Introduction

Time and again, the courts are asked to construe exclusion clauses which were not drafted to address the circumstances which have arisen, often to the detriment of the parties seeking to rely on them. A recent Court of Appeal decision concerning the interpretation of such a clause in a services agreement is a helpful reminder to commercial parties of the importance of clear drafting and the dangers of inadvertently limiting their own recourse in the event of a breach.

Background

EE Limited (EE) contracted with Virgin Mobile Telecoms Limited (Virgin) to provide access to its 2G, 3G and 4G mobile networks to Virgin customers under a Telecommunications Supply Agreement (TSA). Virgin subsequently migrated certain customers from EE's network to other networks allegedly in breach of an exclusivity clause in the TSA. EE claimed damages of c. £24 million for the revenue it would have received under the TSA in respect of those customers had they not migrated.

The lower court's decision

The High Court summarily dismissed the claim on the basis that it was in substance a claim for loss of profits and so fell within the scope of a clause which excluded liability for "anticipated profits", which could only be interpreted as excluding all loss of profit claims.

The Court of Appeal

The appeal was dismissed by a 2:1 majority.

Giving the leading judgment (with which Coulson LJ agreed), Zacaroli LJ noted that the central issue was whether "anticipated profits" meant something other than the type of loss claimed by EE. He found that:

• there is no general principle that a clause which excludes liability for anticipated profits does not apply to profits anticipated to be made under the contract. This will depend on the wording of the clause and the overarching context in each case, and previous authorities are of little assistance;
• there is nothing in the plain language of this clause, which is clear and unequivocal, to indicate that "anticipated profits" should be interpreted narrowly. If the parties had contemplated a narrower meaning, they would have drafted accordingly; and
• a reading of the clause which would encapsulate all loss of profit claims is supported by other provisions in the TSA and does not lead to an obviously uncommercial result, as EE would in principle have had recourse to other remedies.

In his dissenting judgment, Phillips LJ considered the clause in the context of the parties' commercial bargain. In his view, given the exclusivity provision was the core contractual obligation imposed on Virgin, it was contrary to business common sense (and so cannot have been the parties' intention) to allow Virgin to divert customers to a third party without incurring liability to pay damages.

Comment

The decision is not a surprising one given the particular facts of the case, and the court relied on established principles of contractual interpretation in reaching this result. Nevertheless, the fact that the court was clearly divided in its views and the apparent hesitation with which Coulson LJ sided with Zacaroli LJ in dismissing the appeal ("I have not found the central issue in this case easy to decide") leave open the question of a potential appeal to the Supreme Court in due course.

Protecting your business from similar pitfalls

Following the court's decision, commercial parties seeking to negotiate clauses to exclude or limit their liability should remind themselves of the following principles:

• Primacy of the language: Commercial parties are assumed to have control over the language they use in their contract and so the courts will take as a starting point the plain, literal meaning of the clause (unless, for example, this would defeat the main purpose of the contract and so cannot have been what the parties intended). Clear words will generally be respected and any ambiguity will be resolved against the party seeking to rely on the clause. Here, the fact that the contract was a detailed one and was drafted with the benefit of legal advice on both sides were strong indicators that the wording of the exclusion clause reflected a careful allocation of risk between the parties.
• Context matters: The courts will construe the clause in the context of the wider agreement, including any related provisions. Parties should therefore check that a clause means what they intend it to when read cumulatively with other parts of the contract. In this case, the fact that the preceding sub-clause already excluded liability for indirect losses led the court to conclude that the parties must have intended "anticipated losses" to mean something more.
• Clear wording will displace valuable rights: While parties are normally presumed not to intend to derogate from their rights and remedies under common law, that can be displaced by clear words (as was found to be the case here). The more valuable the right, the clearer the language required.
• If in doubt, spell it out: As was apparent in this case, terms such as "loss of profits" or "anticipated profits" can be construed widely or narrowly depending on the context. Consider clarifying the term to remove any ambiguity. It may also be useful to expressly stipulate losses going to the heart of the contract for which the parties will accept liability and which are not captured by the exclusion clause.
• Beware of the impact of amendments: Where a contract is subsequently amended, take care to ensure that any intended change in the risk allocation between the parties is appropriately reflected. A court will not readily assume that the provision of new rights for one party necessarily implies a corresponding change in the rights of the counterparty if that is not evident in the contractual wording.

A copy of the Court of Appeal's decision can be accessed here.