Summary: The High Court has held that an exclusion
of indirect and consequential loss, as drafted, did not cover a
supplier's loss of profit resulting from a customer's failure to
purchase goods in accordance with the contract. The decision turned
on the wording of the clause and, in particular, the fact that the
list of heads of loss which the parties had agreed should not be
recoverable followed a general exclusion of "any indirect or
consequential loss". The losses in question were direct and
therefore not within the scope of the clause. The judge's comments,
that the wording was ambiguous and that it would have been easy
enough to exclude all lost profits if that had been the intention,
serve as a sharp reminder that any lack of clarity on this topic
can have expensive consequences (Polypearl Ltd -v- E.ON Energy
Solutions Ltd [2014] EWHC 3045 (QB)).
Construing exclusions generally: No narrow
construction, but parties unlikely to surrender all remedies. In
this case, which centred on E.ON's breach of its obligations to
purchase polystyrene bead and adhesive from Polypearl, the judge
summarised the correct approach to construing exclusion and
limitation clauses and their application to losses arising in
practice. Fujitsu -v- IBM [2014] EWHC 752 was described as
a helpful summary of the modern law. Key points are:
- the courts have moved away from the traditional restrictive
approach of construction. Now, such clauses will be construed in
the same way as every other clause in a contract and it is very
much a question of deciding whether, on the wording, the clause
covers the type of liability in question;
- there is an increased willingness on the part of the courts to
recognise that commercial parties are free to apportion the risks
as they see fit;
- that said, it is presumed that parties don't intend to abandon the
remedies which the law provides and clear words are needed to show
otherwise. In construing an exclusion clause against the party
trying to rely in it, the courts will "strain against a
construction which renders that party's obligation under the
contract to no more than a statement of intent" and will only reach
that conclusion where the wording gives them no other option.
Loss of profits: direct or indirect? E.ON argued
that it was not liable for the lost profits on the basis of this
clause:
"Neither party will be liable to the other for any indirect or
consequential loss (both of which include, without limitation, pure
economic loss, loss of profit, loss of business, depletion of
goodwill and like loss) howsoever caused…"
To the judge, the general aim of the liability regime was
clear. Liability for indirect losses was excluded, and
liability for other losses was limited by a subsequent clause to
£1m. The references to direct and indirect losses in both clauses
was intended to cover the whole spectrum of losses which a party
could suffer as a result of the other's breach. However, in his
view, the wording of the clause regarding indirect loss was
ambiguous as a result of the phrase in parenthesis. A further
difficulty was that loss of profits can be direct or indirect as a
matter of law. It was unclear whether the phrase in parenthesis
covered all loss of profits claims or only indirect ones.
However, the better interpretation was that only indirect lost
profits were covered by the clause. "If it had been intended to
provide that all loss of profits claims were deemed to be indirect
and therefore excluded it would have been relatively easy to do
so." The word "include" was not enough to achieve this. The
words in parenthesis were an explanation of the phrase "indirect or
consequential" and not an attempt to recategorise direct loss as
indirect. Moreover, lost profits were likely to be the biggest
issue for Polypearl on a breach, and it made little commercial
sense to assume that it was willing to abandon its legal remedies
for such loss. Express words are needed to rebut the presumption
that parties will not readily abandon their remedies and the
wording of this clause was just not clear enough. Polypearl could
therefore recover its lost profits, subject to a financial cap
imposed elsewhere.
Please click on the links below for the other articles in the February 2015 commercial contracts newsletter:
