Effective commercial contracts: Loss of profit exclusions and sole remedy clauses

11th February 2016

Whether or not a contractual term purporting to limit or exclude liability for breach is effective is a common battleground in commercial disputes. One area of particular difficulty is loss of profit exclusion clauses – what these clauses cover and whether they actually achieve the parties’ intentions.

Loss of profit exclusion clauses – the story so far

We have written previously on the key case of Kudos Catering (UK) Limited v Manchester Central Convention Complex Ltd [1] in which a party sought to exclude its liability for loss of profit in relation to a repudiatory (or, fundamental) breach of contract. In that case the Court of Appeal interpreted the relevant clause against its apparent plain English wording so that it did not exclude the claimant’s loss of profit claim.

English case law has long established that a party cannot exclude liability for repudiatory breach of contract and the Court of Appeal’s decision in Kudos illustrated that where an exclusion clause has such an effect, particularly in circumstances where the claimant would otherwise be left with no remedy, the court may well interpret the clause so that the claimant retains its claim, even where that means going against a literal meaning. The Kudos case gave rise to uncertainty for those seeking to draft, interpret and rely on exclusion clauses. A recent case has looked at the issue again and provides some guidance.

Scottish Power UK Plc v BP Exploration Operating Company Ltd

In Scottish Power v BP [2], the shutdown of an oil and gas field meant that BP failed to supply gas to Scottish Power, in breach of contract. During the shutdown, Scottish Power bought gas from elsewhere to meet its needs, and paid more than the contract price. Scottish Power then claimed the difference as damages from BP.

The dispute centred on two of the clauses in the parties’ commercial contract: the exclusion clause and the sole remedy clause.

Exclusion clause

The exclusion clause provided: “Save as expressly provided elsewhere in this Agreement, neither Party shall be liable to the other Party for any loss of use, profits, contracts, production or revenue or for business interruption howsoever caused and even where the same is caused by the negligence or breach of duty of the other Party”.

BP argued that Scottish Power’s claim was for “loss of use” or “loss of production” because it concerned Scottish Power’s inability to use gas produced from the field and BP’s lack of production of gas from the field. BP also argued that, by purchasing gas from elsewhere, Scottish Power had mitigated any loss of profit or revenue that it might otherwise have suffered, and that its claim should therefore also, or alternatively, be regarded as a claim for “loss of profit” or “loss of revenue”. On all fronts, therefore, BP’s case was that the exclusion clause covered, and therefore precluded damages for, all loss claimed.

The High Court disagreed. The judge found [3] that the clause could not have been intended to exclude liability for all losses caused by a party’s breach of duty. Rather, the clause excluded liability for certain specified types of further loss which go beyond the basic or normal measure of loss caused by a breach of contract. (In a non-delivery of goods case such as this, the normal measure of loss would be the difference between the contract price and the goods’ open market price, as was claimed here by Scottish Power).

The judge considered that the exclusion clause was targeted at the specifically identified different categories of loss, each of which he explained:

• Loss of use. This was the loss of a profit or benefit that Scottish Power had expected to gain from using the gas that BP had failed to supply.
• Loss of profits. This covered profits which might be lost if it was not possible to buy gas to replace the contracted delivery or, again, loss of profit that Scottish Power had expected to make from using the gas that BP had failed to supply.
• Loss of contracts. This covered the value of contracts that might be cancelled or not won because of BP’s breach.
• Loss of production. This was the loss caused if, because of BP’s non-delivery, Scottish Power could not use the gas to produce something else, such as electricity.
• Loss of revenue. Revenue might be lost if it was not possible to buy gas to replace the contracted delivery and/or this covered loss of revenue Scottish Power expected to make from using the gas that should have been delivered.
• Business interruption. The judge stated that this overlapped with the other items.

Therefore, despite its apparently clear and comprehensive wording, the exclusion clause failed.

Sole remedy clause

However, the contract also included a sole remedy clause, which contained a compensation mechanism by which BP undertook to supply gas at a reduced price once production restarted, to compensate for the gas it had failed to supply during the shutdown. The contract did therefore provide an agreed, sole remedy in the event of the failure to supply gas, and this clause was therefore effective to preclude any claim for further damages.

WM Comment

This case highlights the importance of having your terms and conditions or indeed any commercial contracts professionally reviewed. The legal principles surrounding loss of profit exclusion clauses are not straightforward and even where clauses appear to be comprehensive, they still may not perform or protect parties as expected. Your legal advisors should also be able to advise you in connection with the inclusion of any sole remedy clause or other pre-agreed contractual remedies [4], which may preclude the need to litigate when a breach of contract does occur and can provide certainty of exposure.

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[1] [2013] EWCA Civ 38
[2] [2015] EWHC 2658 (Comm)
[3] Ibid para. 179
[4] Such as liquidated damages provisions