Judgment sounds warning for validity of standard contracts

We don’t usally report on legal issues however we’re making an exception here, with this item from Carina Badger and Neil Wallis, as it could have widespread implications within the legal IT industry and the contractual relationship between software suppliers and systems users…

When you come right down to it, why have a contract? What is the difference between “Of course I’ll come to your birthday bash” and “I will maintain your software”?

The key is that you can enforce a contract by claiming damages when the promise is broken. If damages are not available, the contract is devalued; which is why courts have taken a dim view of clauses which exclude liability completely. One such clause was the subject of the recent High Court case of Regus (UK) Limited v Epcot Solutions Limited. Here the High Court ruled that an exclusion clause widely used in business-to-business contracts was unenforceable. This has enormous implications for UK businesses, many of whose contracts may not protect them as they had hoped.

Software training business Epcot Solutions rented offices from the well-known serviced offices provider, Regus. After a number of complaints relating to the poor quality of the rooms provided, in particular the lack of air conditioning (which was said to affect the servers), Epcot 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 system. The question was therefore what loss Epcot could claim for.

Epcot had signed Regus’s standard form agreement, which excluded liability for loss of business, loss of profits and other financial loss. Clauses of this sort are common to the standard terms of most IT companies. Under the Unfair Contract Terms Act 1977, an exclusion clause in a standard agreement is unenforceable if it is unreasonable. It was up to Regus to show that the clause was fair and reasonable in the circumstances. They failed to do this.

Regus argued that it could not be expected to know how much lost profit a breach could cause its various customers and that in any case the customer was in a better position to insure against its loss of profits. Regus’s standard terms explicitly advised the customer to take out insurance.  However the court decided that the exclusion clause meant that the customer had no remedy at all – even if the basics of the service were not provided. It was unfair for no remedy at all to be available to customers of Regus. 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 under the contract but because it was tied up in the exclusion clause above, the entire clause became unenforceable. Regus could not therefore rely on that cap.

It is likely that this case will inspire customers to challenge clauses which previously had been accepted as standard practice. IT businesses should take care when including exclusion clauses in their standard form contracts.
How can businesses 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 liability altogether.
•    Think about what might be excluded (such as loss of reputation) and what should simply be limited (in this case, lost profits).
•    Ideally, include an overall cap on liability which should be contained in a separate clause.

• Carina Badger and Neil Wallis are solicitors at City law firm Macfarlanes