Exclusion clauses in your standard terms – be reasonable
When you include exclusion clauses in your standard terms of business, they have to pass the “reasonableness test” under the Unfair Contract Terms Act 1977. Every case depends on its own circumstances but recent cases have shown that there are circumstances in which very wide exclusions can be “reasonable”.
When an industrial frying machine caught fire leading to property damage and business interruption losses of over £6 million, the business sued the supplier of the fire suppression system claiming that it had failed to suppress the fire as a result of negligence on the part of the supplier.
The supplier’s standard terms contained a wide exclusion clause purporting to exclude all liability for any claim in negligence. The business argued that the exclusion clause was too wide to pass the reasonableness test.
The Court acknowledged that the clause excluded practically all of the supplier’s liability but in the circumstances held it to be reasonable and enforceable.
The main reasons for this included the fact that it is usual for the party sustaining these types of losses to effect insurance to cover them and that the parties were of equal bargaining position. The court found the exclusion clause to be a sensible allocation of risk in the circumstances and therefore reasonable and enforceable.
Businesses must take great care when contracting on one party’s standard terms. Exclusion clauses must be very carefully crafted to protect the supplier as far as possible without making them “not reasonable”. Customers must make sure they understand and are comfortable with the allocation of risk – and where they have accepted certain risks by virtue of the exclusion clauses, that they have effected appropriate insurance or taken other steps to cover those risks.