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Exclusion Clauses in Commercial Contracts: The Reasonableness Requirement

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A recent case demonstrates the approach of the Courts in assessing the validity of exclusion clauses in commercial contracts…

What is an exclusion clause?

Exclusion clauses are contractual terms which attempt to limit liability to one party for certain events or happenings.

How does this apply?

In 2002, Goodlife Foods Limited (Goodlife) entered into a commercial contract with Hall Fire Protection Limited (Hall Fire) for the provision of a fire detection and suppression system at their food production site. Ten years after the installation of the system by Hall Fire there was a fire at Goodlife’s factory resulting in losses in excess of £6 million.

Goodlife issued a claim against Hall Fire on the basis that the loss would have been prevented but for the failure of the systems installed by them designed to supress a fire.

The exclusion clause wording

In their defence, Hall Fire attempted to rely upon a clause in the contract purporting to exclude any liability for any ‘loss, damage or expense consequential or otherwise caused to [Goodlife’s] property, goods, persons or the like, directly or indirectly resulting from [Hall Fire’s] negligence or delay or failure or malfunction of the systems or components provided by [Hall Fire] for whatever reason’.

Goodlife attempted to argue that this clause, due to its excessively broad scope, was unreasonable and therefore invalid under the Unfair Contract Terms Act 1977 (UCTA).

Was the clause unreasonable?

Section 2(1) UCTA prohibits the exclusion of liability for death or personal injury as a result of negligence, and it was therefore contended by Goodlife that the exclusion clause (which attempted to do just this) was unenforceable. The High Court found that the fact that the attempt to exclude liability for death or personal injury was unreasonable in itself did not render the whole clause unenforceable. Consequently, it was possible to apply the exclusion clause insofar as it was reasonable to do so.

The Court took into account the fact that Goodlife had access to appropriate legal advice, it had been given the opportunity to consider the terms of the agreement before signing, and clauses to this effect had been utilised by similar companies.

This case highlights the importance of clearly drafted exclusion clauses limiting parties’ liability in the appropriate circumstances. It is clearly misconceived to attempt to exclude one’s liability for death or personal injury. However, it is important to note how the courts can be flexible in applying clauses to the extent that they consider it reasonable to do so.

How can we help

If you would like to discuss the drafting of a commercial contract for your business, or how you can limit the potential liability of your business when entering into commercial contracts, please contact Danielle Collett-Bruce in BakerLaw’s Company and Commercial Department at danielle.collett-bruce@baker-law.co.uk or call 01252 931 116 to discuss further.

Case Referenced:

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

This article is not a substitute for legal advice on specific facts and circumstances. It is designed as a free update on the law at the time of publishing. BakerLaw LLP and/or the writer accepts no responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.

 

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