Restrictive interpretation of limitation of liability clause: not applicable to a failure to perform

However, the Court of Appeal found that it did not apply where MC had entirely refused to perform the contract. The court based its decision on principles of contract interpretation, the wording of the clause, the context of the exclusion clause within the contract and on its view of the parties' commercial intentions.

Background

In 2007 MC, a conference centre operator, appointed Kudos to provide catering services under a five-year agreement (the Agreement). After three years, MC purported to terminate the Agreement alleging "material and persistent breach of contract by Kudos." Kudos treated MC's actions as a repudiatory breach which terminated the Agreement. Kudos began proceedings claiming damages of GBP 1.3 million, including loss of profits it would have earned in the remaining period of the Agreement. MC denied having repudiated the Agreement and argued that Kudos' claim for loss of profits was barred by clause 18.6 of the Agreement which said that:

MC "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 incurred or not) or indirect or consequential loss suffered by the Contractor or any third party in relation to this Agreement." The High Court considered the effect of clause 18.6 as a preliminary issue and held that it was effective to exclude MC's liability for Kudos' lost profits. Mr Justice Seymour QC reached his decision on the basis that where the meaning of a clause is unambiguous, the courts will apply it, whatever the commercial effect. He reasoned that "The issue of construction arises only if there are at least two alternative interpretations of the words used". Thus, the court did not need to consider the parties' intent "if what they have stated is clear and unambiguous".

Decision

Lord Justice Tomlinson gave the lead judgment in the Court of Appeal, overturning the High Court's decision. In particular:

• the High Court was wrong in thinking that ascertaining the meaning of apparently clear words was not itself a process of contractual construction and it failed to consider the wider context of clause 18.6 or the parties' commercial intentions;
• if the High Court's construction of clause 18.6 was adopted, the Agreement would effectively not be a contract at all as there would be no sanction for non performance by MC; and
• the court rejected MC's argument that the exclusion clause did not leave Kudos with no possible remedy as Kudos might still obtain an order for specific performance requiring MC to give Kudos access to the conference venue (or an injunction preventing MC from excluding Kudos from the conference venue).

Tomlinson LJ agreed that "where language is fairly susceptible of one meaning only, that meaning must be attributed to it". However, this did not apply if "the meaning is repugnant to the contract in which case it may be necessary to ignore it." Tomlinson LJ noted that clause 18.6 was in a section of the Agreement headed "Indemnity and Insurance". Given the content of that section, it was not where one would expect to find a wide-ranging exclusion clause of general application. Both its position and content showed that clause 18.6 was intended to qualify the extent of an indemnity given by MC in clause 18.4. While he did not decide that the exclusion applied only to this indemnity, the presence of the clause in this section of the Agreement, together with the unlikelihood that Kudos would have agreed to exclude all remedies, meant that the exclusion related only to defective performance of the contract, and not to a complete refusal to perform it.

Key to this was the reference to loss "suffered by [Kudos] or any third party". The court reasoned that such third party loss could only be a loss suffered in consequence of negligent performance by MC. Therefore the exclusion in clause 18.6 was limited to losses incurred through defective performance. It did not limit losses caused by a complete refusal or an inability to perform it.

In line with principles decided in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 the Court of Appeal held that to construe the provision consistently with business common sense, "in relation to this Agreement" meant "in relation to the performance of this Agreement" and so did not extend to losses suffered in consequence of a refusal to perform or be bound by the Agreement.

Tomlinson LJ also held that any remedy of specific performance would be valueless given that the Agreement was posited on continuing cooperation between MC and Kudos which was necessary in order for Kudos to be able to provide catering services (courts will not grant orders which would result in the courts having to "police" observance of the order or where the order would serve no useful purpose).

Comment

There is no short and comprehensive definition of "contract". However, one working definition for most cases is "an exchange of promises which the courts will enforce." Where a clause purports to exclude one party entirely from any liability, such that performance becomes discretionary, there are no promises by that party which can be enforced and, arguably, therefore, there is no contract.

Thus, although the Court of Appeal's decision turned on the particular wording of the Agreement, its reasoning followed the courts' normal reluctance to uphold clauses which excuse a party from all liability if they refuse to perform the contract (as opposed to exclusions for defective performance).

In particular, Tomlinson LJ argued extensively from the fact that the exclusion clause was in a section headed "Insurance and indemnity", despite the fact that the Agreement expressly said that "headings are for ease of reference only and do not affect the construction of this Agreement". In doing so, he was construing the clause in its immediate context and in the context of what he took to be the parties' intention, on the basis of how he assumed ordinary businessmen would operate.

In this context, the court may have been influenced by the fact that Kudos had said that if the clause was upheld, it would seek to have the Agreement rectified – that is, Kudos would argue that a total exclusion of liability was not what the parties had agreed and would ask the court to repair the wording of the Agreement so that it had its intended effect.

The court therefore construed apparently plain words based on the factual background and its assumptions about intentions. However, the boundaries of such an approach are unclear, and the flexibility it gives the courts may carry with it the risk of uncertainty about how exclusion clauses will be construed.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.