Regus (UK) Ltd v Epcot Solutions Ltd

Regus (UK) Ltd (“Regus”) is part of a large group which is an industry leader in the provision of serviced office accommodation. Epcot Solutions Ltd (“Epcot”) is a small but ambitious provider of professional IT training. For a number of years between January 2001 and October 2004 Epcot took space in Regus’s buildings, first at its Heathrow location and later at Stockley Park. Over the years a number of issues arose: principally arising out of Regus’s closure of its Heathrow location during the course of Epcot’s contract there and the consequential need to relocate Epcot to Stockley Park; and also out of the inadequacy of the air-conditioning system at Stockley Park. The former led to certain relocation expenses including the waste of brochures printed with Epcot’s old address; the latter led to complaints about the premises being uncomfortably too hot, particularly in summer months, even to the extent of Epcot’s staff and trainees being made to feel unwell. These issues gradually built up to Epcot withholding fees otherwise due to Regus for the provision of its services, and to Regus for its part issuing a notice of suspension of its services. That led to Epcot promptly relocating to a competitor’s building at Stockley Park, and to this litigation.

It seems to me a great shame that this dispute about, as will appear, comparatively small sums, has led to protracted litigation which has in all probability given rise to great expense. It must have been a matter of considerable frustration that the air-conditioning did not work as it should have done. Similarly, no doubt Regus was concerned about not being paid its fees and Epcot was upset to be facing a suspension of what amounted to its business. However, at least two matters have contributed to this litigation, once started, being incapable of settlement. One was Epcot’s counterclaim in the sum of £626 million. The other was Epcot’s challenge to Regus’s standard term exception clause as being unreasonable and thus unenforceable under the Unfair Contract Terms Act 1977 (“UCTA”).

The judge, HHJ Mackie QC sitting in the London Mercantile Court, found that the air-conditioning was defective and that Regus was thereby in breach of contract. He also found that Regus’s contract terms dealing with liability amounted to a total exclusion of any remedy at all and on that ground held that they were unreasonable and unenforceable under UCTA. Regus appeals.

Regus’s exception clause was contained in clause 23 of its standard terms, see below. I have numbered its sub-paragraphs for convenience of reference. I also set out a number of other standard terms which explain the nature of the agreement made between Regus and its clients.

“23.

Our Liability

(1)

We are not liable for any loss as a result of our failure to provide a service as a result of mechanical breakdown, strike, delay, failure of staff, termination of our interest in the building containing the business centre or otherwise unless we do so deliberately or are negligent. We are also not liable for any failure until you have told us about it and given us a reasonable time to put it right.

(2)

You agree (a) that we will not have any liability for any loss, damage or claim which arises as a result of, or in connection with, your agreement and/or your use of the services except to the extent that such loss, damage, expense or claim is directly attributable to our deliberate act or our negligence (our liability); and (b) that our liability will be subject to the limits set out in the next paragraph.

(3)

We will not in any circumstances have any liability for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss. We strongly advise you to insure against all such potential loss, damage, expense or liability.

(4)

We will be liable:

• without limit for personal injury or death;

• up to a maximum of £1 million (for any one event or series of connected events) for damage to your personal property;

• up to a maximum equal to 125% of the total fees paid under your agreement up to the date on which the claim in question arises or £50,000 (whichever is the higher), in respect of all other losses, damages, expenses or claims.

24.

The nature of your agreement

Your agreement is the commercial equivalent of an agreement for accommodation in a hotel. The whole of the business centre remains our property and in our possession and control…

27.

Ending your agreement immediately

We may put an end to your agreement immediately by giving you notice if:

• you become insolvent…

• you are in breach of your obligations which cannot be put right or which we have given you notice to put right and which you have failed to put right within fourteen days of that notice…

If we put an end to the agreement for any of these reasons it does not put an end to any then outstanding obligations you may have and you must:

• pay for additional services you have used

• pay the standard fee for the remainder of the period…or (if longer) for a further period of three months, and

• indemnify us against all costs or losses we incur as a result of the termination.

28.

If the business centre is not available

In the unlikely event that we are no longer able to provide the services and accommodation at the business centre stated in your agreement then your agreement will end and you will only have to pay standard fees up to the date it ends and for the additional services you have used. We will try to find suitable alternative accommodation for you at another Regus business centre…

39.

