The High Court has held that a supplier under a contract was not able to claim for loss of profit that arose when the other party failed entirely to perform its obligations under the contract.
In Motortrak Ltd v FCA Australia Pty Ltd, Motortrak and FCAA entered into a contract under which Motortrak would supply web-based marketing services to FCAA.The contract contained an exclusion clause stating:
"[N]either party shall be liable to the other for: (i) any indirect or consequential loss or damage at all; or (ii) any loss of business, capital, profit, anticipated saving, reputation or goodwill, arising out of or in connection with the Agreement or its subject matter.
In due course, FCAA came to believe that Motortrak had paid bribes to a company owned by FCAA’s former managing director (MD) to ensure that FCAA entered into the contract with Motortrak.
Eventually, FCAA treated itself as entitled to rescind the contract due to its former MD’s breach of duty. It told Motortrak to cease providing services and it stopped paying Motortrak’s invoices.
In the event, the court said FCAA was not entitled to rescind the contract, because it had continued to observe the contract after suspecting the bribes had been paid and so had “affirmed it”. As a result, when it stopped paying the invoices, FCAA committed a repudiatory breach of contract.
In response to this repudiatory breach, Motortrak terminated the contract and claimed (among other things) for damages for loss of profits. FCAA said it was not liable for loss of profit, citing the exclusion clause above.
Motortrak argued that the clause should apply only where loss of profits arises “in connection with the performance of the contract”, and not where FCAA simply refused outright to perform the contract. It said that, otherwise, the exclusion clause would deprive FCAA’s obligations of all contractual force.
What did the court say?
In short, the court agreed with FCAA.
Under English law, if an exclusion clause is unclear or ambiguous, the court must interpret it against the person trying to rely on it (in this case, FCAA). This is known as the “contra proferentemrule”. However, this case highlights two important limits to that principle:
- If the clause is mutual and works both ways, the rule does not apply. In this case, the exclusion clause was reciprocal, so the court could not interpret it against FCAA.
- The rule applies only if the exclusion clause is ambiguous. In this case, the court said the wording of the clause was clear, even if its effect would be to deprive Motortrak of any real remedy.
To support Motortrak’s claim, the court would have had to read language into the contract that was not necessary to make it work; essentially, to imply terms into the contract. It was not prepared to do this.
As a result, Motortrak had no claim against FCAA.
There are numerous cases that show how fragile exclusion clauses in contracts can be if not worded properly. This case is remarkable because it shows how a clearly and possibly inappropriately drafted exclusion clause can, conversely, lead to a contract party having effectively no remedy at all.
This judgment is a stark reminder of how critical it is to draft an exclusion clause carefully in the context of the contract in question. It is worth bearing the following in mind when drafting:
- Make the exclusion as clear as possible. Any uncertainty could result in the court implying terms the parties did not anticipate or in the clause being interpreted against the party relying on it.
- What kinds of breach should the exclusion clause cover? Consider whether the exclusion should not apply to a total failure to perform (as happened in this case).
- Make it clear whether the exclusion clause covers non-contractual claims. These might include tortious claims (such as negligence or misrepresentation) or claims for breach of duty. The contract will need to make it abundantly clear exactly what liabilities are being excluded.
- In most business-to-business (B2B) contracts, an exclusion clause will be governed by the Unfair Contract Terms Act 1977. Depending on what the clause is trying to exclude, either it will be void completely, or it will be enforceable only if it is reasonable.
- For this reason, try to structure exclusion clauses using sub-paragraphs, or separate different exclusions out entirely. That way, if a court decides that part of the clause is enforceable but another part is not, it can “sever” (or delete) the offensive part and leave the rest intact.
- Do not confuse loss of profit and indirect loss (or consequential loss). A loss of profit can be indirect, but often it will be direct. Simply excluding indirect loss will not necessarily exclude all loss of profit. The exclusion clause above shows how to separate the two concepts elegantly.