Only infrequently do IT lawyers see a Court of Appeal decision that has an impact on virtually every contract that comes across their desk. For that reason, the ruling in Regus (UK) Limited v Epcot Solutions Ltd [2008] EWCA Civ 361 is a very important one.
The facts of the case did not involve IT subject matter (even though Epcot was itself an IT services provider), but the dispute revolved around a provision that most IT disputes are vigorously fought over: the liability clause. The reasons why liability clauses provide such fertile ground for disputes include lack of clarity or consistent application of the law in that area, the reasonableness (and therefore enforceability) of each clause being looked at in the context of the parties’ own situations, fluctuating attitudes of the judges and the simple fact that if any clause is going to be hotly disputed it would be one that goes to the heart of how much one party can sue the other for.
The trends in cases on liability have ebbed and flowed like the tide; sometimes, courts appear more willing to strike down attempts by suppliers to limit their liability, whilst at other times they seem to take more of a freedom of contract approach.
In the mid-90s, the High Court made a very pro-freedom of contract statement in the case of Salvage Association v CAP Financial Services [1995] FSR 654, where Judge Thayne Forbes QC said: ‘Generally speaking where a party well able to look after itself enters into a commercial contract and, with full knowledge of all relevant circumstances, willingly accepts the terms of the contract which provide for apportionment of the financial risks of the transaction, I think it is very likely that those terms will be held to be fair and reasonable.’
Despite that statement, the High Court refused to uphold the clause as being reasonable in Salvage v Cap itself and the High Court also took an interventionist line in several other cases over the next few years. That was until the ruling in Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, where the Court of Appeal upheld the limitation on liability clause, with Chadwick LJ saying as follows: ‘Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have regard to the matters known to them. They should, in my view, be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question of whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered – the court should not interfere.’
That should have been game over. However, cases since Watford v Sanderson showed that the High Court was again sometimes prone to taking a more interventionist approach. For example, in Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 1900 (Comm), even though Mr Justice Christopher Clarke ruled on the facts that the supplier had not supplied defective products, he felt the need to go on and criticise the supplier’s limitation of liability clause and stated, obiter, that it would have failed the reasonableness test.
There was then the first instance decision last year in Regus v Epcot in which HHJ Judge Mackie had ruled that Regus’s entire limitation of liability clause was unreasonable and was of no effect. That decision has now been reversed by the Court of Appeal.
The Facts
Regus was a leading provider of serviced office accommodation. Epcot was a small but growing IT training provider. Epcot had initially taken space at Regus’s buildings near Heathrow before Regus asked Epcot to relocate to Stockley Park, which Epcot agreed to do. Some time after the move, the relationship soured. Epcot complained that the air conditioning in the new premises did not work properly and its staff became unwell as a result. This escalated until Epcot withheld fees. As the relationship deteriorated and the parties entered into a dispute, Epcot also claimed that it had suffered relocation costs as a result of the move. Following Epcot’s decision to withhold fees, Regus gave notice to suspend its services. Epcot then relocated to a site of one of Regus’s competitors. Regus sued for about £30,000 for its fees. Epcot counterclaimed for losses of £626 million.
Regus claimed that it was not in breach of contract but even if it was then it would be protected from the extent of Epcot’s claims by the limitation of liability clause in Regus’s standard terms and conditions. The clause read as follows (but without any sub-clause numbers, which were inserted by the Court of Appeal for convenience):
‘23. Our Liability
[1] 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.
[2] 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.
[3] 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.
[4] We will be liable:
• Without limit for personal injury or death;
• Up to a maximum of £1 million (for any one event or series of connected events) for damage to your personal property;
• Up to a maximum equal to 125% 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.’
Epcot claimed that, as the limitation of liability clause was on Regus’s standard terms and conditions, by virtue of the Unfair Contract Terms Act 1977, Regus had to prove it was reasonable in order for it to be enforceable. Epcot argued that the clause was unreasonable and therefore unenforceable.
High Court Decision
At first instance, HHJ Mackie QC decided that the air conditioning was defective and Regus was therefore in breach of contract. However, he ruled that the whole of the liability clause was unenforceable under UCTA as it amounted to a total exclusion of any remedy. He acknowledged that it was reasonable to exclude consequential losses and loss of profits, but he said that the rest of the third paragraph within clause 23 had the effect of depriving Epcot of any remedy at all. The judge also refused to sever any offending parts from the rest of the liability clause.