Late payment

If you do not pay fees when due, we may charge interest at the rate of 2% per month on the amounts outstanding. If you dispute any part of an invoice you must pay the amount not in dispute by the due date. We also reserve the right to withhold services (including for the avoidance of doubt, denying you access to your accommodation) while there are any outstanding fees and interest or you are in breach of your agreement.”

The chief executive officer of Epcot is Mr Charanjit Randhawa, whom the judge described as an intelligent and experienced businessman with a tendency to exaggerate both in his business dealings and in his evidence to the court. In late November 2000 he decided to go into business for himself, offering an intense extended half day of IT training in a high quality environment. He chose Regus’s World Business Centre at Heathrow as a suitable first location. His initial contract with Regus was for two months from 31 March to 31 May 2001 at £368 per day or £2,162 (inclusive of VAT) for a five day week. Mr Randhawa had large ambitions to franchise his concept on a global basis. He also sought to interest Regus in his concept, but without success.

This first arrangement appears to have run on until 21 August 2001 when Epcot signed a one year contract with Regus to cover the period from 18 June 2001 to 17 June 2002. The fee had become a monthly fee of £5,500 for the same premises. Regus’s contract terms at that time were not yet in the form which applied to Epcot’s later contract in respect of which the parties came to litigate. One of Regus’s then terms, under the heading of “Consequential loss”, was that “If for any reason we cannot provide you with any service our liability is limited to crediting or returning to you a fair proportion of the relevant fee.” That term did not survive into the later contract.

On 7 December 2002 Epcot proposed a reduced fee of only £2,750 per month for the last six months of the current contract. Regus conceded this, on the basis apparently of Epcot’s bad cash flow.

On 8 August 2002 Epcot and Regus renewed their contract for a further one year from 1 July 2002 to 30 June 2003, on this occasion for a monthly fee of only £1,500. This had followed negotiations in which Mr Randhawa had stated that he could only pay £1,375 for the final month of his previous contract; Regus had offered to renew at £2,750 per month; Mr Randhawa threatened to go to a rival provider, HQ Global, at Stockley Park for a quoted fee of first £2,300 per month (“The choice is with Regus”) and then £1,500 per month; and Regus conceded the renewal at that last figure. It is not clear whether the renewal was on Regus’s old or new contract terms, but I will assume it was on the latter, for those were the only terms discussed at trial.

During that second one year contract, Regus decided to shut its Heathrow location and offered Epcot alternative accommodation at Stockley Park, a few miles distant. Regus’s contract (clause 28) allowed it to terminate its agreement in such circumstances, but it stated that “We will try to find suitable alternative accommodation for you at another Regus business centre”. On 5 November 2002 Regus notified Epcot of the impending closure of its Heathrow premises, and on 13 March 2003 Epcot signed its first contract with Regus for accommodation at Stockley Park, for the three month period from 18 March to 30 June 2003, at a monthly fee of £1,500. The relocation appears to have been accomplished at the time with little friction, but as will appear it did give rise to a grumbling dispute about relocation expenses.

On 3 June 2003 Epcot renewed its contract at Stockley Park for six months from 1 July to 31 December 2003, at a maintained monthly fee of £1,500. An internal document of Regus demonstrates that this was one-third of Regus’s internal price.

On 12 November 2003 Epcot signed two further contracts to renew its accommodation at Stockley Park. The first of these (the third at Stockley Park) was for 6 months from 1 January to 30 June 2004, again at £1,500 per month. The second (the fourth contract at Stockley Park) was for 16 months from 1 July 2004 to 31 October 2005, at a fee of £1,651 per month. Thus as of 12 November 2003 Mr Randhawa was prepared to commit himself for a further 22 months.

It would appear that it was really only in May 2004 that the complaints which were to result in a break-down in relations and then in litigation began in earnest. There had been a brief reference in an e-mail of 26 March 2003 to the need for adjusting the air-conditioning due to higher afternoon temperatures. There was also a letter dated 4 June 2003 to which the judge referred: this complained about both hot and cold air-conditioning temperatures, and also referred to a claim for £13,000 marketing costs and £2,750 relocation costs arising out of the move to Stockley Park. The judge observed that while a copy of this letter was produced by Epcot, the original was not in Regus’s files; that a letter of this kind seemed odd coming the day after the renewal of 3 June 2003 rather than as a negotiation toward renewal; and that the letter was not referred to in subsequent dealings or correspondence. However, the judge did not resolve these oddities as distinct from commenting on them.

