Watford Electronics Ltd v Sanderson CFL Ltd, S appealed against a decision (2000 2 All E.R. (Comm) 984) that two clauses purporting to limit liability in respect of a contract it had entered into with W were unreasonable in their entirety. The con tract contained an entire agreement clause which stated that no reliance had been made by the parties on statements or representations made by them.Held, allowing the appeal, that the judge had erred in (1) failing to mightily identify the scope and effect of the limit of liability clause since the clause did not attempt to exclude liability for pre-contract misrepresentation (2) failing to brood the obligation agreed to by S in an agenda to the contract, to use best endeavours to allocate appropriate resources to the project in order to belittle potential contractual losses, as an additional obligation to those imposed by the standard terms and conditions, and (3) treating Ws own standard terms of business as irrelevant since they showed that W was well aware of the commercial considerations which would lead a supplier to include limit of liability clauses. This was directly relevant to determining whether such clauses were fair and reasonable having regard to the circumstances w hich were, or ought to have been known to or in the contemplation of the parties when the contract was made.In surface-to-air missile Business Systems Ltd v Hedley Co, S, a software company, claimed the sum of GBP 310,510 in respect of the outstanding licence fee for a software musical arrangement which it had supplied to H, stockbrokers. H counterclaimed substantial damages for alleged defects in the system. Immediately after the system went live H experienced serious problems with it and, a year later, ceased using the system without informing S. One month later, H gave S incur that it intended to reject the system. S subsequently issued proceedings against H submitting that its liability for misrepresentation and breach of contract had been excluded under the contract and, in any event, H had failed to give timely unequivocal notice of rejection pursuant to the knead specified in the contract and at the time when H did give notice of rejection it had already gained substanti al benefit from it.Held, giving judgment for S, that the exclusion clause fulfilled the requirement of reasonableness under the Unfair Contract Terms Act 1977 , Stewart Gill Ltd v Horatio Myer Co Ltd 1992 Q.B. 600 CA (Civ Div) applied. The parties were of equal bargaining power in terms of size and resources, it was a standard feature of the computer software industry to supply software alone on stringent terms excluding all or virtually all liability and H had not even tried to negotiate much favourable terms, Watford Electronics Ltd v Sanderson CFL Ltd 2001 EWCA Civ 317, 2001 1 All E.R. (Comm) 696 distinguished. Accordingly, notwithstanding that S had waived an entire agreement clause, S was not liable to H for breach of contract or misrepresentation and was entitled to the balance of the outstanding licence fee. If that conclusion was wrong, H had already gained an enormous benefit from using the defective system by the time it notified S of its decision to reject it. If H had had no computer system it would have gone out of business. Accordingly, H would not have been entitled to claim all its money back from S since it had had the benefit of 17 months service from the system, which it would not have had if it had gone through the process specified in the contract to recover its money.The reasonableness of the clauseThe narrower approach to the construction of in any circumstances combined with the subsidisation that clause 23 did not prevent the defendant from recovering damages in respect of any diminution in the value of the services provided, had the effect of the undermining the approach which Judge Mackie had taken to the reasonableness of clause 23. This being the case, the court of Appeal held that it was entitled to take a fresh view of the reasonableness of the clause. It concluded that the clause was, in fact, reasonable.In so concluding, the Court of appeal had regard to a number of factors. First, it held that in principle it was merely r easonable for the claimant to restrict damage to loss of profits and consequential losses from the categories of loss for which it could become liable when in breach of contract. Second, the chief decision maker of the defendant was an intelligent and experienced businessman who was well aware of the claimant standard terms when he entered into the contract and the defendants own standard terms of business contained a similar exclusion of liability in respect of indirect or consequential losses. Third, there was no inequality of bargaining power between the parties and there had been meaningful negotiation between them in apprisal to the terms of the contract. Although the claimant was by far the bigger enterprise, the presence of competitors who were also pursuit to rent out space, gave to the defendant considerable negotiating in relation to the terms of the contract. Finally, the third paragraph of clause 23 advised the claimants customers to protect themselves by insurance fo r the losses with which paragraph was concerned. In the opinion of Lord Justice Rix, it would have been easier for the customers to obtain insurance against business losses than for the claimant to seek to insure against the range of losses that could conceivably by suffered by its customers. As Lord Justice Rix observed,If insurance is left to each business customer, that customer has salutary autonomy over whether, how and at what price he wishes to insure against business losses. If however, such losses have to be insured by Regus, accordingly that autonomy is lost, and the expense has necessarily to be incurred and transferred to each customers on the form of the fees charged.On the basis of above, the Court of Appeal concluded that the claimant had proved that the third paragraph of clause 23 satisfied the requirements of the reasonableness test.SeveranceThe final exam issue considered by the Court of Appeal concerned the severance of the third paragraph in clause 23, assumin g it to be unreasonable. As has been noted, it was conceded by the defendant that the third paragraph ws severable from paragraph (and it had never been suggested that the tail paragraph was unreasonable on its own terms). Lord Justice Rix stated that the concession was well made. While clause 23 was not divided up into separate sub-clauses, he held that it was plain that the fourth paragraph was autonomous of the third paragraph. He also noted that the fourth paragraph was a limitation clause rather than an exclusion clause and, as such, served a different purpose.The willingness of the Court of Appeal to countenance severance in this context is to be welcomed. It would be rather artificial to conclude that severance is besides possible in the case where the relevant sub-clauses have been separately numbered. state numbering may be a wise step to take but, as the present case demonstrates, it is not mandatory. Whether separate paragraphing is necessary is some other matter. It is probably not necessary but the fact that the clause is busted down into separate paragraphs is likely to be of assistance in demonstrating to the court that one paragraph is independent of the other and that the invalidation of one paragraph should not result in the invalidation of other paragraphs in the comparable clause.