Why exclusion clauses shouldn’t exclude too much
A recent Court of Appeal case shows the dangers in using standard, widely-drafted exclusion clauses without thinking carefully about what types of loss might arise in practice – particularly where the effect of the clause would be to leave one party without any remedy for the other’s breach.
Kudos Catering (UK) Ltd entered into a five year contract to provide catering services to the Manchester Central Convention Complex Ltd (MCCC). MCCC lost confidence in Kudos and two years before the end of the term the contractual relationship broke down with both parties alleging repudiatory breach. Kudos claimed £1.3 million for loss of profits that would have been earned during the remaining term of the contract.
The case centred on the wording of clause 18 of the contract which was headed “Indemnity and Insurance” which provided that MCCC would have:
no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits…suffered by the Contractor or any third party in relation to this Agreement.
In the High Court it was held that clause 18.6 only had one effect: to exclude all liability of MCCC for Kudos’ loss of profit.
Court of Appeal decision
In overturning the High Court decision, the Court of Appeal found that if the contract had continued for the intended five year term, Kudos would have made a profit. The court further found that if MCCC was able to exclude all liability for loss of profit, it would effectively deprive Kudos of any sanction for MCCC’s non-performance. For this reason, the Court of Appeal held that clause 18.6 did not exclude liability for Kudos’ loss of profit where such liability arose out of MCCC’s repudiatory refusal to perform the contract.
In coming to its decision, the Court of Appeal noted the following key points:
- the exclusion of loss of profit was ‘buried’ in a clause headed clause 18 “Indemnity and Insurance”
- if the clause did exclude all liability for loss of profit, it would effectively deprive Kudos of any sanction for a breach of contract by MCCC which would render the contract an unenforceable statement of intent
- if the parties had intended to exclude liability for loss of profit in the event of refusal to perform the contract (rather than for defective performance), it should have been set out unambiguously in a stand-alone clause
Some practical lessons
Casting the exclusion clause net too far may not provide the protection envisaged. In order to avoid the clause being rejected as ‘too wide’ it will be prudent to bear in mind the following points:
- Avoid the temptation to ‘bury’ certain key limitation and exclusion clauses
- If an exclusion is of particular importance, put it in a standalone clause (under a suitable heading) to bring it to the attention of the other party and to avoid a court interpreting it by reference to surrounding sub-clauses
- Although the court in the current case refused to provide a distinction between refusal to perform and an inability to perform, consider inserting a clause to expressly deal with repudiation
- Consider whether the innocent party will have an adequate remedy for breach as the courts will not look favourably on a clause that seeks to remove any remedy for failure to perform or for defective performance