Markerstudy Insurance Co Ltd (a company incorporated under the laws of Gibraltar) and others v Endsleigh Insurance Services Ltd

This particular case serves as a good reminder of why it is important to draft liability clauses carefully.

The claimants in the case, Markerstudy Insurance and others, engaged Endsleigh Insurance Services to provide claims handling services to the claimants under a number of agreements. Markerstudy alleged a whole raft of breaches over a period of time and the court was asked to determine the meaning of parts of the liability clauses in the various agreements. The losses claimed by Markerstudy were mainly economic and related to the incorrect valuation of vehicles and the poor handling of claims by Endsleigh.

The court had to consider two points on the exclusion clauses. Firstly, are categories of losses, such as profit, business and savings, excluded as direct losses when they are combined into a clause excluding indirect and consequential losses? Secondly, does an overall financial cap on liability, for example 125% of fees paid under an agreement, include or exclude contractual and statutory interest?

In relation to the first point, the relevant clause said: "Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profits or savings and all other pure economic losses) arising out of or in connection with this Agreement."

Endsleigh read this as saying that "goodwill, business, profits, etc. are not recoverable at all, i.e. they are excluded as both direct and indirect losses and, conversely, Markerstudy claimed this clause was only an exclusion of indirect losses.

The issue was the same one that came up in the well known case of BHP V British Steel [1999] 2 Lloyd's Rep 583, where the clause set out categories of losses that were excluded like "production, profits, business" and went on to say that "any OTHER (our emphasis) indirect losses or consequential damages" were also excluded. In this case, the judge decided that the clause only excluded indirect or consequential losses and not direct losses.

In the Markerstudy case, the Judge followed similar principles to BHP and found that the clause only excluded indirect and consequential losses. The Judge held that the wording was not clear enough to exclude the specified categories of loss directly and commented that "there is nothing in the factual background at the time of the execution of the agreement that throws light on the intention of the parties". The Judge made it very clear that, if a contract is seeking to exclude categories of loss directly, the clause must say that without ambiguity - i.e. expressly!

Following on from the BHP case, many commercial lawyers are comfortable with the notion that a limitation clause constructed in a similar way to the one in BHP, and indeed in the Markerstudy case, only excludes indirect losses. However, this approach may not be as clear cut as you might hope. In the BHP case, the Judge did wrestle with the construction of the exclusion clause because if it had only intended to exclude indirect losses, what was the purpose behind listing "profits, production, business etc?" Judges do not like extra words in clauses which appear to have no additional purpose and usually try to give them meaning. There is a danger, therefore, that a Judge might, in the future, interpret a similar clause in a different way and find that listed categories of losses are excluded both directly and indirectly.

Turning to the second point, the relevant clause said: "Endsleigh's total liability in contract (our emphasis), tort (including negligence or breach of statutory duty) misrepresentation, restitution or otherwise, arising in connection with the performance of the Agreement shall be limited to the aggregate amount of fees received pursuant to clause * above".

Endsleigh's liability cap under this agreement was around £3.9 million and the issue was whether Markerstudy could recover interest on its damages award if that took the amount over the liability cap. The Judge found that any contractual interest due under the agreement must fall within the overall cap on liability, because the exclusion clause was limiting Endsleigh's "total liability in contract" and any contractual interest fell within that scope. However, the Judge found statutory interest (i.e. interest on damages) was something that was awarded by the court at its discretion and, therefore, on the construction of this clause fell outside the clause and could be claimed over and above the £3.9 million liability cap.

The key learning points from this case are:

  • If the parties to an agreement only want to exclude indirect losses, then the clause should say just that and the position should not be confused by listing additional categories of loss; and
  • The parties should be clear about whether contractual or statutory interest fall inside or outside of an overall financial cap on liability.

There is no substitute for being clear about what you mean in a liability clause and spelling it out succinctly. This case highlights the dangers of a formulaic approach to liability clauses, a trap we can all fall into very easily.