Question of Standard Form Exclusion Clauses Under UCTA

Goodlife Foods Ltd v Hall Fire Protection Ltd

19 September 2017

Author: Rachel Craig
Practice Area: Corporate - M&A

Rachel_craig

In order to be enforceable, an exclusion clause in a contract must satisfy the test of reasonableness in the Unfair Contract Terms Act 1977 (“UCTA”). In practice, this means that a contract term must be fair and reasonable in the context of the circumstances which were, or ought reasonably to have been known to, or in the contemplation of the parties, at the time the contract was made. The recent decision in Goodlife Foods Ltd v Hall Fire Protection Ltd [2017] EWHC 767 is of interest and should be noted, in particular, by those who are drafting and/or seeking to rely on standard terms, as the court held, in this instance, that a broad exclusion clause was reasonable. An obvious implication of this decision was that the ‘innocent’ party was effectively left without the recourse that it had expected to receive.

Background

Goodlife Foods Ltd (“Goodlife”) contracted Hall Fire Protection Ltd (“Hall”) to supply and install a fire suppression system at its factory in 2002. The system was supplied and installed by Hall on Hall’s standard terms and conditions. In 2012, a fire occurred at Goodlife’s premises which Goodlife alleged was the result of “a failure or malfunction”[1] of the fire suppression system which had been installed by Hall in 2002.

In defending the claim brought by Goodlife, Hall sought to rely, among other things, on the following exclusion clause contained in its standard terms and conditions:

“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 HFS for whatever reason. In case of faulty components, we include only for the replacement, free of charge, of those defective parts…”

Goodlife countered that this exclusion clause failed to satisfy the UCTA reasonableness requirement and therefore was invalid. Goodlife sought to rely on previous decisions where broadly drafted exclusion clauses had been held to be incompatible with UCTA.

Decision

The Technology and Construction Court (the “TCC”) upheld the reasonableness of Hall’s exclusion clause, despite its width. In particular, the TCC noted that the loss to which the exclusion clause was directed was one which Goodlife could be expected to insure against (i.e. the damage caused by fire). The TCC suggested that if Goodlife had discovered that the suppression system was faulty before a fire occurred, Hall would be obliged to replace the faulty part. But where a fault went undetected, Goodlife would be exposed to the risk of a fire – however, this was a risk which Goodlife could be expected to insure against.

In contrast, the precedent cases upon which Goodlife sought to rely were cases which the TCC said were variable in terms of cause, effect and amount, and which could not sensibly be covered by insurance. The TCC also gave consideration to the fact that Goodlife and Hall were of equal size and bargaining power and it should be noted that, if the circumstances were different and Hall had supplied and installed a fire suppression system to a counterparty which was much smaller than Goodlife and with more limited means than Goodlife, then the outcome of this case may have been different.

Practice points

This case does not suggest that wide-ranging exclusion or limitation clauses in standard terms will always be enforceable, and it does not supersede the principle of UCTA reasonableness. However, it does suggest that there may be circumstances where broad exclusion or limitation clauses may be reasonable (and therefore, enforceable), in contracts for the supply of goods or services which are intended to reduce the risk of incidents which are commonly insured against, such as fire or flood. Purchasers of such goods or services should review suppliers’ standard terms and conditions carefully to consider key risk areas and whether responsibility for such risks is properly allocated between the parties. Purchasers should also ensure that they have appropriate insurances in place.

How CMcD can help

If you would like advice on standard terms to which you are currently a party, or are likely to become a party, either as supplier or purchaser, please speak with a member of the Carson McDowell commercial team. Alternatively, your usual Carson McDowell contact would be pleased to make an introduction to our commercial team for you.

[1] [2017] EWHC 767 (TCC) paragraph 1

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