The ‘Construction’ of Exclusion Clauses

Late last year, we discussed the interesting approach adopted by English courts to the application of exclusion clauses to deliberate repudiatory breaches of contract. A couple of weeks back, the Court of Appeal decided Kudos Catering v MCCC considering very similar issues and making some highly relevant observations.

Kudos Catering involved a catering contract between the claimant caterer and the respondent conference/exhibition centre, pursuant to which the claimant was to provide catering services in the respondent’s premises in return for the payment of a specified rate of commission. There were several service standards are other requirements to be satisfied by the claimant, and the initial term of the contract was five years. Three years into the contract, the respondent purported to terminate the contract giving the claimant one month’s notice. The claimant accepted this purported termination as a repudiatory breach of the contract and accepted it as a termination of the contract, making a claim in damages for lost profits.

Clause 18.6 of the contract 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 this Agreement“. Relying on this clause, the respondent contended that its liability was excluded and the only remedy available to the claimant was to have rejected the purported termination of the contract and seek specific performance. Having accepted the termination of the contract, the claimant could not seek a remedy in the form of damages for lost profits. The question which fell for the Court of Appeal’s consideration was therefore, whether any or all of the respondent’s liability for the claimant’s loss of profits is excluded on the proper construction of clause 18.6.

Tomlinson LJ, delivering the lead judgment, held that the respondent’s liability was not excluded by this clause. For convenience, the reasoning underlying this conclusion can be broken down into three components.

Damages were the only available remedy

The respondent argued that the claimant had an alternative remedy of specific performance which it had voluntarily foregone by treating the contract as repudiated. Tomlinson LJ held that this argument was without merit. The contract here required active cooperation between the claimant and the respondent and specific performance of the contract could not be ordered if the respondent wished to terminate the contract. This left damages as the only real remedy available for non-performance of the contract. Therefore, the first step in Tomlinson LJ’s reasoning is that damages were the only real remedy against non-performance by the respondent, and the remedy of specific performance was not one which was available to the claimant on these facts.

Presumption of contractual effect

Given that damages were the only real remedy against the respondent’s non-performance, the respondent’s construction of clause 18.6 rendered the contract “effectively devoid of contractual content since there is no sanction for non-performance by the respondent … It is inherently unlikely that the parties intended the clause to have this effect. The parties thought that they were concluding a mutually enforceable agreement”.

Relying on decisions in Suisse Atlantique and Modern Engineering v Gilbert-Ash [1974] AC 689, Tomlinson LJ notes the English law presumption that “parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force; to do so would be to reduce the contract to a mere declaration of intent”. Therefore, the second prong of the reasoning is that in the absence of clear language to the contrary, there is a presumption in English law against interpreting an exclusion clause in a way which deprives obligations provided in a contract of all contractual force.

It is important to note however that Tomlinson LJ expressly also refers to the repugnancy exception by observing that “where language is fairly susceptible of one meaning only, that meaning must be attributed to it unless the meaning is repugnant to the contract in which case it may be necessary to ignore it” (EU Network Fiber). However, on the facts here, the repugnancy exception was not attracted.

‘Construction’ of the clause 18.6

Finally, Tomlinson LJ notes that clause 18.6 cannot be examined in isolation and the mere use of ‘no liability whatsoever’ was not sufficient to exclude the respondent’s liability. Three factors were relevant in construing clause 18.6-

(1) It was a sub-clause in a provision dealing ‘Indemnity and Insurance’, which “is not the place in which one would expect to find a wide-ranging exclusion clause of general application”. Further, “Had the parties intended such an exclusion of all liability for financial loss in the event of refusal or inability of the Company to perform, I would have expected them to spell that out clearly, probably in a free-standing clause rather than in a sub-clause designed in part to qualify an express and limited indemnity”. This was, according to Tomlinson LJ, “a legitimate exercise in construing a contract consistently with business common sense and not in a manner which defeats its commercial object“. Both McCombe LJ and Law LJ also expressly affirmed this line of the reasoning as being the foundation of the Court’s decision.

(2) Clause 18.6 also excluded losses suffered by ‘any third party’. This was taken to be a reference to the losses suffered by a third party in respect of which the respondent was required to indemnify the claimant. Since the indemnity obligation was limited to losses caused by the negligence of the respondent or its employees or agents, the excluded third party losses would also be those falling within this category. Although the excluded claimant losses need not necessarily be as limited as the excluded third party losses, the specific reference to third party losses (as opposed to subsuming them under the overarching umbrella of losses directly or indirectly suffered by the claimant) suggested that the excluded claimant losses were those caused by the deficient (but not necessarily negligent) performance of the contract by the respondent and did not include losses caused by non-performance of the contract or its repudiation. “Reference to third party losses in my view informs the proper construction of the clause, indicating that the circumstances in which the company’s liability is intended to be qualified are similar to, albeit not co-extensive with, those which might also give rise to the obligation to indemnify the Contractor against third party losses“.

(3) Clause 18.6 concluded with the phrase ‘in relation to this Agreement’, which suggested that the exclusion related to losses suffered in the performance of the contract and not on account of its non-performance. In the words of Tomlinson LJ- “In order to construe the provision consistently with business common sense, I would regard the expression “in relation to this Agreement” as meaning in this context “in relation to the performance of this Agreement”, and thus as not extending to losses suffered in consequence of a refusal to perform or to be bound by the Agreement“.

It is also important to note that while this case effectively read down an exclusion clause, Tomlinson LJ expressly steers clear of basing his decision on the nature of the breach in question. He observes that “on the assumption which I have made for the purpose of determining this preliminary issue, we are not concerned with a “deliberate” in the sense of a “knowingly unlawful” repudiation, but I am yet to learn that the consequences of a repudiatory breach of contract differ according to whether it is informed or uninformed, deliberate or inadvertent, hopeful or hopeless“. The last line can in fact be taken to indicate that there is no established distinction between deliberate and inadvertent breaches, and providing a possible shot in the arm for Flaux J’s line of reasoning in Shared Network Services and Astrazeneca.

Therefore, this is a very important case highlighting the tools available at common law to read down a widely worded exclusion clause. Until such time as there is conclusive authority rejecting deliberateness of the breach as a relevant factor in interpreting an exclusion clause, there appear to be three ways in which an exclusion clause contained in a contract may be read down at common law-

(a) Unless there is clear language to the contrary, a court may presume that the parties did not intend the exclusion clause to operate in a way which deprives the obligations provided in the contract of all contractual force. Further, Tomlinson LJ clarifies that in determining whether there is any ambiguity in the effect of an exclusion clause, the court must examine not only the language of the clause itself, but should also examine the entire contract.

(b) Unless there is clear language to the contrary, a court may presume that parties did not intend the exclusion clause to exclude liability for losses caused by deliberate repudiatory breaches of contract.

(c) Even if the language of the exclusion clause is clear as to its scope and effect, a court may ignore it if it is repugnant to the contract.

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