Construing exclusion clauses in context

Acerus v Recipharm [2021] EWHC 1878 (Comm)

The question

How will courts construe an “exclusion of liability” clause where its interpretation is not clear?

The key takeaway

Where the interpretation of an exclusion of liability clause is unclear, the courts will consider not only the wording of the clause itself, but also its wider context (such as its position in the contract as a whole) and the commercial consequences of different contractual interpretations.

The background

Recipharm Limited (Recipharm) was appointed to supply a medicinal product to Acerus Pharmaceuticals Corporation (APC) under a Manufacturing Agreement (the MA). The MA included the following exclusion clause, at clause 9.3: 

“… notwithstanding anything contained in this Agreement in no circumstance shall either party be liable to the other in contract, tort… or otherwise howsoever to the other, and whatever the cause thereof (i) for any increased costs or expenses, (ii) for any loss of profit… or (iii) for any special indirect or consequential loss or damage of any nature whatsoever …”.

In breach of the MA, Recipharm failed to supply the medicinal product to APC for over two years causing APC to suffer loss of profits. APC sought damages to recover its lost profits and costs. Recipharm argued that the exclusion clause excluded its liability for APC’s loss of profits and the wording of the clause could bear no alternative meaning.

The decision

Although the language of the exclusion clause was “plain”, the Court held that it should be construed in context, including by considering its position within the MA as a whole. The exclusion clause was contained in clause 9 which dealt with concepts of indemnification for third-party claims and the parties’ related insurance obligations. The exclusion clause should therefore be interpreted as relating specifically to the parties’ liability under such indemnities, and not as a general, freestanding clause.

According to the Court, Recipharm’s interpretation would enable it to walk away from its supply obligations without liability (given that the only relevant sanction in such circumstances would be its liability for APC’s loss of profits). Such an outcome would be “remarkable” and in commercial terms could not have been the objective intention of the parties.

Why is this important?

The decision reiterates the position under English law that, where contractual terms are unclear, the courts will seek to ascertain the objective meaning of the language used in the contract by considering the contract as a whole and the practical and commercial consequences of each possible interpretation. The decision highlights the importance of careful placement of clauses within a contract and the impact that this can have on their contractual interpretation.

Any practical tips?

Ensure that any general exclusions of liability are separated out from other provisions in the contract, such as indemnities. This can be achieved through the use of separate clauses, numbering and clear sub-headings. If exclusion or liability clauses are particularly wide ranging, consider explaining the rationale or commercial justifications in recitals or in acknowledgments alongside the relevant clauses.