05 July 2007

THE CASE Many commercial supply contracts provide a detailed specification of the services to be delivered. It is usual in such contracts to attempt to exclude liability for some consequences of the failure to provide the full service and to limit liability for other consequences.

The importance of careful drafting such clauses is demonstrated in Regus (UK) Ltd v Epcot Solutions Ltd [2007] EWHC 938 (Comm).

Regus provided an office in Stockley Park near Heathrow on a short-term lease that included the provision of various office services. There were problems with the air conditioning which was defective and not fit for purpose. Regus did not remedy the defects because of the limitations in its internal processes for expenditure beyond a certain limit.

Epcot claimed damages for breach of contract. Regus relied on Clause 23 of its standard terms and conditions to exclude liability.

Clause 23 was in two parts. The first part excluded liability for any loss of business, loss of profits and consequential loss. The second part limited liability to a sum of £50,000 for all other losses, damages, expenses or claims.

It was common ground that Clause 23 fell within Section 3 of the Unfair Contract terms Act 1977 as it restricted liability for breach of contract and was within Regus' written standard terms of business.

It was held that it was reasonable for Regus to restrict damages for loss of profits and consequential losses from the categories of loss for which it would become liable when in breach of contract. It was not however reasonable when the clause deprived Epcot of any remedy at all for failure to provide a basic service like air conditioning in what was the business equivalent of a hotel and not the lease of a flat.

It was considered that the second part of Clause 23 provided an illusion of a remedy limiting liability, but the broad wording of the exclusion of financial losses meant that a business would be unable to establish the liability that Regus sought to limit.

On that basis Epcot had a right to recover any damages it had suffered as a result of the air conditioning failures.

WHAT THIS MEANS when drafting exclusion and limitation clauses, it is important to avoid a situation where the effect of the clause is to prevent a party having any remedy at all for a breach of a term of the contract which is central to the contract. This is particularly the case when the Unfair Contract terms Act 1977 applies.

In the above case it was found that it was unfair for no remedy to be available at all to customers of Regus, most of whom would be companies, for serious failures in service over what may be a contract for a significant period. In this case the breach might include unjustly depriving Epcot of its right to occupy the room and, for example, to extort rate increases.

The case highlights the need to consider carefully the full consequences of any clause too tightly drafted. The effect may be to make the clause unenforceable. In this case it was not open to the court to sever the clause.

Daniel Atkinson is a barrister and engineer at www.atkinson-law.com

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