The importance of clear wording regarding "direct/indirect loss"
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:
- Higher standard of care expected from specialist provider
- Construing payment obligations on breach of contract
- Court of Appeal confirms decision on repudiatory breach
- Liquidated damages, penalties and the dangers of renegotiating the contract price
- Ensuring entire agreement clauses are fit for purpose
- Personal guarantor bound by signature machine
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