Case law Court clarifies when clauses excluding liability for breach of contract are reasonable

A seller or supplier of goods to a business of roughly equal bargaining power, without any obligation to maintain those goods and where insurance is available to cover the risk, may be able to rely on their standard terms excluding their liability for the failure of their goods a recent ruling makes clear.

A company sold a fire suppression system to a buyer without an ongoing maintenance contract. The seller's standard terms excluded the seller from any liability in the event that the system failed, and the seller urged the buyer to take out fire insurance to cover the risk.

The law says that any clause in a party's standard terms of business which attempts to exclude or restrict that party's liability is of no effect, except to the extent the clause is reasonable.

The system subsequently failed and the buyer suffered a major fire. The buyer argued that the system was defective, and the exclusion clause was invalid because it was not reasonable. It therefore claimed compensation.

The Court of Appeal ruled that the exclusion clause was reasonable, so the seller was not liable to pay compensation. The Court's reasoning included that the parties were of roughly equal bargaining power, the transaction was a one-off sale for a modest sum, the seller was not responsible for ongoing maintenance of the system (which made it reasonable for them to exclude liability for future failure of the system) and, critically, the seller had strongly recommended the buyer take out insurance to cover the risk of fire.

The exclusion was also specifically flagged up on the front of the seller's quotation – which the buyer had for ten months before committing to buy - and it was set out clearly in the standard terms.

Operative date

• Now

Recommendation

• A seller or supplier of goods to a businesses of roughly equal bargaining power, where insurance is available to cover the risk, may be able to validly exclude their liability for breach of contract under their standard terms

Case ref: Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371