Regus v Epcot

Out-Law Guide | 02 Nov 2007 | 8:31 am | 4 min. read

This Court of Appeal decision provides a useful reminder of the need for suppliers to carefully consider the scope of exclusion clauses contained in standard form contracts so as to minimise the potential for a challenge to the reasonableness of the clause under UCTA.

Regus (UK) Ltd v Epcot Solutions Ltd, [2008] EWCA Civ 36

Help with citations

Facts

Regus supplied office accommodation to Epcot (an IT training provider) on Regus’ standard terms and conditions of rental. The air-conditioning in the offices was defective but, despite numerous complaints from Epcot, Regus did not remedy the problem.   Epcot refused to pay the rental fees and, as a consequence, Regus claimed unpaid fees from Epcot up to the end of the agreed term.  Epcot in turn brought a counterclaim against Regus seeking: (i) damages for loss of profits; (ii) loss of the opportunity to generate profits; and (iii) for distress, inconvenience and loss of amenity suffered by reason of Regus’ failure to provide adequate air-conditioning.

Regus sought to rely on an exclusion clause which read as follows:

"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."

Epcot argued that the clause should be struck out as it failed the test of reasonableness under the Unfair Contract Terms Act 1977 ("UCTA").

Judgment

First instance decision

The judge considered that Regus was under a contractual obligation to provide functioning air-conditioning to Epcot. Although it was reasonable for Regus to restrict damages for loss of profits and consequential losses, it was not reasonable to seek to deprive Epcot of any remedy at all for failure to provide a basic service such as air conditioning.

Due to the broad wording of the exclusion of financial losses,  Epcot would be unable to establish that Regus had any liability for breach of contract.   The judge also found that the use of the words "not in any circumstances" had the effect of purporting to exclude liability for fraudulent or malicious acts.  The judge therefore found that the exclusion clause was unreasonable due to its broad purported application.  If the clause was upheld it would effectively leave Epcot without a remedy even in circumstances where there had been serious breaches by Regus.

Court of Appeal

The Court of Appeal found that the judge was incorrect to hold that the exclusion was unreasonable on the grounds that it left Epcot with no remedy for the breach of contract which it claimed to have suffered. Whilst Epcot's counterclaim was framed as a multi-million pound claim for loss of future business and loss of amenity, the Court considered that Epcot's true loss was the diminution in value of the services provided, namely the difference in value of the office accommodation with and without proper air-conditioning, and this was not in fact excluded by the clause.

The Court of Appeal also found that the judge erred in his finding that the exclusion clause purported to exclude liability for fraud and malicious damage. This was not a natural interpretation of the clause and such losses could only be excluded by explicit wording. The Court considered the application of the guidelines provided for in Schedule 2 of UCTA for determining the reasonableness of an exclusion clause and found that:

  • there was no inequality of bargaining power.  Although Regus was a significantly larger company, Epcot’s directors were experienced businessmen
  • Epcot were fully aware of Regus’s standard terms at the time they concluded the contract and had used similar wording in its own exclusion clauses
  • Epcot had sought to negotiate other parts of the standard form contract but not the exclusion clause, indicating that it had not regarded the clause as unreasonable
  • the exclusion clause advised Regus' customers to protect themselves by insurance for losses and it was likely to be easier for Epcot than for Regus to obtain insurance against Epcot's business losses.

The Court determined that the clause met the requirement of reasonableness under UCTA and Regus's appeal was therefore successful.

Commentary

The first instance decision appeared to herald a move away from the "pro-supplier" approach to limitation and exclusion clauses followed in cases such as Watford Electronics v Sanderson and SAM Business Systems v Hedley & Co. In both of these cases the courts upheld exclusion clauses in standard form agreements following challenges by customers under UCTA.

The effect of the Court of Appeal ruling in Regus should be to give IT suppliers greater confidence in exclusions of financial loss in standard form agreements provided these clauses are carefully drafted. In particular, suppliers should take care to ensure that their exclusions clauses do not have the effect of leaving a customer with no effective remedy at all.

The Court of Appeal's consideration of the availability of insurance as a factor in determining reasonableness is of interest. The Court suggested that it would normally be easier for a customer rather than a supplier to ensure against business losses.  If this view is followed in subsequent cases it may become increasingly difficult for customers to challenge exclusion clauses in circumstances where they could have obtained insurance cover for the loss complained of.

Of course there are likely to be practical and commercial difficulties for customers seeking insurance cover against its IT supplier's breaches of contract. Even where such cover is available, it is likely to be expensive.  The parties will also have to agree pre-contract who bears responsibility for specific categories of loss in order for the customer to know the scope and level of cover it requires.  It will require further decisions of the court to clarify how the availability of insurance will affect future challenges under UCTA.