In any event, there was, as the judge remarked, no further record of any complaint until 18 May 2004, nearly a year later, when there is reference to the air-conditioning being too hot. On 12 July 2004 Mr Randhawa wrote to Regus seeking compensation in the sum of £55,400 for relocation costs and loss of business due to the move and the faulty air-conditioning. Regus offered to pay £3,919.80 plus VAT for stationery (marketing) wasted by the move, but this was refused. By end of September, the parties were, as the judge said, at loggerheads, but the sums spoken of were comparatively small. Mr Randhawa was now claiming only six months free rental, worth £9,000: broken down as to relocation costs of £2,750, the wasted marketing costs of some £3,900, and the balance to reflect loss of clients due to the air-conditioning problems. This figure fell still further when on 1 October 2004 Epcot received a notice of suspension of services with effect from 5 October. There was then four months rent due in the sum of £6,600: Mr Randhawa countered with a claim of £6,667. It was a shame the parties could not have found a solution at that stage. As it was, the contract contained a pay first, dispute later clause (clause 39). If they had anticipated this litigation, they would, I think, have undoubtedly done so.

On 8 October 2004 Regus suspended its services and on the same day Epcot moved out to a provider of competing services in Stockley Park, HQ Global. On or about 1 August 2006, nearly two years later, Regus commenced these proceedings. The sums claimed have been amended and also include VAT (whereas the fees quoted above were net of VAT), but at trial amounted to £6,814.58 for the period up to 8 October 2004, and a further £23,385.46 for the period to the end of the fourth Stockley Park contract on 31 October 2005. As I have already mentioned, Epcot counterclaimed £626 million.

There was a four day trial with numerous witnesses, on liability alone. Most of the witnesses were related to Epcot’s complaint about the air-conditioning (albeit there was also an allegation of misrepresentation relating to Epcot’s original contract at the Heathrow premises, which failed: I need not refer to it further). There were also expert witnesses on the topic of air- conditioning, but there was no need for them to attend for cross-examination as any differences between them were limited.

The judge found that the air-conditioning was defective, and that this was due to Regus’s negligence in failing to carry out urgent and significant repairs. In particular, Epcot’s suite became too hot in the summer months. Regus lacked a sound system for monitoring its contractors and ensuring that basic systems were properly maintained. Its priorities in this respect at any rate at that time were subject to its desire to save money. Regus was negligent in terms of its clause 23.

Although the inadequacies of the air-conditioning were significant, they were not a real threat to Epcot’s business. Regus’s premises at Stockley Park had real advantages despite the air-conditioning problems. The facilities were impressive and available to Epcot on good terms.

Section 3 of UCTA provides as follows:

“(1)

This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business.

(2)

As against that party, the other cannot by reference to any contract term -

(a)

when himself in breach of contract, exclude or restrict any liability of his in respect of the breach…

Except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.”

Section 11 provides:

“(1)

In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act…is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought to have been, known to or in the contemplation of the parties when the contract was made.

(2)

In determining for the purposes of section 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract…

(4)

Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to –

(a)

the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and

(b)

how far it was open to him to cover himself by insurance.

(5)

It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.”

Although section 11(2) only applies Schedule 2 so far as issues arising under sections 6 (sale of goods and hire-purchase) and 7 (other contracts for the supply of goods) are concerned, jurisprudence has frequently regarded it as of general application. The judge, however, did not get as far as Schedule 2, for he concluded that clause 23 was unreasonable in principle and as a whole, on the ground that it provided no remedy at all in a case such as the present. His critical reasoning is contained in the following passage:

“50.

