Excluding liability for loss of profit and loss of bargain

1st April 2014

Section 50(1) of the Sale of Goods Act 1979 provides that where a buyer wrongfully neglects or refuses to accept and pay for goods, the seller may bring an action for damages for non-acceptance. How such damages are to be calculated is set out in section 50(2) of the 1979 Act, which states that “The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract”. Section 50(3) elaborates further, providing that where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market price at the time when the goods ought to have been accepted.

In Glencore Energy UK Ltd v Cirrus Oil Services Ltd [1] Glencore agreed to supply crude oil to Cirrus. In turn, Glencore entered into a contract to purchase the oil from its supplier, Socar Trading SA. Cirrus refused to accept the oil on the basis that it was blended. Glencore in turn terminated its contract with Socar and brought an action for damages against Cirrus under section 50.

The agreement between Glencore and Cirrus incorporated an exclusion clause which excluded the liability of both parties “… in respect of any indirect or consequential losses or expenses including (without limitation) if and to the extent that they might otherwise not constitute indirect or consequential losses or expenses, loss of anticipated profits, plant shut-down or reduced production, loss of power generation, black outs, or electrical shutdown or reduction, hedging or other derivative losses, goodwill, use, market reputation, business receipts or contracts or commercial opportunities, whether or not foreseeable”.

Cirrus argued that Glencore’s claim was simply a claim for loss of profit that it would have earned had the transaction completed and that this was excluded by the above clause.

The High Court disagreed, finding that the clause did not operate to exclude Glencore from claiming the losses suffered by Cirrus’ non-acceptance. It held that Glencore’s claim was not a claim for loss of profits but a claim for loss of bargain. It went on to say that the measure of damages in section 50(2) and 50(3) was not a computation of lost profit but was designed to compensate the seller, in this case Glencore, for loss of bargain – it was seeking to calculate the situation the seller would be in if it sold the goods in question to a substitute buyer at the time of the breach.

The Court said that if Cirrus’ contention was correct, it would have the effect of preventing Glencore from recovering any sums of money from Cirrus for Cirrus’ non-acceptance (as Glencore was not in any way liable for terminating its own purchase contract with Socar) and that, if this position – which the Court considered “uncommercial” – were to be a reflection of the parties’ intentions, then it would require very clear drafting to that effect. Such clear drafting was not present in the contract in question.

The clause is indicative of the approach that the courts are currently taking to exclusion clauses, namely that very clear wording is required to exclude liability for a particular type of loss and that the courts will generally apply a narrow construction to the scope of an exclusion clause in the case of ambiguity. This was seen last year, for example, in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2], where the Court of Appeal construed a loss of profit exclusion clause against its apparent plain English meaning so as to allow a claim.

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[1] [2014] EWHC 87 (Comm)
[2] [2013] EWCA Civ 38