In the recent case of Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd (2012) the Court of Appeal found that a clause excluding liability for loss of profits applied only to defective performance, and not to a refusal to perform. In reaching this judgment, the Court departed from a literal reading of the clause and instead construed it in accordance with business common sense.
In April 2007 Kudos Catering (UK) Ltd (the "Claimant") entered into a five year contract with Manchester Central Convention Complex Ltd (the "Defendant") to supply catering services at two venues operated by the Defendant. The Defendant terminated the contract two years early due to a loss of confidence in the Claimant; the Claimant in turn considered this to be a repudiatory breach, accepted the termination and claimed for loss of profits of £1.3 million.
The Defendant argued that a claim for loss of profits was excluded by clause 18.6 of the contract, which provided:
"The Contractor [the Claimant] hereby acknowledges and agrees that the Company [the Defendant] shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by the Contractor or any third party in relation to this Agreement…".
The proper construction of the exclusion clause was tried as a preliminary issue. The Judge took a literal approach to the clause, and held that all liability for the Claimant's loss of profits was excluded. As the words of the clause were "perfectly clear" and "susceptible of only one possible interpretation" there was no sensible question of construction for the court to consider. It was also not appropriate to consider the intention of the parties given the clear and unambiguous wording of the clause.
The Judge rejected the Claimant's submission that this would leave them without a remedy for breach of contract; the Claimant was not bound to accept the repudiation by the Defendant, and there were other remedies available to enforce the contract, such as specific performance.
The Claimant appealed.
The decision was overturned in the Court of Appeal, which held that the contract must be construed in accordance with business common sense.
Tomlinson LJ noted that specific performance was not a practical possibility. Performance of the catering contract depended on daily and detailed co-operation between the parties. The Court also expressed reservations as to whether the Defendant could be compelled to continue to employ a caterer in which it had lost confidence. The only remedy for a breach of contract, therefore, lay in a claim for loss of profits. A literal interpretation of the exclusion clause, as adopted by the trial judge, would effectively bar such a claim and deprive the Claimant of any sanction for the Defendant's non-performance. The contract would therefore be "devoid of contractual content" and reduced to a mere declaration of intent. It was inherently unlikely that this was intended by the parties.
The Court then sought to give effect to this intention by considering the exclusion clause in its wider context. Both the position and the content of the clause suggested that it was intended to qualify an indemnity given by the Defendant to the Claimant in an adjacent provision. This would explain the reference in the exclusion clause to third party liability, which could only sensibly be read as qualifying the extent to which the Defendant must indemnify the Claimant against a third party claim. Such third party loss could only be suffered as a result of defective performance of the contract, and not by a refusal to perform it.
It was held that the reference to these third party losses informed the proper construction of the exclusion clause. The clause operated to exclude loss incurred through defective performance of the contract, but not those losses caused by a refusal to perform or be bound by the contract. Tomlinson LJ stated that this decision was "a legitimate exercise in construing a contract consistently with business common sense and not in a manner which defeats its commercial object".
While the decision in this case turned on the particular wording of the contract, the case demonstrates that the courts are willing to use language as a flexible instrument in order to give effect to the commercial purpose of a contract. It also reinforces the rule that contractual provisions must be construed in the context of the contract as a whole.
The practical points to take from the case are as follows:
- When drafting exclusion clauses, one should keep in mind the court's presumption that neither party to a contract intends to abandon any remedies for its breach arising by operation of law. Clauses that deprive a party of a substantial remedy may be interpreted restrictively.
- Those parties wishing to exclude all liability for financial loss must use clear and unambiguous wording. Ideally, the contract should spell out the commercial justification for the exclusion of liability.
- The exclusion clause should be free-standing. In Kudos the clause was part of a series of sub-clauses dealing with the provision of indemnities and insurance. The Judge held that it was not the place in which one would expect to find a wide-ranging exclusion clause of general application.
- The headings should be an accurate guide to the terms of the contract. In Kudos, despite the contract providing that headings were for ease of reference only and should not affect construction of the contract, they were seen as a further indication that the exclusion clause related to defective performance and not to a refusal to perform.