The wording of many exclusion clauses and limitations of liability may not cover claims in unjust enrichment or restitution.

Exclusion clauses and limitations of liability are a common feature of commercial contracts, but how far do they go? A recent case in the Western Australian Court of Appeal considered the effect of contractual limitations on liability when a claim was made for restitution based upon economic duress.

Its findings in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2013] WASCA 36 should give pause to anyone seeking to rely upon exclusion clauses and limitations of liability, particularly in standard form contracts.

The gas supply agreement goes up with a bang

A Western Australian electricity generator and supplier, Verve Energy, entered into a gas sale agreement (GSA) with certain participants in the North-West Shelf Joint Venture (Sellers). The Sellers and Apache Energy were the two principal suppliers of gas into the Western Australian market at that time.

Under the GSA, the Sellers committed to supply Verve Energy up to a prescribed maximum daily quantity of gas each day. They would also use their reasonable endeavours to make available for delivery up to an additional prescribed quantity of gas at a prescribed price.

The GSA also contained two crucial clauses:

  • the Seller's liability "in respect of" any failure to use reasonable endeavours to supply additional gas was limited to the sum calculated using a specified formula; and
  • the remedies expressly set out in the GSA were stated to be the sole and exclusive remedies available in respect of any breach of the GSA, or for negligence or any other tort arising from any act or omission in the course of or in connection with the performance of the GSA.

The 2008 explosion at Apache Energy's Varanus Island facility reduced the supply of gas into the WA market by approximately 30%. The next day, the Sellers' agent informed Verve Energy that they would not be able to supply additional gas. They could, however, supply the equivalent quantity of gas at a greater price than the prescribed price.

Under protest, Verve Energy entered into a series of short-term contracts with the Sellers for additional gas at this higher price.

At trial and on appeal the Sellers were found to have breached their reasonable endeavours obligation under the GSA. Verve Energy also claimed against the Sellers for restitution of sums paid under economic duress.

Economic duress

Verve Energy contended that the Sellers' refusal to supply additional gas, resulting from a breach of their reasonable endeavours obligation under the GSA, was illegitimate pressure on Verve Energy which was a cause of it entering into the short-term gas contracts.

The Court of Appeal agreed. It did not matter that the Sellers had not made any threats or actually demanded that Verve Energy enter into the short-term gas contracts. Nor did it matter that the Sellers genuinely believed that they were not in breach of their best endeavours obligation and, accordingly, were not acting for an improper purpose.

Did the contractual limitation on liability affect Verve Energy's economic duress claim?

Verve Energy claimed the difference between the amount it paid for the additional gas under the short-term contracts, less the amount it would have paid for the additional gas at the prescribed price under the GSA.

The Sellers argued that the contractual exclusions on liability were an effective bar to a claim based upon economic duress of the type advanced by Verve Energy.

By a majority of two to one, the Court of Appeal rejected this argument. It found that the connecting words "in respect of" were not wide enough to capture liability in unjust enrichment or restitution for economic duress, even though an essential element of these claims was the Sellers' contractual breach (ie. the failure to use reasonable endeavours to supply additional gas). The Sellers' liability for economic duress stemmed not from the failure to use reasonable endeavours, but in taking advantage of the pressure generated by that breach to obtain a benefit that was well outside the scope of the GSA.

Similarly, the sole and exclusive remedies clause was only directed to breaches of the GSA or for a tort that was relevantly connected with conduct under the GSA.

Ultimately, Verve Energy failed on its economic duress claim, but only because it did not terminate the short-term gas contracts. This was held to be an essential precondition to a claim in unjust enrichment or restitution, based upon the general principle that restitution does not operate in respect of money paid pursuant to an effective contract. As the court noted, a contract procured by economic duress is voidable rather than void.

Pay attention to clauses limiting or excluding liability

While the facts in Verve Energy are somewhat unusual, the decision provides a timely reminder of the need to pay close attention to the wording of any clause which seeks to exclude or limit liability for default, breach or non-performance, such as those in standard form contracts, and amend where necessary.

You should not assume that non-contractual claims will have a sufficient connection to a particular contractual obligation to be covered by a clause which excludes, or limits, liability "in respect of" the failure to perform that obligation.

Moreover, without clear and direct wording, a contractual regime providing for the consequences of non-performance may not exclude non-contractual claims – such as claims of a restitutionary nature – whether arising at common law or in equity.