I conclude that in principle it is entirely reasonable for Regus to restrict damages for loss of profits and consequential losses from the categories of loss for which it will become liable when in breach of contract. I do not consider however that it can satisfy the burden of reasonableness when the clause deprives Epcot of any remedy at all for failure to provide a basic service like air conditioning in what is the business equivalent of an hotel, not the lease of a flat. Furthermore clause 23 provides an illusion of a remedy by limiting (as it is in principle reasonable to do) liability to 125% of the total fees paid or £50,000. But, as the clause stands, because of the broad wording of the exclusion of financial losses, a business will be unable to establish the liability which Regus seeks to limit. The frail prospect of damages for loss of amenity is remote and uncertain…I therefore consider that such a broad exclusion is not reasonable when one applies the factors identified by the Act. It is unfair for no remedy at all to be available to customers of Regus, most of whom will be companies, for serious failures in service over what may be a contract for a significant period of, for example, eighteen months. As it is not open to the court to sever a clause which fails to meet the requirements of the Act clause 23 is of no effect.”

The judge went on in para 51 of his judgment to anticipate the assessment of damages which therefore lay ahead for the parties. He was seeking to be helpful to the parties, and to discourage Epcot from pursuing unreasonable claims. He acknowledged that Epcot would be entitled to produce further evidence, but he said that he was “very sceptical about these consequential loss claims”. It was in the course of this passage of his judgment that he said this:

“The appropriate measure of damages would in the ordinary way be some percentage deduction from the fees paid by Epcot unless it can show additional specific loss caused by the air conditioning failure.”

This remark, and the references in para 50 to “no remedy” led Regus’s trial counsel, Mr Thomas Braithwaite, to write a letter dated 20 April 2007 to the judge following receipt of his draft reserved judgment, in which he asked the judge to reconsider it. He accepted some responsibility for lack of clarity in his trial submissions, but he sought to make two points. The first was that the judge’s own reference in para 51 to “some percentage deduction” was a recognition of a remedy allowed by clause 23; the second was that another possible remedy was the cost of replacement air-conditioning, or even of alternative accommodation. The judge incorporated references to these points in his amended final judgment, but they did not find favour with him, for reasons which are not entirely clear.

This appeal has been shortened or affected by three important concessions made on behalf of its respondent, Epcot. The first, made in its counsel’s, Mr Richard Colbey’s, skeleton argument dated 27 July 2007, but not before, is that Epcot no longer seeks on its counterclaim damages of £626 million, but has limited its claim to a maximum of £50,000. That concession does not impinge upon the legal issues whereby Regus seeks to argue that the judge was wrong to say that clause 23 fell foul of UCTA as failing its requirement of reasonableness, but it does go quite far to render the appeal somewhat academic – save that Regus would still be entitled to say that under clause 23(3), if it is effective, it should have no liability whatsoever for consequential loss, and save also for Regus’s legitimate concern to save if it can its clause 23 from that criticism which might have wider ramifications in other cases. In the present case, however, the effect of that concession is to put Epcot’s claim in the same position as if clause 23(4), with its upper limit of £50,000, was operative. Epcot’s second and linked concession, also contained in Mr Colbey’s skeleton argument, is not to resist Regus’s second ground of appeal (the first relates to the legitimacy of clause 23(3)) that in any event clause 23(4) is severable and can survive the loss of clause 23(3). Epcot made that concession because it was in any event prepared to concede that its claim should be limited to £50,000.

Epcot’s third concession, not made until Mr Colbey’s oral response at the hearing of the appeal, was to acknowledge that the judge had been wrong to say that clause 23(3) left a customer without any remedy at all. In these respects he accepted the criticisms of the judge’s judgment made on behalf of Regus by Mr Richard Gillis QC, leading Mr Braithwaite, on the hearing of this appeal. Of that more below: but Mr Colbey still maintained, despite that third concession, that clause 23(3) was unreasonable, for separate reasons which I shall explain in due course.

In the light of these concessions, this judgment will take the following form. First, I will explain why, consistently with Epcot’s third concession, the judge was wrong to say that clause 23(3) left Regus’s customers without any remedy. Secondly, I will deal with Epcot’s respondent’s notice that even so, the judge’s judgment should be maintained with respect at any rate to clause 23(3). Thirdly, I will explain why Epcot was correct to cede the severability of clause 23(4). I can deal with the first and third of those matters more briefly than I would otherwise have been able to do, in the light of Epcot’s concessions.

Clause 23 is structured as follows. Clause 23(1) lays down two conditions for any liability for the failure to provide a contracted service as a result of certain causes which include mechanical breakdown: one is that Regus acts deliberately or negligently; the other is that Regus is told of the problem and given a reasonable time to fix it. In the present case, neither condition presents a problem to Epcot. The judge has found that Regus was negligent; and there was no dispute that, at any rate by a certain time, Regus was told of the problems with the air-conditioning and given the opportunity to fix it. None of those factual questions are any longer in dispute. Only the precise moment of any breach may still require further definition. It is possible that there was no breach until the summer of 2004, but that matter has not been debated.

