Exclusion clauses work

In Interactive E-Solutions v O3B, the Court of Appeal has, yet again, held that a widely drafted exclusion clause represented the allocation of risk between the parties.

A dispute arose when Interactive refused to pay service fees due to O3B under a contract, and O3B purported to terminate the contract. Interactive brought an action for specific performance and, in the alternative, counterclaimed for damages. The contract between the parties excluded O3B’s liability for anything bar fraud.

Interactive's argument was that it did not have to pay the service fees because O3B had not obtained the necessary regulatory approval from the Pakistan Telecommunication Authority. It transpired that, in the course of liaising with the the Authority, O3B’s subcontractor had written a letter containing statements which it allegedly knew to be untrue. Interactive therefore claimed that the application for regulatory approval had been made fraudulently.

However, there was no allegation by Interactive that either it or the Authority had been misled by anything said or done by or on behalf of O3B.  Interactive’s sole "complaint" was that O3B’s demand for payment had been invalid because O3B had not obtained the necessary approvals.

At first instance, the trial judge found that Interactive was unable to establish an arguable cause of action that was not precluded by the exclusion clause. He had held that only fraud and dishonesty claims fell outside the scope of the exclusion of liability. The Court of Appeal unanimously agreed, and dismissed the appeal.

One of O3B's arguments that received short shift was that if the exclusion clause meant only what the trial judge had said it meant then much of it was superfluous: "the argument from redundancy seldom carries much weight because, as it has been graphically put, drafters frequently employ linguistic overkill and try to obliterate the conceptual target by using a number of phrases expressing more or less the same idea".

On exclusion clauses generally, Lewison LJ noted that although the courts were traditionally hostile, since the Unfair Contract Terms Act 1977, they had interpreted them less narrowly recognising (at least in commercial contracts made by parties of equal bargaining power) that exclusion and limitation clauses are “an integral part of pricing and risk allocation” (Persimmon Homes and Nobahar-Cookson followed). Lewison LJ also acknowledged that it had become common drafting practice to include fraud carve-outs to reflect that a contracting party might be willing to assume the risk of negligence by his counterparty, but not the risk of fraud.