Excluding liability for loss of profit
Motortrak v FCA Australia [2018]
Commercial contracts routinely exclude liability for ‘loss of profit’. This case demonstrates some potential dangers for a contracting party where a mutual exclusion for loss of profits has been included in a contract. The case is also notable for observations on when delays in terminating will amount to an affirmation of a contract (thus precluding termination on the basis of a repudiatory breach) and also when invoices become (a) due and (b) payable.
Facts:
Motortrak and FCAA entered into a contract under which Motortrak would supply web-based marketing services to FCAA. The contract was for a fixed term, initially of 3 years but subsequently extended. When FCAA sought to terminate the contract it had approximately 3 years left to run. The contract contained an exclusion clause stating:
"Neither party shall be liable to the other for any loss of profit arising out of or in connection with the Agreement or its subject matter.”
In due course, FCAA came to believe that Motortrak had paid bribes to a company owned by the FCAA’s former managing director in order to secure the contract. Eventually, it believed it had the right to rescind the contract (rescission being a form of termination of a contract as from its conception). It told Motortrak to cease providing services and it stopped paying Motortrak’s invoices.
Motortrak claimed that FCAA had wrongly terminated the contract, ‘accepted’ the repudiation bringing the contract to an end and claimed damages for the profits it would have earned under the contract for the remainder of the term.
Motortrak argued that the clause excluding all liability for loss of profit should not apply where FCAA simply refused to perform the contract. It said that, otherwise, the exclusion clause would deprive FCAA’s obligations of all contractual force and deny Motortrak any substantive remedy.
A question also arose as to when an invoice becomes due for payment. Charges were stated to be payable ‘quarterly in advance’ and, in a separate section of the contract ‘within 30 days of the date of invoice’. For some reason 4 invoices related to the quarter beginning on the 1st July were issued by Motortrak on 20th May. Motortrak argued that the invoices were therefore payable by 19th June, i.e. prior to the date of termination. The particular unpaid invoices in dispute related to a period after 30th June when the contract was terminated by Motortrak. FCAA argued that either the entitlement to raise an invoice did not arise until 30 days prior to the start of the quarter to which the invoice charges relate, or the obligation to pay does not arise until the start of the quarter to which the charges relate.
Decision:
The Court agreed with FCAA regarding the clause excluding all liability for loss of profit. It held that the wording of the clause was clear, even if its effect would be to deprive Motortrak of any real remedy. As a result, Motortrak had no significant claim against FCAA.
On FCAA’s right to rescind the contract, the Court said FCAA was not entitled to rescind the contract, because it had continued to observe the contract after the point where it had found out about the bribes and so had “affirmed” the contract. As a result, when it stopped paying the invoices, FCAA had itself committed a repudiatory breach of contract which entitled Motortrak to terminate the contract. By October 2015, FCAA was aware of the payments made by Motortrak, believed them to be bribes and thought that it was able to terminate the Agreement as a result of those payments. It was argued that the delay in termination was due to the need to put alternative arrangements in place. In fact a replacement contract was entered into during February 2016 but for reasons which are not entirely clear from the judgment, FCAA did not ultimately take steps to terminate until the end of June 2016. As a result the Judge felt that the acts of FCAA amounted to affirmation of the contract although the Judge did not make it clear at exactly what point the affirmation had occurred. As a footnote to the Judgment, the Judge has said that at the request of the parties a separate hearing will take place to determine the exact date of the affirmation.
On the question as to whether Motortrak had the option to either (i) accept the repudiation of the contract by FCAA and claim general damages or (ii) affirm the Agreement, continue to offer to provide services and continue to raise quarterly invoices for its fees or the remainder of the term, the Court made it clear that the latter option did not exist in this case. This was because Motortrak could not, in practice, perform the contract without the active cooperation of FCAA and in such circumstances affirmation is not available.
So far as the unpaid invoices were concerned the Court drew a distinction between the [payment] obligation becoming due and the obligation becoming payable. The construction which was held to be more consistent with business common sense is that payment became due at the start of the quarter and the obligation is payable within 30 days of the invoice being rendered, but that the obligation is not payable earlier than the due date. In other words, notwithstanding the broad language of clause 7.1, an invoice could not be rendered so as to make the debt payable prior to its due date, which in accordance with the relevant sentence in schedule 2, was found to be the first day of the relevant quarter. Accordingly, the payments claimed under the four invoices for the quarter July to September 2016, only became due on 1 July 2016 and given the termination of the Agreement on 30 June 2016, there was no obligation on FCAA to pay those invoices. It is unclear what the position would have been had the invoices been payable 1 day prior to the date of termination rather than 1 day later.
Points to Note:
This judgment is a clear reminder that exclusion clauses have to be carefully drafted in the context of the contract in question. Whilst in many cases an exclusion of liability for loss of profit is not particularly contentious and will have little or no impact, in other cases such an exclusion will effectively exclude practically all liability for breach so beware!
This case contrasts with the previously reported cases of Kudos Catering v Manchester Convention Complex [2013] (where the Court of Appeal held that a loss of profit exclusion did not apply where the customer had prematurely terminated and refused to allow continued performance of the contract) and Albemarle v AstraZeneca (2011) where the Judge refused to give effect to the strict literal wording because Albemarle would have been deprived of any effective remedy.. The Judge in the Motortrak case managed to bend over backwards to distinguish the Kudos and Albemarle judgments that would seem to have suggested another conclusion, relying instead on the case of Fujitsu v IBM (2014), in which the Judge had been willing to give effect to an exclusion of liability for loss of profits primarily on the basis that the language was clear and unambiguous but also because the contract had been negotiated by two highly sophisticated commercial parties with the benefit of legal advice, the contract was very detailed and the clause applied equally to loss suffered by both parties.
Be extremely careful not to delay in terminating more than is absolutely necessary if you do not want to be found to have affirmed the contract in question. Unfortunately, the judgment does not provide particularly clear guidance as to the principles to be followed in determining a reasonable period which can elapse before a party will be taken to have affirmed the contract. Equally, take care not to give a false impression to your contracting counterparty that the contract may continue beyond the point where you have taken a definite decision to bring it to an end.