Clause 23(2) again emphasises the need for Regus’s deliberate act or negligence if any liability of any kind is to be imposed in connection with the contract or use of Regus’s services.

Clause 23(3) is the focus of contention. It excludes all liability (“in any circumstances”) for certain kinds of losses, namely “loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss”. In other words, even if Regus has acted deliberately or negligently, those losses are excluded. The losses in question are a mixture of direct and consequential loss. Loss of profits are often thought of as consequential losses, but may well be direct. The point of the losses distinguished for exclusion is nevertheless reasonably clear: the profitability of the customer is his own affair, as are its data, and its liabilities to third parties. As clause 23(3) ends up: “We strongly advise you to insure” against such potential losses.

Clause 23(4) is a limitation rather than an exclusion clause. It arises where there is liability. Apart from personal injury or death (no limit) and damage to the customer’s property (a limit of £1 million), there is a residual limit of 125% of fees paid under the customer’s agreement up to the date on which the claim arises or £50,000, whichever is the higher. In practice, the £50,000 limit is the relevant limit. It operates in respect of each agreement, so that in theory, depending on the date of some fault giving rise to liability, there could be more than one limit of £50,000 in play.

I return to clause 23(3). The judge said this was unreasonable because it left Epcot with no remedy for the breach of which it complained, namely defective air-conditioning. However, the obvious and primary measure of loss for a breach of such a kind is the diminution in value of the services promised: see Hewitt v. Rowlands [1924] All ER 344 (CA), Electricity Supply Nominees Ltd v. National Magazine Co Ltd [1999] 1 EGLR 130 (Judge Hicks QC), and Earle v. Charalambous [2006] EWCA Civ 1090, [2007] HLR 8. See also, by analogy with defective goods, section 53(3) of the Sale of Goods Act 1979: “In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value which they would have had if they had fulfilled the warranty”. As Chitty on Contracts, 29^th ed, 2004, at para 43-439 says: “This [section 53(3)] is the “prima facie” measure of damages, which will be superseded where the buyer claims loss of profits or other consequential losses”, a comment which (a) highlights the point made by clause 23(3) which leaves the prima facie measure of loss untouched but excludes claims for loss of profits and consequential losses generally, and (b) supports the commercial, if not the legal view, that loss of profits are regarded as being part of consequential losses. Thus, on the assumption for the sake of argument that the cost of the fees reflects the market value of the services promised, then the loss suffered can be measured by asking how much less valuable the same services would have been if the suite had not been air-conditioned (or had only been partially air-conditioned). An expert could readily advise on the difference between the value of air-conditioned offices and of non-air-conditioned offices, a well-known market distinction. Of course, in the present case such advice would have to take into account that the office services in the present case were in all other respects first class, or, as the judge found, “impressive”: in other words of the standard to be expected in modern air-conditioned offices.

While the diminution in value of the promised services is the clear and obvious prima facie measure of loss, how a court would go about assessing such a loss may depend on the circumstances of the case and the most efficient method of assessment. Thus in the case of residential property (and Hewitt v. Rowlands was itself such a case), where the courts are frequently called upon to assess the loss to the tenant of the landlord’s failure to repair and maintain the premises as he had promised to do, the courts have been anxious to avoid the expense of expert witnesses or to encourage too fine-toothed an approach to quantification. In such cases, as Woodfall on Landlord & Tenant, 2005, at para 13.089.2 observes, assessment of diminution in value and of the tenant’s personal discomfort and inconvenience may amount to much the same thing and may be recognised either by way of a global award, or by way of a notional reduction in the rent, or by a mixture of the two; and that one should bear in mind that “it is logical to relate the amount of the award to the rent, since the tenant is not getting proper value for the rent he is liable to pay”: citing inter alia McCoy & Co v. Clark (1984) 13 HLR 87 (CA), Chiodi v. de Marney (1989) 21 HLR 6 (CA), Wallace v. Manchester City Council [1998] 3 EGLR 38 (CA), and Shine v. English Churches Housing Group [2004] HLR 42 (CA). See also McGregor on Damages, 17^th ed, 2003, at para 23-025. We are not here concerned with the details of such assessments, and there are possible differences between the cases of individual and corporate tenants, since general (non-pecuniary) damages for inconvenience, discomfort or distress are not available to the latter. However, the general point, that damages for breach of contract in failing to provide to a tenant the services promised by a landlord are available and totally familiar, is one that it is entirely appropriate to make in the present context.

