UK: Failure To Perform Not Covered By Exclusion Clause

Last Updated: 11 April 2013
Article by Mark Alsop

Kudos provided catering services to the Manchester Central Convention Complex. The agreement ran from five years from 1 April 2007 but ended unhappily in July 2010 with claims and counterclaims as to who was entitled to terminate etc. An initial point for consideration by the courts was whether the exclusion clause protected Manchester Central from a claim by Kudos for loss of profit. The exclusion clause 18.6 provided: "The Contractor hereby acknowledges and agrees that the Company shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by the Contractor or any third party in relation to the Agreement ... ...".

The High Court thought that the words were "perfectly clear .. their effect is that in any case in which there might otherwise be a liability in contract to pay damages in respect of loss of profit there is not one. It is as simple as that". The judge went on to say that it was not necessary or appropriate for the Court to consider what the parties could possibly have intended if what they have actually stated is clear and unambiguous. The Judge took the view – as per the Rainy Sky Supreme Court case - that, where a clause is unambiguous, the issue of construction does not arise. There were potentially other remedies available to Kudos. Kudos appealed.

The Court of Appeal allowed the appeal. Whilst the decision depended on the exact wording of the clause and its context, the Court made a number of useful observations.

  • The Judge failed to look at the words in the exclusion clause in the context of the particular clause or the contract as a whole. The Judge fell into error by thinking that the ascertainment of the meaning of apparently clear words was not itself a process of contractual construction.
  • The Court disagreed with the Judge's view that there were other remedies available (which it took to mean an injunction restraining Manchester Central from excluding Kudos from the venues). It looked at the agreement as a whole and came to the conclusion that it was wholly unsustainable that Kudos could perform the contract without the full hearted cooperation of Manchester Central. That meant that if the High Court's interpretation of the exclusion clause were adopted, the contract was effectively devoid of contractual content, since there would be no sanction for non-performance by Manchester Central. It was inherently unlikely that the parties intended the clause to have this effect.
  • The exclusion clause itself was 18.6, being one of a series of clauses under the heading "Indemnity and Insurance". It was plain that (clause 18.5 being seemingly in the wrong place) clause 18.6 was to be read with clause 18.4 which contained an indemnity by Manchester Central in favour of Kudos against all damage to property arising out of the negligence of Manchester Central, i.e. it covered loss suffered by Kudos directly and from third party claims. Similarly in clause 18.6 there was a reference to loss suffered by the Contractor or any third party. That indicated that clause 18.6 was intended to cover a similar type of loss as that which was the subject of the indemnity, i.e. a loss arising out of negligent performance. If it had been intended simply to exclude all liability for profits etc in the event of any breach of contract by Manchester Central, including a refusal to perform, there would have been no need to refer to third party losses as a separate category. The court interpreted "in relation to this Agreement" in 18.6 as meaning "in relation to performance of this Agreement", so it did not include losses in consequence of a refusal to perform or be bound by the Agreement.
  • Had the parties intended an exclusion of all liability for financial loss, the court would have expected them to spell that out clearly, probably in a freestanding clause rather than in a subclause designed in part to qualify an express and limited indemnity.

Comment The court seemed to be minded to make sure that Kudos had some remedy and to construe the clause accordingly. It was obviously short-sighted to bury a wide ranging exclusion clause in a clause dealing with insurance and indemnities. So, some steps to be taken to improve the likelihood of enforceability of an exclusion of loss of profits:

  • Give the other party a substantial remedy for serious breaches. The court may well be looking for ways to construe a clause so the exclusion does not apply.
  • Put the exclusion in a prominent position, preferably in a clause that deals only with exclusions and not with other matters.
  • Explain in the agreement why the parties have come to this commercial position. That would help overcome the argument that business common sense makes it unlikely that the parties would have agreed to such an exclusion.
  • Make it clear (if this is what has been agreed) that the clause is to exclude losses caused by repudiatory breach. There have been conflicting cases on the exclusion of deliberate repudiatory breach, but both agree that, as a matter of common law, it is possible to exclude it, as long as the wording is clear enough.

Note the Situ Ventures Court of Appeal decision reported below where the Courts took account of the context and surrounding purposes of a clause, but found that the wording of the particular clause was a more reliable guide to construction. UCTA was not raised, presumably because it was a negotiated clause and negligence by

Manchester Central was not alleged (s2 makes exclusion of liability for negligence subject to the reasonableness test).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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