Challenging standard form exclusion clauses under UCTA: new TCC guidance

United Kingdom

A TCC decision last week has rejected an attempt to challenge a broadly drafted standard form exclusion clause under the Unfair Contract Terms Act. The decision gives helpful guidance as to the circumstances in which broadly drafted exclusions might be considered to be reasonable under the Act in contrast to previous decisions striking down such clauses.

As this is an English decision, it is not technically binding in Scotland, but is highly persuasive.

Goodlife Foods Limited v Hall Fire Protection Limited

Goodlife is a producer of pre-packaged vegetarian meals. In 2002 Goodlife contracted Hall to supply and install a fire suppression system at its factory in Warrington. In 2012 a fire occurred at the factory which Goodlife alleged ought to have been prevented by the suppression system. A faulty compression joint was said to have prevented the delivery of suppressant media to extinguish the fire.

Goodlife brought a large claim against Hall for losses suffered as a result of the fire. Hall defended the claim by relying, among other things, on an exclusion clause contained within its standard terms and conditions supplied to Goodlife with its quotation. The clause read as follows:

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

Goodlife contended that this clause failed to satisfy the reasonableness requirement in the Unfair Contract Terms Act (“UCTA”) and was therefore invalid. This requirement applies to exclusion or limitation clauses contained in contracts based on one party’s standard terms and conditions as well as any exclusion or limitation clause with regard to liability for negligence (i.e. whether or not contained in standard terms and conditions).

Goodlife relied on previous sale of goods cases where broadly drafted exclusion clauses had been held to be incompatible with UCTA. For example, in Balmoral Group Ltd v Borealis [UK] Ltd liability in relation to the supply of polyethylene polymer was limited to the exchange of defective products with non-defective products or the price paid for the defective products.

On a preliminary issue basis, the TCC was asked (among other things) to determine whether Hall’s exclusion clause satisfied the requirement of reasonableness.

Decision

Despite the width of the exclusion clause, the court upheld its reasonableness. In reaching this conclusion the court placed emphasis on the fact that the only loss to which the clause was directed was one which Goodlife could be expected to insure against. If the suppression system was shown to be faulty before a fire occurred, Hall would be obliged to replace the faulty parts. Were a fault to go undetected, Goodlife would be exposed to the risk of a fire which the system had failed to supress. However, the risk of fire was one which Goodlife could be expected to insure against.

The sale of goods cases relied upon by Goodlife were distinguished by the court on the basis that the potential loss and damage to the purchaser in those cases was infinitely variable in terms of cause, effect and amount and could not sensibly be covered by the purchaser’s insurance. For example, in Balmoral v Borealis, the polymer supplied was used to make oil tanks, thousands of which proved to be defective allegedly due to the polymer not being fit for purpose. Those were losses which the supplier was better able to manage and insure against. As the court noted:

“… the crucial difference between this case and those cases is that in this case, apart from the risk of the need for repair or replacement of some or all of the fire suppression system if defective, which would be a relatively modest cost even if not covered by the warranty, the only likely loss would result from a fire not being prevented by the fire suppression system, in respect of which the customer almost certainly would and certainly should be covered by insurance anyway.”

Conclusion and implications

This case provides important guidance as to when broad ranging exclusion or limitation clauses might not offend against the reasonableness requirement in UCTA. The case suggests that such clauses may well be reasonable in contracts for the supply of goods or services intended to protect against risks commonly insured against such as fire, flood, theft and the like. Purchasers in such situations should take care to ensure that adequate insurance is in place or carefully review any terms and conditions quoted by their suppliers.

References:

Goodlife Foods Ltd v Hall Fire Protection Ltd [2017] EWHC 767 (TCC)

Balmoral Group Ltd v Borealis [UK] Ltd [2006] EWHC 1900 (Comm)