Unfair contract terms – exclusion clause upheld

Goodlife Foods Limited v Hall Fire Protection Limited [2018] EWCA Civ 1371, Court of Appeal

Facts

Goodlife Foods had a multi-purpose fryer in its frozen food factory.  It contracted with Hall Fire Protection to supply and install a fire detection and suppression system for the fryer.  Unfortunately, the fryer caught fire, but the new system failed to suppress the fire.  Goodlife sued Hall for £6 million worth of property damage and business interruption losses.  Hall relied upon clause 11 of its terms and conditions which offered to replace defective items, but excluded all liability for loss or damage arising to property and goods directly or indirectly resulting from negligence or malfunction of the systems or components provided by it for whatever reason but with an option to provide insurance against such risks, at extra cost, if required.

The Court of Appeal held

1. Although clause 11 was a wide ranging exclusion clause, it formed part of the terms and conditions which had been incorporated into the contract.
2. Fire damage was reasonably foreseeable as a consequence of any failure of performance of this contract; it was reasonable of the contractor to offer insurance, which the client should have had in any event. The parties were of equal bargaining power, and the allocation of risk was sensible.  The clause should therefore be upheld.

Comment

1. This is a very robust decision which effectively exempts the contractor from the consequences of poor contractual performance. In theory, the Unfair Contracts Terms Act curbs the use of sweeping exclusion clauses such as this.  In practice, common law position tends to be that where parties are proved to be of equal size and bargaining power, their freedom of contract – to make a bad bargain or a good one – will be respected and upheld.  Goodlife Foods could have objected to these contract terms but chose not to do so and must take the consequences.
2. This was a one-off supply contract for a modest sum (£7,490) without any maintenance obligations attached. It is therefore not particularly unusual nor onerous for the contractor to protect itself against the possibility of unlimited liability.  It had been proportionately brought to the appellant’s attention, because it was apparent in plain text in the middle of the standard terms which were clearly referred to in the quotation.  This is important because if the exclusion clause had been regarded by the judge as being particularly unusual or onerous, Hall would have had a duty to expressly draw that particular clause to the customer’s attention.  In those circumstances, a failure to do so would have rendered the clause unenforceable (the precedent here is Interfoto Picture Library v Stiletto [1989] QB 433).
3. Lord Justice Gross particularly stressed that although the Unfair Contract Terms Act applies to standard terms, in commercial contracts, where parties have broadly equal bargaining power, the most important considerations are party autonomy and Freedom of Contract. The court will not interfere in the bargain which the parties choose to make.  Further, whether a clause is reasonable has to be judged as at the time of making the contract, not using hindsight after a disaster has occurred much later.

Contract drafters may consider amending terms and conditions containing exclusion clauses to offer as part of the exclusion deal an insurance option at extra cost.  This was clearly a key influencer in this decision which saved Hall Fire Protection £6 million in liability.

For more specialist legal advice contact the Construction and Engineering team.