Need to revisit exclusion clauses
MARKERSTUDY v ENDSLEIGH [2010]
Liability clauses and the exclusions they contain are usually the most contentious terms in any commercial contract yet the parties are often still uncertain as to where liability will actually fall if there is a breach. Or worse, the exclusions provide less cover than was understood or anticipated. Although this decision will be surprising to many lawyers, it emphasises once again the need to be careful how exclusions are set out and to be crystal clear about which direct and indirect losses are excluded. But you thought your contract did that...
Facts:
M alleged widespread breaches by E of various claim handling agreements. E tried to argue its liability for direct and indirect loss was exempted by its exclusion clauses which were (our emphasis underlined):
"Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profits or savings and all other pure economic loss) arising out of or in connection with this Agreement." (Art. 13.1)
"Endsleigh will not be liable to Markerstudy ... for any indirect or consequential loss or loss of profit or loss of business arising out of data input errors by Endsleigh ..." (Art. 8.1)
The key issues before the court were whether the exclusions in brackets in the first clause and for loss of profit or business in the second clause were freestanding or caught by the preceding reference to “indirect and consequential loss”.
Decision:
- Regarding Art. 13.1, not surprisingly, the High Court judge held that the use of the term “including but not limited to" was a strong pointer that the specified heads of loss were just examples of the excluded indirect loss. He added that the purported exclusion of the identified categories of loss in both direct and indirect form was not expressed clearly. Therefore, this clause did not exclude direct loss which was potentially recoverable by M.
- Much more unexpectedly, with respect to Art. 8.1, it was held that the introductory phrase “any indirect and consequential loss” did not permit the exclusion of loss of profit or loss of business to be freestanding: “in short, only indirect loss of profit or business is excluded”.
Points to note:
- This outcome is quite significant as many exclusion clauses are drafted along the lines of Art. 8.1 and most parties would assume that both direct and indirect loss of profit and business would be excluded rather than being tainted by the preceding words.
- This shows again the need for care when drafting exclusion clauses. If you want to exclude categories of direct loss you would be well advised to structure the exclusions as separate standalone clauses/sub-clauses so that they are clearly seen as separate and distinct from any exclusion of indirect losses. Do not list direct types of loss after words such as “indirect and consequential”. It is worth checking your existing clauses to see if they do this and consider amending them if necessary. Remember, what does an exclusion of ‘indirect and consequential loss’ actually exclude? Not a lot.
- It has to be said that the decision on Art. 8.1 is quite startling indeed, if not bizarre, and not one that is easy to rationalise. The judge gave little or no reasoning to justify his decision. Whether it will be followed or overturned on appeal will be interesting but for the time being it does present a significant problem for many contracts.
- Another interesting point that arose in this case was whether the financial limit on liability contained in the contracts covered the payment of interest due under the contracts. The conclusion was that contractual interest comes within the cap but statutory interest (ie interest on damages) does not as it is awarded at the court’s discretion and is not a “liability in contract”. Interest paid under the Late Payment of Commercial Debts (Interest) Act 1998 will be treated as contractual as that Act provides expressly that this is the case. For such interest to be subject to the limitation on liability, it would need to be specifically referenced.
- This latter aspect of the ruling means that contractual interest caught by the cap (such as interest paid on late payments pursuant to a typical payments clause) may reduce the amount of additional damages that can be claimed under the contract. So if you want to exclude such interest from being caught by the limit on liability, you should expressly provide for this in the liability clause.