Is that exclusion clause enforceable?

In the decision in Regus (UK) Limited v Epcot Solutions Limited, the Court of Appeal looked at the enforceability of an exclusion clause contained in Regus' standard terms and conditions so as to decide whether it was reasonable for Regus to rely on it.

The Facts

Regus provided Epcot with serviced office accommodation. During the term of the contract Regus closed down the office but Epcot agreed to transfer to another of Regus' serviced offices nearby. At the new location the air-conditioning was faulty and inadequate. Despite receiving notification of the defective system by Epcot, Regus failed to rectify the problems. As a result of this, and also following allegations by Epcot that it was entitled to certain relocation expenses, Epcot withheld payment of fees for the cost of using the serviced offices. Regus issued a notice of suspension due to non-payment of monies owing and Epcot then vacated the offices. Regus issued a claim for the withheld fees. In the proceedings Epcot counterclaimed for its losses associated with the relocation and faulty air conditioning (perhaps surprisingly in the sum of £626 million, although during the appeal Epcot did confirm that it had limited its claim to a maximum of £50,000).

Regus argued that even if it was in breach of contract in relation to the defective air-conditioning there was a term in the contract which excluded any liability to pay compensation.

The Exclusion Clause

Regus's exclusion clause was lengthy but the part in dispute was labelled clause 23(3) by the Court of Appeal and stated:

"We will 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 advise you to insure against all such potential loss, damage expense or liability."

What UCTA says

Section 3 of UCTA states that when one contracting party deals as consumer, or accepts the other's written standard terms of business, then the other cannot exclude or restrict any liability for a breach by him of the contract except in so far as the contract term satisfies the requirement of reasonableness. Section 11(1) states that a term will be reasonable if, having regard to the circumstances which were known, or ought reasonably to have been known to the parties when the contract was made, it is fair and reasonable.

Schedule 2 to UCTA contains a non-exhaustive list of factors to consider in assessing reasonableness. Although this schedule is stated as applying only to claims relating to sale of goods, hire purchase and for the supply of goods, it is considered by the courts to have general application. If a term is found to be unreasonable, then the entire term is unenforceable. The court cannot rewrite clauses or strike out words so that they become reasonable, but the issue of severability has not previously been decided by the court. If a sub-clause is held to be unreasonable, is the remainder of the exclusion clause enforceable, or do all elements of the exclusion clause fail? The Court looked at this point and it is discussed below.

Why did the Court of Appeal disagree with the Judge and confirm the clause was reasonable?

At first instance the judge found that Regus was negligent and in breach of contract by failing to rectify the defective air-conditioning. He went on to conclude that clause 23(3) was unreasonable because it left Epcot with no remedy for this breach. Clause 23(3) excluded all liability for certain specified consequential and direct losses (such as loss of business and loss of profits) even if Regus acted negligently or deliberately. The judge said that to exclude all remedies for negligent or deliberate breaches of contract was unreasonable.

The Court of Appeal disagreed - not with the judge's conclusion that being left with no remedy was unreasonable but with his assertion that no remedies were available to Epcot. Epcot did have a remedy against Regus. That remedy was for the diminution in value of the services promised. The Court of Appeal said that this diminution in value claim by Epcot was the "obvious and primary measure of loss for a breach of such a kind". A claim for breach of contract did exist and was left untouched by the wording of the exclusion clause. Epcot could claim for the difference between the costs they paid for serviced office accommodation with air conditioning (assuming that that reflected the market value of the services promised) compared with the cost of such services without air-conditioning. In the circumstances, the judge was wrong to conclude that the exclusion clause left Epcot with no remedy and therefore his basis for deciding that the exclusion clause was unreasonable was flawed.

The Court of Appeal then went on to apply the Schedule 2 factors and look at all the circumstances of the case to decide if the clause was reasonable. It concluded that Regus, who as the party seeking to rely on an exclusion clause had the burden of proof, had shown the clause to satisfy the requirement of reasonableness.

The issue of severability

The Court of Appeal also confirmed that, even if clause 23(3) had been unreasonable and unenforceable, the remainder of the clause, which capped liability for losses at a maximum of £50,000, could be severed from the remainder of clause 23, as it was independent of it. Although the Court of Appeal did not have to decide this issue (because it had already concluded that clause 23(3) was reasonable) its comments are likely to be extremely useful in the future for those seeking to rely on exclusion clauses. Especially useful is the Court's view that, to be severable, the clause does not necessarily have to be divided into a separate sub-clauses. As long as any part of an exemption clause can be said to be independent from the rest then it can be severed from the unenforceable part, and will be valid and enforceable.

Comment

This case is perhaps more significant not for what it says about the reasonableness requirement in UCTA but for what is says about the ability to sever and retain any reasonable sections of an exemption clause, if they are independent from the unreasonable parts.  Although the party seeking to rely on an exemption clause has the onus of proving that it is reasonable, this case demonstrates that it is not that difficult to do so. But if a party has excluded all remedies for a fundamental breach of contract then it is likely that the courts will hold the exclusion clause to be unreasonable and unenforceable. The definition of standard terms of business, for the purposes of UCTA, is wide enough to include negotiated contracts if they are based on one party's standard terms. It is always important to consider carefully exactly what losses are being excluded.