Exclusion of liability for failure to perform: Kudos for trying!

Scotland

Parties negotiating commercial contracts will often seek to manage their risk by including clauses which provide that their liability is excluded or limited in a particular way, for example by excluding liability for certain types of loss.

In fully negotiated business-to-business contracts, parties are relatively free to agree the extent to which they exclude or limit each other’s liability without the need to consider statutory controls, such as the Unfair Contract Terms Act 1977 (UCTA). This contrasts with the position with regards to business-to-business contracts entered into on one party’s standard terms and business-to-consumer contracts, which are both subject to tighter statutory controls so far as the exclusion and limitation of liability is concerned (such as the “reasonableness test” under UCTA).

Despite this general principle of ‘freedom to contract’ between commercial parties, in recent years the courts have been prepared to restrict the use of exclusion of liability clauses in bespoke business-to-business contracts by resorting to the common law controls afforded by the law of contractual interpretation. In particular, there has been a recent spate of cases whereby the courts have intervened to limit the effect of clauses that, on a literal interpretation, exclude all liability for one party’s failure to perform the contract.

Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38, is the latest example of a court (in this case, the Court of Appeal) arriving at a restrictive interpretation of an exclusion clause in a fully-negotiated commercial contract which one party sought to rely on to exclude their liability for failure to perform.

The Facts

Manchester Central Convention Complex (MCCC) engaged Kudos to provide catering services at (as the name would suggest) a convention centre in Manchester, under an agreement which was to run for a five year term.

The relationship broke down three years into the term of the agreement, when MCCC asserted that Kudos was in material breach and purported to terminate. Kudos responded by arguing that this was unlawful termination (otherwise known as repudiatory breach). Kudos claimed £1.3 million in lost profits to reflect the income it argued it would have earned during the remainder of the term.

The exclusion of liability clause (clause 18.6) provided that: “the Contractor [Kudos] 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 …”.

The High Court’s decision

In determining the effect of clause 18.6, the High Court applied a literal, narrow interpretation of the exclusion clause and found that the words used 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 neither necessary nor appropriate “for the court to consider what the parties could possibly have intended if what they have actually stated is clear and unambiguous”. As a result, Kudos was not entitled to recover its lost profits from MCCC. Kudos appealed the decision.

The Court of Appeal’s Decision

The Court of Appeal overturned the High Court’s decision and found that, on a consideration of the exact wording of the clause and its wider context, MCCC’s liability for Kudos’ loss of profits was not excluded by clause 18.6.

The Court found that the High Court judge had failed to interpret the words used in the exclusion clause in the context of the agreement as a whole and had paid insufficient attention to the commercial intentions of the parties. It concluded that if the High Court’s literal interpretation of the clause was adopted, the contract would be “effectively devoid of contractual content” as there would be “no sanction for non-performance” of the contract by MCCC. In effect, the contract would be reduced to an unenforceable statement of intent. In the opinion of the Court of Appeal, it was “inherently unlikely that the parties intended the clause to have this effect".

Comment

Although the Court of Appeal was influenced by the unique circumstances and wording of the contract between Kudos and MCCC in reaching its decision, a few tips for negotiating exclusions and limitations of liability in commercial contracts can be gleaned from this case:

(i)
Consider whether the other party will be left with an adequate remedy for serious breaches:

The Court of Appeal did not look favourably on MCCC’s attempt to rely on a wide ranging clause that sought to deny Kudos of any remedy for MCCC’s failure to perform its side of the bargain.

When negotiating sweeping exclusions of liability, it is therefore worth considering what remedy the other party will be left with in the event of serious breaches of contract, as a more moderate position is likely to be more resilient to challenge in the courts.
(ii)
Be wary of the locational context of your exclusion clauses:

Although the agreement between MCCC and Kudos included a provision confirming that clause headings were for reference only and did not affect interpretation, the Court of Appeal’s interpretation of the exclusion clause was influenced by the fact that it was buried in a clause entitled “Indemnity and Insurance”.

If you are intending to include a wide-ranging exclusion of liability, it will be easier to enforce if it is brought to the other party’s attention during negotiations and included in a prominent position within the contract, preferably in a clause that deals only with exclusions and not with other irrelevant matters.
(iii)
Use unambiguous wording if you intend your exclusion of liability to extend to deliberate breach or non-performance:

In this case, the Court of Appeal confirmed that there is no presumption that an exclusion clause will not apply to a party’s deliberate breach of contract (this contrasts with the controversial decision of the High Court in the NetTV V MARHedge case – which we commented on in our Commercial Contracts Bulletins of August 2009 and November 2012). Nonetheless, the courts are likely to apply a restrictive interpretation to blanket exclusions which attempt to exclude all liability for repudiatory breach.

As such, if you do intend to exclude certain types of liability for deliberate breach of contract, this should be clearly spelt out within the agreement.



To read this case in full, please click here.