How the courts will interpret exclusion of liability clauses in contracts and the importance of specificity when negotiating what liabilities will or will not be excluded when entering into a contractual relationship was highlighted a few weeks ago in a case concerning a supply agreement.
The example of EE Limited v Virgin Mobile Telecoms Limited
In EE Limited v Virgin Mobile Telecoms Limited, the High Court dismissed a claim for “charges unlawfully avoided” that EE claimed it would have received had Virgin Mobile not breached the exclusivity provisions of the supply agreement between them. Virgin Media denied breaching the supply agreement and maintained that EE was prevented from bringing the claim as the agreement excluded liability with respect to “anticipated profits”.
So are “charges unlawfully avoided” the same as “anticipated profits”, and what was the role of the exclusion clause?
Background
In 2013, EE and Virgin Mobile entered into a supply agreement (the “Agreement”) under which EE provided Virgin Mobile access to its mobile network, enabling Virgin Mobile to provide 2G, 3G, and 4G mobile services to its customers.
Virgin Mobile agreed that it would use only EE’s mobile network for the provision of these mobile services for the duration of an exclusivity period (the “Exclusivity Clause”) and that the amount to be paid by Virgin Mobile would depend on the level of usage of EE’s network by Virgin Mobile’s customers (the “Charges”). The agreement also included an extensive limitation of liability clause which provided that “neither party shall have liability to the other in respect of anticipated profits” (the “Exclusion Clause”).
The Agreement was later amended in 2016 to provide that, in the absence of an agreement with EE, Virgin Mobile would be entitled to provide 5G services to its customers using the mobile network of one of EE’s competitors. The Exclusivity Clause was varied accordingly.
In 2021, having not reached an agreement with EE, Virgin Mobile entered into an agreement for the supply of 5G services by an alternative mobile network.
In bringing its claim, EE argued that Virgin Mobile had, in breach of the Exclusivity Clause, migrated its non-5G customers to the alternative network and added new non-5G customers to the alternative network rather than the EE network. In doing so, EE claimed to have been “deprived of revenue that it would otherwise have earned” by way of the Charges. EE estimated this loss of revenue at around £24.6 million.
Loss of Revenue or Loss of Profit?
A major issue before the Court was the characterisation of the claim as a claim for loss of revenue as opposed to loss of profit.
Virgin Mobile denied that “loss of revenue” was the correct measure of damages. Instead, Virgin Mobile contended that the correct measure would be EE’s loss of profit. Calculating losses in this way would require the Court to take into account costs of providing the services to Virgin Mobile’s customers as well as any savings to EE from no longer providing services to those transitioned to the alternative network.
EE denied the characterisation of its claim as a claim for loss of profits. It insisted that the claim was “in respect of a liability for charges”.
The Court was unconvinced. The judge decided that EE’s claim was for a “loss of bargain – in this case loss of profit” and said, that to “suggest otherwise appears to me to be fanciful”.
Exclusion Clause
Having decided that the claim was for loss of profit, the Court then turned to whether EE was precluded from bringing its claim by virtue of the Exclusion Clause given that it excluded liability in respect of “anticipated profits”.
In reaching its decision the Court applied the following principles to the interpretation of exclusion clauses:
- that the exercise of constructing an exclusion clause must be undertaken in accordance with the ordinary methods of contractual interpretation;
- that the Court will start from the assumption that in the absence of clear words the parties did not intend to derogate from the normal rights and obligations established by the common law;
- that the more valuable the right, the clearer the language of the exclusion clause must be if it is to be given effect;
- that any ambiguity or lack of clarity following the linguistic, contextual and purposive analysis of the exclusion clause will be resolved against the party seeking to exclude liability;
- that where the clause has been negotiated by sophisticated parties capable of protecting their own interests and deciding how to allocate risk, not to place a strained construction upon the words of the exclusion clause which are “clear and fairly susceptible of one meaning only”; and
- irrespective of the above points, the Court’s interpretation of an exclusion clause may be broader than the literal interpretation of the clause if that interpretation would defeat the main object of the contract or create a commercial absurdity.
On this basis the Court decided that the exclusion clause prevented EE from claiming given that:
- the language of the Exclusion Clause was clear and unambiguous. With one express exception, the clause excluded liability for anticipated profits. The clause included no other qualification or limitation. As such, the Court decided that the “obvious implication is that the parties were seeking to cast the net as widely as possible” and that “it is difficult to see why the court should not give effect to the clear words of that agreement”;
- there was “a bespoke, lengthy and detailed contract negotiated between two sophisticated parties” and there was no suggestion that the negotiations occurred on anything but a level-playing field;
- detailed consideration had gone into the risks and benefits for each party, and both parties had agreed the limitation of liability set out in the Exclusion Clause, which was a “tailor made, stand along, clause apparently intended to have a wide reach”;
- the Exclusion Clause applies equally to damages claims brought by either party with respect to anticipated profits. The clause did not exist solely for the benefit of just one party, and
- although EE was precluded from bringing a claim for loss of profit, it was not prevented from seeking alternative relief (such as a claim for wasted expenditure or a claim for injunctive relief).
Key Points to Consider
This judgment highlights the importance of careful consideration of which liabilities are to be excluded in supply and distributorship agreements as well as agency agreements, irrespective of the application of the Commercial Agents Regulations. Parties should exercise caution when negotiating an exclusion clause and consider what remedies they may wish to pursue if the contractual relationship should deteriorate or breakdown entirely. The language of any exclusion clause needs to be clear and unambiguous, and accurately reflect the intentions of the parties.
This article first appeared in our agent law newsletter. Register to receive the newsletter here.
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