Appeal
On appeal from Regus, the Court of Appeal reversed the High Court’s decision. Its position was made easier by Epcot conceding in the meantime that:
• Its counterclaim was no longer for £626 million, but had become reduced to a maximum of £50,000.
• In any event, sub-clause 23(4) was severable and could have survived the loss of sub-clause 23(3).
• The trial judge had been wrong to say that sub-clause 23(3) had left customers without any remedy at all.
The fact that Epcot conceded on the second and third points was an unfortunate reflection on the first instance judge’s decision. Nevertheless, Epcot maintained its argument that sub-clause 23(3) was unreasonable.
Despite the concessions, Lord Justice Rix, giving judgment for the Court of Appeal, helpfully went on to explain why Epcot was right to make the second and third concessions. He also explained why Epcot was wrong in its claim that sub-clause 23(3) was unreasonable.
(a) Sub-clause 23(3) had not left Regus’s customers without any remedies
Lord Justice Rix mentioned that the categories of loss in sub-clause 23(3) could be direct or indirect. Loss of profits was often thought to be consequential but could be direct. The categories of financial loss in sub-clause 23(3) were therefore quite wide. However, it would be wrong to say that they left customers without any remedy at all. The primary measure of loss for breach of a services contract would be the diminution in value of the services promised. In the case of goods, this would be the difference between the value of the goods at the time of delivery to the buyer and the value that the buyer would have had if the warranty had been fulfilled. This primary measure of damages can be supplemented by any available extra claims for loss of profits or consequential losses. The loss suffered, which was not affected by sub-clause 23(3), was measurable by asking: how much less valuable were the services with the premises not being properly air-conditioned than the price payable under the contract.
(b) Sub-clause 23(3) was not unreasonable
Epcot submitted that sub-clause 23(3) was still unreasonable as it operated ‘in any circumstances’, which could even include situations where Regus had breached the contract deliberately, for example if it had deliberately not repaired the air conditioning in order to save costs. Epcot suggested that the interpretation of the words should be wide enough to capture situations where Regus had committed fraud or deliberately damaged the customer’s business, which would make the whole exclusion unreasonable. Lord Justice Rix dismissed that argument: ‘In my judgment, however, these examples misconstrue the clause. Clause 23 as a whole does not purport to exclude liability for fraud or wilful, reckless or malicious damage.’ After considering what he thought the draftsman had in mind by the words used in sub-clause 23, he went on: ‘…it would be an error to construe ‘in any circumstances’ in sub-clause 23(3) as intended or effective to exclude liability for fraud or malice or their equivalent.’
The High Court judge had come to a decision that sub-clause 23(3) was unreasonable based on an error in interpreting the scope of sub-clause 23(3). Given that the clause was not seeking to exclude liability for fraud or wilful, reckless or malicious damage, and that the wording in the clause did not deprive Regus’s customers of any remedy at all, the Court of Appeal went on to re-consider the judge’s assessment as to whether clause 23(3) was reasonable.
Lord Justice Rix emphatically came down on the side of freedom of contract in this case and decided that clause 23(3) was reasonable. He gave the following reasons:
• The judge was right that it was reasonable in principle for Regus to restrict damages for loss of profits and consequential losses from the categories of losses for which it was liable.
• Epcot’s chief executive officer was an ‘intelligent and experienced businessman’.
• Epcot’s CEO had admitted that he was well aware of Regus’s standard terms and conditions when he had entered into the contract on Epcot’s behalf. This had been treated as a significant point in Watford v Sanderson.
• Also as in Watford v Sanderson, Epcot had used a similar exclusion of liability in its own business.
• Epcot had sought to renegotiate the contract terms ‘frequently and energetically’, but had not done so for the liability clause.
• There was no inequality of bargaining power. Even though Regus was much bigger than Epcot in terms of size of corporation, that did not mean that Regus could simply do as it wished. Regus had competitors even within Stockley Park itself, whom Epcot used. In fact, it was Epcot rather than Regus that had used a ‘take it or leave it’ tactic during contract negotiations.
• Sub-clause 23(3) advised Regus’s customers to protect themselves by insurance for their losses. The Court did not hear evidence as to the availability of insurance, but it said that it would have been easier for each customer to insure against its own business’s losses rather than Regus to take out insurance to cover its constantly changing customers. The customer would be in a better position than Regus to discuss its potential losses with an underwriter and also to consider what amount of cover it wanted to insure up to.
