Know your limits

Writing a business-to-business contract is like long-distance running. A key decision is where to pitch the level of effort. Is it better to attempt a marathon and risk having to pull out, or be content with a half-marathon, where one may have a reasonable chance of success?

Similarly, should you be very reasonable with your limitation clause, hoping the courts will enforce it, or exclude everything you can, and risk it not working at all? After the recent case of Regus (UK) Ltd v Epcot Solutions Ltd, the hazards of the second approach have increased. Here the High Court ruled that an exclusion clause widely used in business-to-business contracts was unenforceable.

Regus provides serviced offices and Epcot Solutions, a software training business, was one of its customers. Epcot began to suffer what it regarded as poor service, particularly in relation to the air-conditioning. When the system failed during a particularly sultry summer, Epcot felt conditions were having a serious effect on its training sessions and thus its pitches for new work. It made a number of complaints, and eventually began to withhold its monthly fee. Regus sued for non-payment, and Epcot responded by claiming lost profits caused by the poor office accommodation.

The court held that Regus had breached the contract, and was also negligent, because it had not carried out urgent repairs to the air-conditioning. The question was therefore what loss Epcot could claim for.

Epcot had signed Regus’ standard form agreement, which imposed an overall cap on Regus’ liability. However it also excluded liability for loss of business, loss of profits and other financial loss. Clauses of this sort appear in the standard terms used by a wide range of companies. Under the Unfair Contract Terms Act 1977, if a court decides an exclusion clause is unreasonable, it will be ineffective. It was up to Regus to show that the clause was fair and reasonable in the circumstances. It failed to do so.

Regus argued that it served a range of businesses. It could not anticipate how much lost profit a breach could cause a customer. In any case it believed the customer was in a better position to insure against its own loss of profits, as part of its business interruption policy. Regus’ standard terms advised the customer to take out insurance. These are common arguments used to defend this position.

The court decided the exclusion clause was so wide that
the customer had no remedy at all and that was unfair

However, the court decided the exclusion clause was so wide that the customer had no remedy at all – even if the basics of the service were not provided. The court felt the clause meant Regus was not liable for any financial loss Epcot suffered, even though that was also the only loss it was likely to suffer. It was unfair for no remedy at all to be available to customers. Accordingly Regus could not enforce the exclusion of liability and Epcot was free to claim for its loss of profits.

There was an overall cap on Regus’s liability, but because it was tied up in the exclusion clause above, the entire clause became unenforceable. This has enormous implications for suppliers. This case is likely to inspire customers to challenge clauses that were previously accepted as standard practice. What can businesses do to try to make their terms enforceable?

Don’t be over-ambitious: it is better to have an effective limitation on liability than an ineffective attempt to avoid it altogether.

Think about things that could be excluded (such as loss of reputation or goodwill) and things that should simply be limited (lost profits, revenue or contracts).

 Include an overall cap on liability, which should be contained in a separate clause. Neil Wallis is a solicitor at City law firm Macfarlanes