Telecoms supply agreement excludes "loss of profit" claim under "anticipated profits" liability exclusion (EE v Virgin Mobile)
In line with a number of recent cases, in EE Limited v Virgin Mobile Telecoms Limited  EWHC 1989 (TCC) the courts have shown that parties generally cannot avoid clear wording contained in exclusion clauses in order to recover losses that have been expressly excluded (in this case, loss of profits).
Under a telecommunications supply contract, Virgin Mobile Telecoms (Virgin Mobile) contracted with Mobile Network Operator (MNO) EE to access its radio access network. EE was required to supply to Virgin Mobile with various services that would enable Virgin Mobile's customers to be provided with 2G, 3G and 4G mobile services. This arrangement was subject to an exclusivity clause in the contract.
The initial arrangement wasn't applicable to the provision of 5G services but 5G was added subsequently and the contract was amended accordingly. The amendments provided for potential agreement between EE and Virgin Mobile in relation to the provision of 5G services using EE's network or, in the absence of such agreement, for Virgin Mobile to be entitled to provide 5G services to its customers from a different network owned by one of EE's MNO competitors.
Virgin Mobile put some of its customers on Vodafone's and O2's networks believing it fell within that '5G services' exception to the exclusivity clause. EE considered that by doing so Virgin Mobile had breached the exclusivity clause and issued proceedings, claiming damages of c. £25 million in revenue that it would otherwise have earned in respect of liability for additional charges payable by Virgin Media to EE under the contract had Virgin Mobile's customers been kept on EE's network instead.
The exclusion clause
Other than in certain limited circumstances, the contract expressly excluded liability for "anticipated profits".
Virgin Mobile accordingly applied for strike out and/or reverse summary judgment of EE's claim, contending that regardless of breach (which it denied) the claimed losses fell within the clear and natural meaning of the words "anticipated profits" in the exclusion clause.
The key question for the court was whether that interpretation was correct. While bearing in mind that the court should hesitate about making a final decision without trial, the court decided that it had all the evidence necessary to determine this key point of contractual construction summarily.
The court revisited the well-established general approach to contractual interpretation, as well as the purposive and contextual principles applicable to the interpretation of exclusion clauses (as referred to in our recent Drax v Wipro blog here).
Given the clear and unambiguous language of the exclusion clause, the court found that EE's damages claim fell within the natural meaning of "anticipated profits" and was therefore excluded.
There was no difference in meaning between "lost profits" and "anticipated profits". The agreement was a bespoke, lengthy and detailed contract negotiated by two sophisticated parties operating in the field of telecommunications, which had been negotiated on a level playing field. Although that admittedly left EE without a financial remedy if Virgin Mobile breached the exclusivity clause, EE would still be paid the substantial contractually agreed minimum revenue payments in any event, and EE could still seek effective non-financial remedies (such as injunctive relief), so the result could not be said to render the contract an "illusory bargain" or "a mere declaration of intent".
The court therefore gave summary judgment in Virgin Mobile's favour.
Comment and practical takeaways
This is the latest of several judgments in a matter of months that emphasises the courts' willingness to construe the words of an exclusion clause so as to recognise that commercial parties are free to make their own bargains and allocate risks as they think fit. While the court will start with the assumption that in the absence of clear words parties do not intend to give up their normal rights, it will not generally place (what the court referred to in its own words as) a strained construction on clear words excluding liability. This is particularly so where the parties are sophisticated and have been legally advised.
The court did, however, comment that it may endeavour to strain to avoid a particular construction if the exclusion clause would otherwise have the effect of defeating the object of the contract or creating commercial absurdity, such that one party can effectively breach the contract with impunity. Even then, if the contractual language fairly has only one meaning, adopting a strained construction should only be a "last resort". This does therefore leave open the possibility for claimants to push the boundaries of interpretation in some circumstances.
The focus and intention behind a contractual exclusion of lost profits is often on loss of (indirect) profits that might be earned through business dealings with third parties 'outside' the contract. Here, however, the charges EE was claiming were for charges it would have received had Virgin Mobile not (as EE alleged) breached the exclusivity clause – i.e. additional charges paid under the contract. When drafting the contract, if the parties do intend to exclude 'outside' of the contract indirect or consequential losses, this could be done explicitly by, for example, referring (as the court suggested could be done) to "losses arising in connection with third parties".
When liability has been excluded for financial damage such as lost profits, at the dispute stage arguments may centre on what 'loss of profits' actually covers. The court made the point that even if the words "loss of profits" feature in the exclusion clause they may not be apt on the facts to encompass the claim that is being made, or they may be narrowed in scope by their factual context. Those framing the claims in a dispute should, at a pre-action stage, be mindful that despite explicit wording there may be context that means a court will characterise the loss claimed as something other than "loss of profit". As a result, we will no doubt continue to see these types of arguments being run.