(c) Sub-clause 23(3) could have been severed to leave the rest of the liability clause intact
Interestingly, it was never suggested that the limit in sub-clause 23(4) was unreasonable. As an aside, Lord Justice Rix commented that a maximum liability of 125% of fees paid or £50,000 was ‘generous’. (The rent was about £1,500-£2,000 per month.)
Therefore, even if sub-clause 23(3) had been unreasonable then, if it could be severed, Regus would be left with a maximum liability of £50,000 per contract.
Lord Justice Rix agreed with Epcot’s concession that the sub-clauses within clause 23 could be severed from each other. He acknowledged that this was despite the paragraphs having not been divided up into sub-clauses within the contract itself. He addressed that point simply by saying that it was ‘plain’ that sub-clause 23(4) was independent of sub-clause 23(3).
Impact
This is an extremely significant case given the Court of Appeal’s clear affirmation of freedom of contract. It effectively followed Watford v Sanderson with an approach that experienced business people should look after themselves.
IT lawyers who seek certainty when they draft contracts will be comforted by the Court’s willingness to give effect to what the parties had negotiated. The decision is also a blow for people who seek to adopt the tactic of negotiating heavily over the rest of the contract while leaving the liability clause unchanged with a view to challenging it later; this case shows that that is a very risky position to take.
The danger remains, though, that where a court must consider the reasonableness of a liability clause under UCTA, each case must still be taken on its own merits. The dicta in Watford v Sanderson and Salvage v Cap still provide room for manoeuvre for a judge to do what he considers to be fair based on the particular facts before him. For example, if the court here had felt that there was a real inequality of bargaining power or the customer was not an experienced business person, it is questionable whether the result would still have been the same.
Those questions must remain speculation until there are further liability cases that are decided on their own sets of facts. What this case does clearly demonstrate is that the judicial mood and desire to maintain freedom of contract amongst freely negotiating business people has been re-established. In addition, Regus v Epcot is a further authority at Court of Appeal level when suppliers plead the reasonableness of their own liability clauses.
The case provides comfort in another respect. It is standard practice for many IT contracts specifically to exclude particular financial heads of loss and also consequential losses. The High Court decision had caused concern that that practice would be going too far, and also that any unreasonable provisions may not be severed from the rest of the liability clause. Both of those concerns have now been eased following the Court of Appeal’s decision.
Final Note: A General Softening of the contra proferentem Rule?
There is one final important point from this case that is worth noting. Suppliers usually face two hurdles when seeking to enforce their liability clauses in contracts. One is to make them reasonable so as to ensure that they are not unenforceable under UCTA. The other is to overcome the strict interpretation rules of contra proferentem: if there is even the slightest ambiguity in a liability clause, the courts should interpret that ambiguity against the party wishing to rely on the limitation or exclusion. For example, as shown in previous case law, any references in liability clauses to ‘performance’ should also expressly refer to ‘non-performance’ as well, and references to ‘warranties’ should also be to ‘conditions’. In this case, though, Lord Justice Rix seems to have overlooked the contra proferentem rule. This may have been borne out of a desire to come down as much as possible on the side of Regus due to his disappointment that the dispute had dragged on because of Epcot’s vastly inflated claims when in fact the parties were not really that far apart.
Examples of where the contra proferentem rule was not followed in this judgment were:
• Lord Justice Rix inserting sub-clause numbers into the original clause (where they had not been there) out of convenience to enable severability.
• Although sub-clause 23(4) expressly stated that Regus would be liable without limit ‘for personal injury or death’ (as Regus would be required to do under UCTA), this was not stated to apply to the rest of clause 23 (including sub-clause 23(3)) nor was the rest of clause 23 made subject to that ‘personal injury or death’ provision. The most disadvantageous interpretation of sub-clause 23(3) would therefore have been that ‘in any circumstances’ overrode (in that context) any reference to Regus being liable without limit for death or personal injury, which would have rendered sub-clause 23(3) unreasonable.
• The general refusal to interpret the wording ‘in any circumstances’ widely (and therefore unreasonably) but when looking at that phrase Lord Justice Rix imputed a meaning that he said he thought that the draftsperson had in mind.
Whether or not this was a specific softening of the contra proferentem rule or it had just been glossed over in this particular case on policy grounds remains to be seen in future cases as Lord Justice Rix did not specifically address the point.
Paul Gershlick is an Associate in the Commercial, IP & IT department at Matthew Arnold & Baldwin, working in their London, Milton Keynes and Watford offices. He is editor of the IP/IT/e-commerce legal and market news update site, www.upload-it.com.
© Matthew Arnold & Baldwin 2008
