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Exclusion clauses and UCTA: An unexpected decision?

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27/07/2017


The interpretation of exclusion clauses in commercial contracts continues to prompt disputes and debate. Walker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, explains the recent decision of the High Court in Goodlife Foods v Hall Fire Protection [1].

The Unfair Contract Terms Act 1977 (UCTA) applies to determine the enforceability of clauses which seek to restrict or exclude business liability in the majority of supply contracts.  UCTA provides, in short, that any attempt to exclude or restrict liability for death or personal injury is void and that any attempt to exclude or restrict liability for other loss is subject to the ‘reasonableness test’ [2].

Case and clause

In Goodlife Foods v Hall Fire Protection, when Goodlife alleged that Hall Fire Protection was liable for a fire at its factory and claimed over £6 million in property and business interruption damages, Hall Fire Protection sought to rely on the contractual provision which excluded all liability for loss caused to “…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…”.  Goodlife, however, argued that the reference to “persons” was an attempt to exclude liability for death/personal injury which rendered the exclusion clause void.

An unexpected, but not unreasonable, decision?

The High Court judge agreed with Goodlife that the clause included an attempt to exclude or limit liability for death or personal injury but, perhaps somewhat surprisingly, he decided that that did not render the whole clause invalid.

Instead, in reliance on an unreported Court of Appeal decision from 1991 [3], HHJ Davies found that the part of the clause seeking to exclude liability for death/personal injury could simply be severed, and the remainder could be upheld as enforceable if it passed the UCTA reasonableness test.

HHJ Davies went on to find that the remainder of the clause was reasonable and therefore enforceable.  He placed particular emphasis on the facts that the parties were of roughly equal bargaining position and that the real risk behind this contractual arrangement was the risk of fire damage and that was something that Goodlife could (economically) – and should – have insured against.

The decision in this case may have been surprising firstly because it seemed to contradict received wisdom that an exclusion of liability for death/personal injury renders an entire clause void. That line of reasoning was embodied in the Court of Appeal case of Stewart Gill Ltd v Horatio Myer & Co Ltd [4], but HHJ Davies was able to distinguish that decision by reference to the facts and clause in question, which did not mirror exactly those in the Goodlife case.

Secondly, the decision may have been surprising because it also goes against what has been a relatively common reluctance on the part of the courts to leave a party without any remedy at all. However, as Walker Morris has reported previously, last year’s Transocean Drilling v Providence Resources [5] case also provided clear authority that, where sophisticated parties enter into contractual terms which very clearly define the exclusions and limitations of risks to which they have agreed, the courts will uphold such exclusions even if this will deprive an innocent party of sums due following a breach of contract.

WM Comment

Limitation and exclusion clauses restrict a party’s contractual rights and obligations or legal remedies and the law therefore provides that parties should not lightly be taken to have limited their rights or remedies without clear wording to that effect [6].  Equally, however, freedom of contract is a crucial concept within English commercial contract law which allows parties – in particular commercial parties of equal bargaining strength entering into sophisticated contractual arrangements – to apportion responsibility and risk howsoever they see fit.

There is a tension between these apparently competing legal principles. Combine that with the circumstantial pressure when a costly dispute has arisen and the parties have turned to their contract to ascertain where liability falls, and it is easy to see why exclusion clauses can be highly controversial.  To make matters worse, the law in this area is constantly in flux, and can often seem contradictory, largely due to the fact that all such cases turn so closely on their own facts and contractual provisions.  So what can parties do?

Practical advice

Parties would be well advised to remember that rarely can a limitation/exclusion of liability clause be absolutely watertight. In many cases, therefore, rather than seeking to exclude all liability in all or any circumstances (and potentially thereby rendering your clause unenforceable altogether), it may be better to accept limited liability in some circumstances to ensure that your clause will stand.

Key to that process will be for the parties to ‘get behind’ the contract to try to identify the likely possible risks from the outset, and to really think about how best those risks can be allocated between them or otherwise mitigated (for example, through insurance). Your legal advisor should be able to review and re-draft your contract terms in light of your particular business needs, so as to get the balance right.

In addition, limitation/exclusion clauses should, where possible, be drafted in a series of separate, self-contained provisions so that, if any part of the clause is found to be void or unreasonable, there is at least a chance that that part can be severed, thereby leaving the remainder of the clause enforceable.

If you would like any assistance in relation to your negotiation or review of any contractual exclusions or limitations, or if you would like any advice in connection with any commercial contract dispute more generally, please do not hesitate to contact Gwendoline Davies or any member of Walker Morris’ Commercial Dispute Resolution team.

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[1] [2017] EWHC 767 (TCC)
[2] See section 11 (1) and Schedule 2, UCTA
[3] Trolex Products Limited v Merrol Fire Protection Engineers Ltd (20 November 1991, unreported)
[4] [1992] QB 600
[5] [2016] EWCA Civ 372
[6] although that is not to say that there is any special rule that exclusion clauses should necessarily be interpreted narrowly

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