Impact of a loss of profit exclusion
Acerus v Recipharm (High Court) [2021]
Exclusions of liability for ‘loss of profit’ are fairly commonplace in a whole variety of commercial agreements. The courts have, however, shown an unwillingness to give effect to such clauses in circumstances where to do so would effectively deprive the innocent contracting party of any meaningful remedy.
Facts:
Acerus, sought damages from Recipharm, for loss of profits and costs caused by Recipharm’s alleged failure to perform contractual obligations under a pharmaceutical Manufacturing Agreement dated 12 May 2009.
Clause 9.3 of the Agreement stated “In any event in no circumstance shall either party be liable to the other for any loss of profit or for any special indirect or consequential loss or damage of any nature whatsoever”.
By clause 2.1 Acerus appointed Recipharm as its exclusive supplier for the manufacture of the products covered by the Agreement.
Decision:
The court accepted that the language of clause 9.3 was plain, but so, too, was the context of clause 9.3 and, in particular, the fact that it was within clause 9 was regarded as being important. Clause 9, examined as a whole, was said to be directed to the circumstances that the parties may face when there is a claim by a third party brought against one or other of them.
The court also said it was legitimate to look at the consequences for a particular construction. Treating the clause as though it was entirely freestanding was said to produce the remarkable outcome that it would allow the manufacturer to choose to walk away from its obligations to supply in the period before termination. In that situation, the only relevant sanction would be a liability for loss of profits, but, on Recipharm’s argument, that liability is taken away by clause 9.3. That scenario, of an effective freedom to walk away cannot, according to the court, be the meaning that was, objectively, the intention of the parties. The court therefore decided that the exclusion of profits should not be given effect to.
Points to Note:
- The judge made reference to the case of Kudos v Manchester Convention Complex (2013) http://www.trglaw.com/news138.html which featured the same sort of loss of profit exclusion and which arrived at the same result.
- Be very careful where within a document you include a clause as that can often be used, as it was here, to argue for a particular interpretation.
- Although it is tempting to include loss of profit exclusions in almost all commercial contracts, if the primary measure of loss in the event of a breach of contract is likely to be exactly that, it is very likely that the exclusion will be interpreted as having little or no impact.