Ominous court ruling for users - supplier exclusion clauses upheld

It’s of course common for IT suppliers to have an exclusion clause in contracts to protect them from claims from users after a serious failure.

The clause usually says that the supplier is not in any circumstances liable for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss. Sometimes the clauses are challenged in court.

Now a Court of Appeal ruling suggests that suppliers can have confidence in correctly-framed exclusions of financial loss. 

Shadbolt Law says in its latest technology law update that the ruling means users will have the choice of either attempting to amend the standard exclusion clause significantly and/or taking out appropriate insurance in order to cover any potential irrecoverable losses. On the Court of Appeal ruling Shadbolt Law says:

“The ruling continues a striking trend in which the courts have been keen to enforce standard contractual exclusion/limitation clauses which have been freely entered into between the parties, reversing the prior approach of the courts.

“For suppliers, the decision is undoubtedly good news and means that correctly framed exclusions of financial loss can be relied upon with confidence whilst, for their clients, it means that users will have the choice of either attempting to amend the standard clause significantly and/or taking out appropriate insurance in order to cover any potential irrecoverable losses.

“Businesses need to pay close attention to the following factors which are relevant to the issue of reasonableness and validity of limitation/exclusion
clauses:
• equality of bargaining power: the courts are reluctant to find that there is inequality between business organisations, even where the disparity in size and resources is significant;
• practice/behaviour of the claimant: the courts are placing increasing emphasis on whether the claimant has also used similar exclusion/limitation clauses to those which it is challenging and whether the claimant actively challenged the clause in
negotiations;
• remedies: parties drafting exclusion/limitation clauses should not be over-zealous and attempt to expressly exclude all causes of action, as this  approach is likely to be counter productive;
• insurance: the CA [Court of Appeal] suggested that it would normally be easier for the user to take out relevant insurance than for the supplier to do so – if the courts
continue to take this general view, it could amount to a “presumption” in favour of the validity of an exclusion/limitation clause;
• drafting: the decision reinforces that parties should have separate clauses which (i) exclude indirect or consequential loss and (ii) limit liability for all other types of loss; this facilitates the argument in favour of severing any unreasonable and invalid clauses, leaving the others intact.”

The court’s ruling was over a case, Regus (UK) versus Epcot Solutions which was brought after the failure of air conditioning equipment. The Appeal Court ruled that Regus’s exclusion clause was reasonable after a trial judge said it wasn’t.

Link:

Shadbolt – its website

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