The judge did in fact recognise this obvious truth when he said (in para 51 of his judgment) that “The appropriate measure of damage would in the ordinary way be some percentage deduction from the fees paid by Epcot…”. It appears, however, that he may have been side-tracked by a submission at one time made before him on behalf of Regus, but subsequently dropped, to the effect that there was no remedy in the present case because a corporate party could not make a (non-pecuniary) claim in terms of distress, discomfort and inconvenience. That may be true as far as it goes, but even in the case of an individual claimant such a claim is often a proxy for a claim for diminution in value, and in any event the primary measure of loss of diminution in value remains and needs assessment. The judge may also have been side-tracked by Epcot’s pleadings which claimed loss and damage “including…distress and inconvenience and loss of amenity”. The judge does not appear, moreover, to have been assisted by reference to the appropriate authorities on this issue. He said: “I emphasise that I was taken to no authority on this issue” (at para 48). In any event, none of this is any longer in dispute. Nor is it in dispute that mitigation damages would also be available to a customer: as where he hired in alternative services, or even, if need be, found alternative premises.

Mr Colbey submits that, even when it has been acknowledged that clause 23(3) still leaves room for a remedy in terms of the prima facie measure of loss, it still fails the statutory requirement of reasonableness: because the exclusion operates “in any circumstances”, viz even where the loss has been caused by the deliberate act of Regus (cf clause 23(1) and (2)). He also submits that in the present case Regus’s failure to repair the air-conditioning was a deliberate act, in that it was a consequence of Regus’s policy of saving costs.

To support his submission Mr Colbey puts before the court the following scenarios. He says clause 23(3) on its face excludes liability for fraud or for deliberately damaging the customer’s business. He hypothesises a deliberate failure to deal with electricity power surges which destroy the customer’s data. In my judgment, however, these examples misconstrue the clause. Clause 23 as a whole does not purport to exclude liability (in the case of the losses identified in clause 23(3)) for fraud or wilful, reckless or malicious damage. Nor would any such clause naturally be construed as purporting to exclude liability for fraud or wilful damage: see HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank [2001] EWCA Civ 1250, [2001] 2 Lloyd’s Rep 483 (CA), [2003] UKHL 6, [2003] 1 All ER (Comm) 349 (HL) and the comments thereon in the context of UCTA in Granville Oil and Chemicals Ltd v. Davies Turner & Co Ltd [2003] EWCA Civ 570 [2003] 1All ER (Comm) 819 at para 15.

Moreover, the fact that Regus expressly accepts liability in general for its deliberate and negligent acts in clause 23(1) and (2) does not entail that in clause 23(3) it excludes liability even where it has acted maliciously or recklessly. A deliberate act, in the sense of an intentional act, will in nearly all cases fall well short of the fraudulent, reckless or malicious. It was not those classes of acts which the draftsman had specifically in mind in accepting general liability for deliberate and negligent acts, but in excluding liability for certain categories of loss under clause 23(3) “in any circumstances”. Liability for fraud or malice, or recklessness which is a species of either, goes without saying: parties contract with one another in the expectation of honest dealing. It is simply that in imposing conditions for the accepting of any liability, Regus did not, by referring to the need for negligence, wish to suggest that an intentional breach of contract could not similarly be made the basis of liability. That is very far indeed from contemplating causing deliberate harm. So, in the present case, there is no suggestion that the failure to attend to the air-conditioning, although in one sense a deliberate or intentional act to the extent that it depended on an unwillingness at some level of the company to spend money, was a deliberate attempt to cause harm to Regus’s customers. The judge rightly referred to Regus’s breach in such circumstances as a case of negligence; but even if he had referred to it as due in part to a deliberate act, it would not be an act of a dishonest or malicious kind. In these circumstances, it would be an error to construe “in any circumstances” in clause 23(3) as intended or effective to exclude liability for fraud or malice or their equivalent.

