Liability caps and the primary obligation to pay the price
Costcutter Supermarkets v Vaish (High Court) [2024]
This case illustrates the need to ensure that any liability caps are carefully drafted taking full account of the payment structures set out in the contract
Facts:
The defendants operated two convenience stores under a franchise arrangement with Costcutter. Under the arrangements, the defendants placed orders for goods with Costcutter who in turn procured those goods from a third party supplier. Costcutter did not charge the retailers any mark-up on the goods supplied or any so called ‘service charge’, but instead received a payment from the supplier. After some poor performance by the supplier in question, the defendants opted to terminate their arrangement with Costcutter and move to another retail brand. Costcutter issued a claim for payment for goods previously supplied which had not been paid for.
The High Court had to consider whether a limitation of liability clause applied to a buyer's obligation to pay the price for goods purchased.
The clause said "the total liability of either party … shall in respect of all acts, omissions, events and occurrences whether arising out of any tortious act, breach of contract or statutory duty or otherwise arising in any particular Contract Year in no circumstances exceed a sum equal to five (5) times the Service Charge paid by the Retailer to [Costcutter] in respect of the Contract Year immediately prior to the Contract Year in which such claim was made".
The reason this was so important was because, since no service charge had in fact been levied in the year in question, the cap on liability was therefore potentially ‘zero’.
Decision:
The court started by summarising the approach to be adopted when interpreting a contract.
(1) The court construes the relevant words in their documentary, factual and commercial context.
(2) The court considers (i) the natural and ordinary meaning of the provision being construed, (ii) any other relevant provisions of the contract being construed, (iii) the overall purpose of the provision being construed and the contract or order in which it is contained, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense.
(3) The court disregards subjective evidence of any party's intention, or facts or circumstances which were not known or reasonably available to both parties at the time that the contract was made.
(4) The starting point is usually the language used, and where the parties have used unambiguous language, the court must apply it. This is so even if the outcome is improbable or appears to be extremely commercially disadvantageous for one party. It is not the function of a court when interpreting an agreement to relieve a party from a bad bargain.
(5) Where there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
The Court held that the words limiting liability did not affect the buyer's primary obligation to pay for goods received. Instead:
- The clause was only drafted to limit secondary obligations to pay damages following a breach.
- An action for the price of goods was a claim in debt to enforce a primary obligation. It was not a claim for breach of contract. An action for the price of the Goods as a debt arises upon non-payment. It is unrelated to the separate cause of action arising out of the fact that the omission to pay was also a breach of contract.
- The fact that damages for breach of contract were limited did not prevent an action in debt in respect of the primary obligation to pay.
- The words "or otherwise" were not sufficient to exclude any claim relating to the enforcement of primary obligations. Broad exclusion clauses aimed at any cause of action are not the same as an agreement to excuse performance of a primary obligation.
The judge queried whether a purported exclusion of liability to perform the primary obligation [to pay] could ever exist meaningfully in an effective contract.
Points to Note:
- The decision in this case is entirely unsurprising even though it does involve some judicial ‘gymnastics’ to get to what was clearly regarded as the right result. Whilst some contracts include express drafting to make clear that any limitation of liability does not affect the obligation of a customer to pay the contract price, this judgment makes such language less important.