Exclusion of liability for fire was ‘reasonable’

Posted: 26th June 2018

FactoryWhen businesses with broadly equal bargaining power enter into a freely negotiated contract, the law will rarely intervene to alter the bargain. The point was clearly made than by a Court of Appeal in a case concerning a disastrous food factory fire.

The owner paid just under £7,500 to a specialist fire protection company for the provision and installation of a fire detection and suppression system. Following a serious blaze – which was said to have caused damage totalling £6.6 million – the owner launched proceedings, alleging that it had been caused by the company’s negligence.

The case hinged on a clause in the contract by which the company excluded liability in respect of any loss, damage or expense arising from its negligence or from any failure or malfunction of the system or its components.

The company offered, at extra cost, to arrange insurance to cover those risks, but that was not taken up by the owner. Following a preliminary hearing, a judge found that the exclusion clause was incorporated in the contract and was reasonable, within the meaning of the Unfair Contract Terms Act 1977.

In dismissing the owner’s challenge to that ruling, the Court noted that it is a pillar of English commercial law that parties enjoy autonomy to contract on whatever terms they choose and to allocate risks as they see fit. The owner and the company were businesses of similar size; the clause was not particularly onerous or unusual, and it had been fairly and reasonably brought to the owner’s attention.

The Court noted that, if the owner’s arguments were correct and the exclusion clause was of no effect, a relatively low-value contact would have exposed the company to potentially unlimited liability for an indefinite period. The owner could easily have gone elsewhere and entered into a contract with another supplier on less restrictive terms in respect of risk allocation.

The clause could not properly be viewed as having granted the company a blanket exclusion, in that it had undertaken to replace any faulty components free of charge, and the company’s offer to arrange insurance cover was also a powerful indicator that the clause was reasonable.