In this connection it is well to remember the wise words of Mance J in Skipsredittforeningen v. Emperor Navigation SA [1997] 2 BCLC 398 at 413, where he is discussing the requirement of reasonableness in the context of an exclusion against misrepresentation. He said:

“The consequence of the approach adopted in Stewart Gill [[1992] 1 QB 600] is (as the present case shows) that the court may hear arguments that a term is or may be unreasonable (and so wholly void in relation to misrepresentation or breach of contract claims, as the case may be) for reasons or in respects that have nothing to do with the facts of the actual case. Assuming that the whole term will be invalid in this way if it fails the requirement of reasonableness, the court should, I think, take care to consider the clause as a whole in the light of the circumstances when the contract was made, in order to judge in the round whether it satisfies the requirement of reasonableness. The court should not be too ready to focus on remote possibilities or to accept arguments that a clause fails the test by reference to relatively uncommon or unlikely situations.”

In the circumstances, this court is entitled to look again at the question of reasonableness. The judge found clause 23(3) to be unreasonable on the basis that it left a customer without any remedy whatsoever. That is now conceded to be wrong, which for the reasons given above is a concession rightly made. I have rejected Mr Colbey’s further argument that clause 23(3) should be regarded as unreasonable on the basis that it purports to exclude liability for fraud or deliberately caused loss. The only question remaining is whether Regus can sustain the burden of proving the reasonableness of the clause as now construed and in the light of the fact that it leaves the primary measure of loss untouched and only excludes liability for the heads of loss expressly set out in it. The judge has not answered that question, and it has not been suggested that the case should be remitted to him to consider this aspect anew. Therefore it falls to this court to answer this issue.

Although in the ordinary way a judge’s assessment of reasonableness will be accorded the “utmost respect” (see Lord Bridge in George Mitchell (Chesterhall) Ltd v. Finney Lock Seeds Ltd [1983] 2 AC 803 at 816), in the present case the judge’s decision did not turn on such an assessment but on an error as to the scope of the clause and the available remedies. On the contrary, absent the judge’s error, he appears to have been inclined to be in favour of the reasonableness of clause 23(3), for he commenced his para 50 with this statement:

“I conclude that in principle it is entirely reasonable for Regus to restrict damages for loss of profits and consequential losses from the categories of loss for which it will become liable when in breach of contract.”

Therefore, in my judgment, it is open to this court to take a fresh view.

On that basis, the following considerations arise, which I take in the main from the judge’s own judgment, supplemented to some extent by the correspondence before the court and Mr Randhawa’s own witness statement. (i) The judge’s general view as a matter of principle just cited above appears to me to be correct. (ii) Epcot’s Mr Randhawa was an “intelligent and experienced businessman”. (iii) He accepted in evidence that he was well aware of Regus’s standard terms when he entered into the contract. Indeed, he had contracted before on identical terms. (iv) He also accepted that he used a similar exclusion of liability for indirect or consequential losses in his own business. These last two factors were treated as of significance by this court in the judgment of Chadwick LJ in Watford Electronics Ltd v. Sanderson CFL Ltd [2001] EWCA Civ 317, [2001] 1 All ER (Comm) 696 at para 48. (v) As the papers make clear, Epcot sought to renegotiate terms of the contract frequently and energetically, albeit not clause 23(3): despite Mr Randhawa’s evidence, which the judge did not accept, that he had told Regus that this clause was not acceptable.

(vi) There was no inequality in bargaining power, as the history of negotiations cited above makes clear. Of course Regus was by far and away the bigger enterprise, but it had competitors, in the area of Stockley Park itself, of whom Epcot made good use. In this respect the judge, I think, erred in saying that “There is considerable inequality of bargaining power” unless he intended there, as his use of the present tense perhaps suggests, rather to refer merely to the comparative sizes of the two companies: and he immediately went on (at para 49) to refer to Epcot’s use of Regus’s competitors. It seems to me that a combination of the existence of relevant and local competition, and the difficulty that Regus found itself in when it needed to secure alternative accommodation for Epcot at Stockley Park, and possibly market factors at that time which gave an advantage to a customer who was prepared to make use of the existing competition in his negotiations, served Epcot well. After all, it was Epcot, not Regus, who used the tactic of “take it or leave it”, when Mr Randhawa told Regus in June 2002 “The choice is with Regus”.

