Applying limitation of liability clause to primary obligation to pay for goods

Costcutter Supermarkets Group Limited v Vaish [2024] EWHC 152 (KB)

The question

Can a limitation of liability clause limit a claim in debt for the actual purchase price of the goods?

The key takeaway

For a limitation of liability clause to apply to non-performance of a primary obligation, such as the requirement to pay for goods delivered, clear wording is required. Where the clause was expressly directed to acts or omissions arising out of any tortious act, breach of contract or statutory duty “or otherwise arising”, this did not prevent an action to enforce the debt. “Or otherwise” was not sufficiently clear to prevent a claim relating to that primary obligation.

The background

Costcutter contracted with two retailers PV and AV for the supply of goods to PV and AV’s convenience stores. Under the contract the retailers ordered goods from Costcutter which Costcutter sourced from a third party, National Independent Supermarkets Association (NISA), and delivered to the stores. Costcutter charged the retailer for the cost of the goods plus a commission (a service charge). 

The contracts contained a limitation of liability clause. Clause 19.2 stated: “…the total liability of either party shall in respect of all acts, omissions, events and occurrences whether arising out of any tortious act, breach of contract or statutory duty or otherwise arising … in no circumstances exceed a sum equal to [five times the Service Charge paid by the Retailer in the previous year]”

In 2014, Costcutter changed its supplier from NISA to P&H and stopped taking the service charge. P&H failed to adequately perform under the contract, however, often failing to fulfil orders for goods and in time for various promotions. In the light of the poor level of service provided, PV and AV cancelled their direct debits to Costcutter. Costcutter sought payment for the goods delivered for which no payment had been received.

Costcutter brought an action in debt for the price of the goods, and, in the alternative, sought damages for breach of contract. Costcutter alleged that in failing to pay, PV and AV had breached both an implied and express term of the contract, namely to pay for goods supplied.

At first instance, the trial judge held that since the debt arose out of “a breach of contract…or otherwise,” PV and AV’s liability was limited under clause 19.2. Since no service charge has been paid in the preceding year, the judge held that AV and PV owed nothing. Costcutter appealed. 

The decision

The court iterated that when construing limitation of liability clauses, the modern approach is for courts to recognise that commercial parties are free to make their own bargains and allocate risks as they think fit and that in the absence of clear words to the contrary, the parties did not intend to agree to give up the rights they would otherwise have under the contract.

The judge distinguished between a claim in debt and a claim for damages for breach of contract. For a debt claim, the claimant merely needs to prove their performance under the contract, not that they suffered any actual loss following the defendant’s failure to pay, unlike with a claim for damages.
He also distinguished between primary and secondary obligations under a contract. The obligation to pay (i.e. performance) is a primary obligation; the requirement to pay damages for breach of a contractual term is a secondary obligation, and an agreement to restrict the recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligation.

Consequently, broadly drafted clauses such as clause 19.2, did not excuse performance of a primary obligation to pay for the goods received. While it was clear that the clause covered “breach of contract”, it was not clear that the words “or otherwise” sought to excuse liability for failure to comply with primary obligations (eg payment). The court questioned whether a contract could even meaningfully exist if it purported to exclude liability for performance of primary obligations under the contract.

The court allowed Costcutter’s appeal and found PV and AV liable to repay the cost of the goods ordered.

Why is this important?

The case highlights that courts are likely to make a distinction between the primary obligation to comply with the obligation to pay for goods received and a claim for breach of contract. 

The result is that it is unlikely that a limitation of liability clause will be construed as excluding liability for the performance of primary obligations under the contract. Where the parties intend to limit liability in relation to primary obligations, (very) clear wording will be needed; but bear in mind that the court may not enforce such a clause, even where clear wording is used, if it results in performance of a primary obligation being excused. 

Any Practical Tips?

Ensure that the contract properly allocates the risks between the parties, including through clear wording of the exclusion and limitation of liability clauses. 

Consider what remedies remain available under the contract and whether the exclusions/ limitations are overly broad, depriving a party of any effective remedy or purporting to excuse performance of primary obligations.

Spring 2024