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Excluding liability (and avoiding judicial red ink)

28 March 2013

Exclusion clauses – by which a party excludes or restricts a liability or duty that would otherwise arise – are common 'boilerplate' provisions in commercial agreements.

A recent Court of Appeal judgment provides a valuable insight into the court's approach to the construction of such clauses1.  It also highlights the importance of precise drafting to the effective incorporation of expansive limitations and exclusions.  

Facts

MCCC, the operator of a conference centre and exhibition venue in Manchester, entered into a comprehensive written agreement with Kudos Catering (UK) Limited by which it appointed Kudos as exclusive catering services supplier for the two venues for a five year period.

Three years into the five year term a dispute arose as a result of which MCCC purported to terminate the agreement.  Kudos, in turn, sought to treat the purported termination as a repudiatory breach of contract which it claimed to accept as bringing the agreement to an end and in relation to which it claimed damages, including £1.3 million for loss of profits (being the profit that Kudos would have earned had the contract run its course).

As a preliminary issue, the court was asked to consider the scope of an exclusion clause on which MCCC sought to rely:

"[MCCC] 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 foreseeable or not) or indirect or consequential loss suffered by [Kudos] or any third party in relation to this Agreement…"

HHJ Seymour QC found this clause to be effective in excluding MCCC's liability for Kudos's loss of profit claim.  In reaching this decision, the judge held that it was neither necessary nor appropriate "for the court to consider what the parties could possibly have intended if what they have actually stated is clear and unambiguous."

Decision

The Court of Appeal disagreed with both the approach and the result at first instance and allowed Kudos's appeal.  The judge was criticised for having assumed that the need to engage in an exercise of construction arose only when there were "at least two alternative interpretations of the form of words used."

In his leading judgment, Lord Justice Toulson recalled that the ascertainment of the meaning of apparently clear words is itself a process of contractual construction and that it was necessary, even in that context, to have regard to all of the relevant surrounding circumstances in order to establish "what a reasonable person … with all the background knowledge which would have reasonably been available to the parties … would have understood the parties to have meant."

Part of that context, so the Court of Appeal held, was that Kudos could not perform the contract without the full-hearted support of MCCC.  It followed from this that – if the exclusion was as wide as MCCC contended (and the first instance court found) – the contract was effectively devoid of contractual content since there was no sanction for MCCC's non-performance.  This weighed heavily in the Court of Appeal's analysis. 

The court also looked closely at the structure of the agreement.  It noted, in particular, that the exclusion appeared in a clause headed 'indemnity and insurance' which "was not the place in which one would expect to find a wide-ranging exclusion clause of general application."  Had the parties intended to exclude liability for financial loss in the event of MCCC's refusal or inability to perform they could be expected to have spelt "that out clearly, probably in a free standing clause."

Taking this into account, the court concluded that the seemingly wide exclusion was, in fact, restricted to claims in respect of poor performance, as opposed to non-performance, of the agreement.

Comment

This decision is yet a further example of the increasing willingness of the judiciary to weigh the factual matrix against the written word, particularly when the result, based on a textual analysis alone, would appear to be unduly onerous or otherwise counter intuitive.

As a result, draftsmen seeking to incorporate expansive limitations and exclusions of liability need to ensure that such clauses are precisely drafted so as to leave the court with minimal room for manoeuvre.

Seeking to 'hide' exclusions in an unobvious part of the contract is a perilous path that increases the likelihood of encountering judicial resistance.  Confronting the reality of the provision is a much better course.  Expressly reciting the commercial basis for the provision – and so contemporaneously recording its business common sense - is better still. 

Conversely, the decision shows that the court can, in appropriate circumstances, throw a lifeline, in the guise of 'business common sense', to parties who find themselves at risk of drowning under the weight of onerous contractual provisions: a last chance saloon, but a saloon nevertheless.


1. Kudos Catering (UK) Limited v. Manchester Central Convention Complex Limited [2013] EWCA Civ 38

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