Exclusion clause interpreted narrowly
KUDOS v MANCHESTER CENTRAL CONVENTION COMPLEX (CA) [2013]
A clause which expressly excluded a customer’s liability for loss of profits did not apply where the customer had prematurely terminated and refused to allow continued performance of the contract. The Court of Appeal (‘CA’) applied what it saw as ‘business common sense’ notwithstanding an apparently clear exclusion clause.
Facts:
- K, a supplier of catering services, entered into a five-year agreement with M. M ended the agreement two years early presumably believing that it had the right to do so. K claimed its loss of profits (£1.3 million) for the remaining two years which it suffered as a result of the early termination.
- Clause 18.6 of the contract provided that M had no liability: "whatsoever …for any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by [K] or any third party..."
- M maintained that it had no liability for K's lost profits as these were excluded by clause 18.6.
- At the first hearing in the High Court of the preliminary point as to whether M had any liability for loss of profit, clause 18.6 was interpreted literally as having only one possible meaning - to exclude all M’s liability for loss of profit despite its alleged premature termination of the contract.
- K appealed to the CA.
Decision:
- The earlier ruling was overturned by the CA who held that M's liability for loss of profits was not excluded by clause 18.6. The decision was based on existing principles of contract interpretation, the particular wording of the clause, where the clause in question appeared within a series of obligations to indemnify and to insure, and on the Court's view of the parties' commercial intentions.
- The CA commented that the wording of the exclusion of loss of profit was very broad. If the contract was performed by M, K would earn substantial profits. If M was not liable for loss of that profit, there was no effective consequence for its non-performance. The Court said that if clause 18 were interpreted literally, the Agreement would be ”effectively devoid of contractual content since there is no sanction for non-performance by [M]. It is inherently unlikely that the parties intended the clause to have this effect". Therefore, the CA concluded that a literal interpretation of clause 18 would be contrary to business common sense and that in context it only applied where there had been defective performance but not where there was a refusal to perform.
- The CA was also influenced by the fact that clause 18.6 was located amongst provisions dealing with indemnities and insurance. Clause 18.4 was an indemnity that M gave in relation to damage to K’s property due to its negligence. Clause 18.6 was interpreted by the CA as a qualification to clause 18.4.
- The Court commented that if clause 18.6 had been meant to stand alone and to affect all liability under the contract, and not be a qualification of the liability under clause 18.4, would it not have been in a separate part of the contract? One judge said “Had the parties intended such an exclusion of all liability for financial loss in the event of refusal or inability of [M] to perform, I would have expected them to spell that out clearly, probably in a free-standing clause rather than in a sub-clause designed in part to qualify an express and limited indemnity, and in one which moreover forms part of a series of sub-clauses dealing with the provision of indemnities and the insurance to support them."
Points to Note:
- Rather unusually, it was the customer’s exclusion of liability here rather than the supplier’s that was the issue in dispute. However, this decision is consistent with previous cases (see AstraZeneca v Albemarle [2011]) where an exclusion of loss of profit by one party was not upheld as this was the main loss that the other party was seeking to recover.
- A provision which, even if clearly drafted, effectively deprives the other party of any substantial remedy may be unenforceable (as was the case in Regus v Epcot [2008] and AstraZeneca v Albemarle [2011]).
- Even where a contractual ‘boilerplate’ provision states that clause headings do not affect their meaning, headings should still be as clear and appropriate as possible to assist both parties in understanding the content underneath them and to any third party interpreting them.
- Make sure that, so far as possible, clauses do not appear in documents in unexpected places where they are intermingled with clauses dealing with other matters. As also occurred in the Ampleforth v Turner & Townsend [2012], such positioning of clauses gives judges the opportunity to interpret wording which might otherwise be thought to only have one meaning.
- The judgment demonstrates that the Courts are often prepared to construe exclusion (as opposed to limitation) clauses very narrowly particularly where they feel that such a construction is warranted to achieve a fairer outcome.