(vii) Clause 23(3) advised Regus’s customers to protect themselves by insurance for the losses with which it was concerned. The judge was unable to make any finding about the availability of insurance to either party, in the absence of any evidence on the subject before him, and thus treated this as a neutral matter. In my judgment, however, the probability is that it would have been easier for each customer to insure himself against business losses, than for Regus to insure all of its constantly changing phalanx of customers in respect of their own interests. It is true that Regus would only be insuring up to £50,000 per customer per contract; but it would hardly be in a position to give proper information to underwriters about the businesses concerned; and the customers themselves may not have been willing to accept an uninsured position in excess of £50,000. As Lord Diplock observed in Photo Production Ltd v. Securicor Transport Ltd [1980] 1 AC 827 at 851:

“Either party can insure against it. It is generally more economical for the person by whom the loss will be directly sustained to do so rather than that it should be covered by the other party by liability insurance.”

The “it” there being discussed by Lord Diplock was the misfortune of a customer’s own premises being destroyed, eg by fire. Ours is an a fortiori case, for what we are concerned with is not something reasonably obvious such as property insurance, but forms of business loss insurance, which needs to be tailored to the business of each assured. Moreover, if insurance is left to each business customer, that customer has full autonomy over whether, how and at what price he wishes to insure against business losses. If, however, such losses have to be insured by Regus, then that autonomy is lost, and the expense has necessarily to be incurred and transferred to each customer in the form of the fees charged.

In these circumstances, it seems to me that Regus has shown that clause 23(3) meets the requirement of reasonableness.

It has never been suggested that clause 23(4) is unreasonable on its own terms. Even if, therefore, clause 23(3) were to be held to be unreasonable, clause 23(4) would cap all liability, even for the losses referred to in clause 23(3), at a maximum of £50,000 per contract. That raises the issue of whether an unenforceable clause 23(3) could be severed from clause 23 as a whole, or would render the whole of clause 23 unenforceable.

At trial, the issue of severability was not specifically raised, although the virtues of clause 23(4) were argued separately. The judge merely said (at the end of para 50) that “As it is not open to the court to sever a clause which fails to meet the requirements of the Act clause 23 is of no effect.” However, it is now conceded that clause 23(3) could be severed so as to leave clause 23(4) intact.

In my judgment, that concession is well made. It is true that clause 23 was not divided up into separate sub-clauses in the way that, for the sake of convenience, I have treated it by introducing the numbers (1), (2), (3) and (4). I bear that fully in mind. Nevertheless, it is plain that clause 23(4) is independent of clause 23(3). It is a limitation clause, rather than an exemption clause, and thus serves a different purpose, as was recognised in Ailsa Craig Fishing Co Ltd v. Malvern Fishing Co Ltd [1983] 1 WLR 964 at 966. In Watford Electronics this court was prepared to sever the clause in question, which again contained one sentence dealing with a complete exclusion in respect of “indirect or consequential losses whether arising from negligence or otherwise” and another sentence limiting liability “in any event…[to]…the price paid”: see at paras 32 and 66.

As for the reasonableness of such an exclusion, the relevant maxima of 125% of fees paid or £50,000, whichever is higher, are generous, and the considerations are similar to, or a fortiori of, those discussed above in relation to clause 23(3).

For these reasons, this appeal should in my judgment be allowed. There will have to be an assessment of the damages caused by Regus’s breach in respect of the defective air-conditioning so far as diminution in value is concerned. Although the judge gave judgment, rather surprisingly, interalia for damages for distress, inconvenience and loss of amenity pleaded at paragraphs 43(b) of The Re-Amended Defence and Counterclaim (see para 2 of his order), the claim in damages was also pleaded generally (“loss and damage … including” etc). It is possible that Epcot’s relocation costs may also have to be taken into account. There may still be an issue as to whether Regus was entitled to serve notice withholding services (see clause 39). However, these peripheral issues have not been debated on this appeal. It is to be hoped that the parties’ dispute is now capable of settlement without further unnecessary costs. The fact that in October 2004, admittedly before this litigation began, the parties were only some £7,000 apart, taking into account air-conditioning and relocation costs, suggests that such a hope may not be misplaced.