When is a total exclusion of liability enforceable?

The recently-reported, Court of Appeal case of Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 provides a tutorial in how to make an exclusion clause, in standard contract terms, legally enforceable. Drafters of standard terms will find the lead judgment, by Coulson LJ, a good refresher.

This area of law is, in IP Draughts’ view, far too complex. It is easy to gloss over subtleties and jump to conclusions that seem intuitively right, but may be legally wrong. You need to know this stuff if you are drafting standard terms of business and want them to be legally enforceable in the English courts. This is an area where law graduates can be at an advantage compared with science graduates who qualify as lawyers via the one-year graduate diploma in law. The more intense examination of cases that you get in a three-year law degree helps you not to make mistakes.

This article attempts a brief, and incomplete, summary.

The facts of the case

  1. Goodlife produces frozen foods from a factory in Warrington, a town in the north-west of England. Before freezing, the foods are cooked, using a fryer.
  2. In 2002, they contract with Hall Fire, who install a fire suppression system over the fryer. The contract price is £7,490. The contract is made on Hall Fire’s standard terms of business, discussed below.
  3. In 2012, there is a fire at Goodlife’s factory, said to have originated in the fryer. The fire suppression system fails to suppress the fire. The fire is said to have caused loss and damage in the region of £6.6 million.
  4. Both parties are insured. Goodlife’s insurers exercise rights of subrogation under the contract and sue Hall Fire for the loss and damage incurred.

Procedural issues

  1. A claim for breach of contract is time-barred as the contract was performed more than 6 years before the fire. But there may still be a claim for negligence under the law of tort.
  2. The judgment being appealed was a preliminary decision on whether the exclusion clause was (a) incorporated into the contract between the parties, and (b) enforceable in light of the Unfair Contract Terms Act 1977 (UCTA).

The relevant contract clauses (emphasis added)

We draw your particular attention to the following specific conditions and assumptions on which the tender is based, unless qualified in our covering letter. Any contract would be based on our tender and these supplementary conditions sections 4 – 12 which do not provide for the imposition of any form of damages whatsoever and are based on English Law…
11) We exclude all liability, loss, damages 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 defected parts.
As an alternative to our basic tender, we can provide insurance to cover the above risks. Please ask for the extra cost of the provision of this cover if required.

Legal issues and the court’s conclusions

The following paragraphs attempt a very brief summary of the outcome of the Court of Appeal’s analysis; unlike Coulson LJ’s judgment they do not discuss the earlier cases. Essentially the Court of Appeal agreed with the judge at first instance.

  1. Was the clause particularly onerous or unusual (“POU”)? This is a separate issue to whether the clause is reasonable under UCTA. There is a strand of case law that says that POU standard terms have to be brought to the other party’s attention, rather than being buried in small print, if they are to be effective. So the first question is whether the total exclusion of liability highlighted in red above is POU. The court said no. It was more extreme than clauses that limited liability to price paid, and excluded indirect losses. The latter clauses were commonly seen in contracts, and in several cited cases were held to be not POU. But for practical purposes, in the context of a fire causing millions of pounds of damage, it made little difference whether the clause excluded all liability or limited liability to £7,490.
  2. Was the clause fairly and reasonably brought to Goodlife’s attention? In light of the long-established case law in this field, IP Draughts typically puts some warning wording at the top of standard terms, when he is asked to draft them, drawing attention to the strict limits and exclusions of liability that appear later in the terms. The drafter in this case included the text coloured blue above. Coulson LJ agreed with the judge that, if the exclusion clause was POU, this wording was sufficient to bring the clause to the customer’s attention.
  3. Was the exclusion unreasonable: (a) bargaining power. Even if the clause is enforceable at common law, in light of the points discussed at items 1 and 2 above, it will not be enforceable under UCTA if it forms part of written standard terms of business and if the exclusion is not “reasonable”. The tests for reasonableness are set out in detail in section 11 and Schedule 2 of UCTA. Coulson LJ emphasised the importance of giving effect to contracts entered into between parties of broadly equal size and status (a point that Gross LJ felt so strongly about that, even though he agreed with Coulson LJ’s judgment, he added some remarks of his own on the point, after Coulson LJ’s judgement).
  4. Was the exclusion unreasonable: (b) insurance. Coulson LJ also considered the question of insurance. In light of earlier case law, it is a common technique used by drafters of standard terms to strictly limit liability but make clear to the customer that, for an additional price, insurance to cover potential losses can be arranged. The wording coloured orange, above, does this. There was also some wording, not quoted above, about Hall Fire providing details of current insurance on request. In reality, these seemed to be clauses that no-one followed up on. And the judge felt that it was probably easier for Goodlife to arrange insurance for its factory. Overall, the insurance issues did not result in the clause being unreasonable.
  5. Was the exclusion unreasonable: (c) total exclusion of remedies. Several submissions by Goodlife’s counsel (as summarised by Coulson LJ) seemed to skirt around the theme that the wording coloured in red above was a blanket exclusion clause and avoided a core obligation. IP Draughts is reminded of advice he received from senior lawyers when he was a junior, that standard terms should offer something positive (eg a repair or replace warranty), rather than totally excluding liability and removing any remedies. In the present case, however counsel formulated the argument, Coulson LJ came to the same conclusion: the clause was not unreasonable.

Lessons for the future

The more that IP Draughts reads Coulson LJ’s judgment, the more he feels that Coulson LJ was determined to find the exclusion clause enforceable. Perhaps he was influenced by the fact that this was really a dispute between insurers on who should pick up the bill.

IP Draughts has detected a different approach by the English courts to exclusion clauses in recent years. When he first started in practice, the view of expert contract lawyers seemed to be that limiting liability to the contract price was a high-risk strategy, and that a limit linked to the contractor’s reasonable level of insurance cover was more likely to be effective.

With all the usual caveats that cases are decided on their facts, different judges have different views, etc, the current view of the courts seems to include the following themes:

  1. Parties of roughly equal size or bargaining power should be allowed to agree whatever contract terms they wish, without interference from the courts.
  2. Courts should not interpret wording in an unintended way, eg by saying that a clause could cover fraud, and in that situation the clause would be unenforceable, so the clause is unenforceable in all situations.
  3. Limiting liability to the contract price and excluding indirect losses are conventional terms in contracts, and should not be regarded as particularly unusual or onerous.
  4. It may still be necessary to draw attention to onerous terms in standard contracts. Lord Denning favoured a big red hand in the margin, but this technique seems to have fallen out of fashion.

1 Comment

Filed under Contract drafting

One response to “When is a total exclusion of liability enforceable?

  1. Reblogged this on IP Draughts and commented:

    Excluding ALL liability, by means of a contract term, is in IP Draughts’ view a very high risk strategy. Sometimes less is more: if you go too far, it becomes too easy for the judge to find against you. So offer a modest remedy rather than nothing at all. But sometimes, total exclusions can work, as this case shows.

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