Breaking the chains

The case of Regus (UK) Ltd v Epcot Solutions Ltd [2007] EWHC 938) highlights several key points:

• The Unfair Contract Terms Act (1977) contains special provisions for contracts on written standard terms.
• Exclusion clauses in such cases may have to satisfy the reasonableness test in order to be valid.
• Limitation clauses are subject to the same restrictions.
• The Act lays down various factors to be considered when deciding if a clause is reasonable.
• Fundamental breach can still pose problems of interpretation.

Outline of the case

The contract between the parties was for the provision of serviced office accommodation. The contract was on the written standard terms of the party providing the accommodation, and its duties were spelled out in clause 2 of the agreement: 'We are to provide the number of furnished and fully furnished rooms for which you have agreed to pay in the business centre stated in your agreement. Your agreement lists the rooms which we have initially allocated for your use'.

Crucially, as it turned out, the contract also contained, in clause 23, the following exclusion clause in the section titled 'Our liability'. It said: 'We are not liable for any loss as a result of our failure to provide a service as a result of mechanical breakdown, strike, delay, failure of staff, termination of our interest in the building containing the business centre or otherwise unless we do so deliberately or are negligent. We are also not liable for any failure until you have told us about it and given us a reasonable time to put it right.'

You agree (a) that we will not have any liability for any loss, damage or claim which arises as a result of, or in connection with, your agreement and/or your use of the services except to the extent that such loss, damage, expense or claim is directly attributable to our deliberate act or our negligence (our liability); and (b) that our liability will be subject to the limits set out in the next paragraph.

'We will not in any circumstances have any liability for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss. We strongly advise you to insure against all such potential loss, damage expense or liability.

'We will be liable: without limit for personal injury or death;up to a maximum of £1m (for any one event or series of connected events) for damage to your personal property; up to a maximum equal to 125 per cent of the total fees paid under your agreement up to the date on which the claim in question arises or £50,000 (whichever is the higher), in respect of all other losses, damages expenses or claims.

Dispute over central heating

The claim related to the central heating. The system did not work satisfactorily and was in many respects defective. A third party company examined the air conditioning and uncovered a series of defects. It also made specific proposals for remedial work costing around £23,500. It was also recommended that the remedial works be undertaken as a matter of urgency. The work was, however, not carried out and the reason appeared to be that the providers of the accommodation were having financial problems. There was some debate as to whether the expert report even reached the providers, but even if it had not, the court was clear that they should have had in place a proper system of maintaining and checking on the state of the air conditioning. In either even, the court determined that the providers had been negligent within the meaning of clause 23.

Effect of clause 23

The providers accepted liability only when given a reasonable time to put matters right. The court found that it had been given such time, and the court also rejected the argument that it could postpone the repairs on the grounds of cost and profitability. That would be inconsistent with the service it had contracted to provide.

The claim for damages had been for loss of profits and the loss of the opportunity to develop that party's business to generate anticipated profits, matters which the providers argued fell within those provisions of the clause dealing with loss of business and loss of profits.

The question of reasonableness

The court paid regard to the guidelines set out in Schedule 2 to the Act. Strictly speaking, it was not required to do so since a court is enjoined to consider this Schedule only when the contract involves the sale or supply of goods. It has, however, long been the practice of the courts to pay regard to the Schedule as part of the requirement imposed by s 11(1) of the Act to have regard to all the relevant circumstances.

The guidelines refer to the relative bargaining strength of the parties, taking account of alternative means by which the customer's requirements could have been met; whether the customer was induced to agree to the relevant term; and whether the customer was aware of the term.

The evidence showed that the other party was aware of the exclusion clause and that it also used such clauses in its own business contracts.

Clause 23 did advise customers to consider insurance, and the providers argued that loss of profits was very much the subject of insurance. They further argued that their client base contained many sizes of business, and their insurance requirements were very much within their own area of knowledge. If the providers were to bear such responsibility, they argued, this would result in a big increase in costs. It was also the case that there were other service providers, to one of whom the other party subsequently moved. It was also the case that negotiation on lowering the price to be charged was undertaken in the knowledge of clause 23.

Insofar as clause 23 also limited liability to a specific sum, s 11(4) of the Act requires consideration to be given to how far it was open to the party imposing the limit to obtain insurance cover. In the present case, however, this proved irrelevant since the evidence put before the court was non-existent.

The court considered that, in principle, the providers were reasonable in seeking to exclude liability for loss of profit and consequential loss. It went on to say, however, that it could not be reasonable to exclude liability for the provision of a basic service such as air conditioning. The court also accepted that it was again reasonable in principle to limit liability in the way clause 23 had done, but such a limit was without relevance, since the wording of clause 23 prevented the victim of a breach from establishing the liability which it sought to limit. The conclusion was, therefore, given the factors identified by the Act in determining such matters, that clause 23 was unreasonable.

Fundamental breach

It had for many years been argued that no exclusion clause, however well drafted, could exclude liability for breach of a term which was fundamental to the whole contract. Eventually, in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, the House of Lords declared that there was no such principle; whether an exclusion clause covered such a breach was a matter of construction. Arguably though the apparently discredited approach has made its reappearance in this case.

The court, as noted above, stressed that it cannot be reasonable to deprive a party of any remedy for a failure to 'provide a basic service'. It is not unfair to say that this amounts to saying that, for a breach of a fundamental term, a party will always have a remedy, regardless of the actual construction of any exclusion clause.