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Upholding Your Liability Clause - Court of Appeal Ruling Highlights Importance of Insurance Options and Allocation of Risk

on Wednesday, 08 August 2018.

Waiting to challenge liability clauses rather than negotiating what you want is a dangerous game - what can your business learn from a recent case surrounding liability and insurance?

Background

One of the key clauses in any commercial contract is the liability clause. A party (usually the supplier) looks to minimise its risk by limiting its liability to a capped amount and excluding some liability altogether. Excluding or limiting liability on a party's standard terms can only be done if it is reasonable - unreasonable exclusions, as determined in accordance with the Unfair Contract Terms Act, would be struck out, leaving the party with unlimited liability. A particularly onerous or unusual clause will not be incorporated into the contract unless it has been fairly and reasonably brought to the other party's attention.

The Court of Appeal has had to consider an exclusion of loss for physical property in the case of Goodlife Foods Limited v Hall Fire Protection Limited, and decided that the exclusion was reasonable. But what was it about the case that led to the Court's decision, and what are the implications for other businesses?

Facts of the Case

Hall Fire had installed a fire suppression system at Goodlife's factory at a cost of £7,500. A fire led to Goodlife incurring losses of £6m due to property damage and business interruption. Goodlife claimed the losses were incurred due to Hall Fire's fault. Hall Fire claimed that the terms and conditions excluded liability for damage to property or goods resulting from negligence or malfunction of the system.

The High Court sided with Hall Fire, and now the Court of Appeal had to rule on appeal.

Court of Appeal Decision

The Court of Appeal rejected the appeal and the customer's argument that the liability clause was unusual or particularly onerous. It decided that the clause was relatively normal, and crucially the parties were of roughly equal bargaining power. The Court would, where possible, look to give effect to the clause.

Other key influencing factors were that the clause was not hidden away but were part of the clear conditions that applied and drawn to the customer's attention. In addition, Hall Fire had very clearly stated that the liability position was taken on the basis that the customer was best placed to insure against losses from the fire suppression system not working, and indeed that was what happened; furthermore, Hall Fire had offered a different level of liability if the customer wanted Hall Fire to insure instead. The Court of Appeal commented that this was not an empty offer and Hall Fire was prepared to do this.

Comment

There were several factors at play here. Suppliers who want to enhance the effectiveness of their clauses limiting their liability should do the following:

  • Ensure the respective liability is discussed and brought to the other party's attention - even more so if the clause is unusual in any way.
  • Offer different amounts of liability according to different levels of risk, and specifically discuss who insures against what. Potentially, discuss a different price as a different reward to reflect this different level of risk.

This recent line of cases shows that, for customers, it would be a dangerous game to wait and challenge clauses later, particularly if they are not at a commercial disadvantage in terms of relative bargaining power. Customers should ensure they negotiate the contract they want, rather than rely on arguing later that the liability clause was unreasonable.


If you want advice on the critical liability clause in your commercial contracts, please contact Paul Gershlick in our Commercial Contracts  team on 01923 919 320.

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