In Polypearl Ltd v E.On Energy Solutions Ltd, England’s High Court had to consider the applicability of an exclusion or limitation clause to losses allegedly suffered by Polypearl as a result of alleged breaches by E.On of two agreements. Exclusion of liability clauses for indirect losses and loss of profits are commonly found in sale of building materials and equipment contracts.
The parties had entered into a Master Agreement, containing general terms and conditions and an Insulation Scheme Event Transaction Document (ISETD). It was Polypearl’s case that under the ISETD, E.on was obliged to purchase 153,000 m3 of Polypearl Platinum cavity Wall Bead and Polypearl adhesive (Products) during the contract period, but had only purchased 39,295m3. Polypearl claimed that as a result, it had suffered (i) loss of profits; and (ii) loss of opportunity to receive its share of carbon savings that would have been achieved but for the breach.
E.on denied that there was any obligation to purchase 153,000m3 and also sought to rely on two clauses of the Master Agreement which excluded liability for indirect losses (Clause 10.1) and limited liability for direct losses to ₤1 million (Clause 10.7).
The Exclusion and Limitation of Liability Clauses
Clauses 10.1 and 10.7 provided as follows:
Clause 10.1: "Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profits, loss of business, depletion of goodwill and like loss) howsoever caused (including as a result of negligence) under this Agreement, except in so far as it relates to personal injury or death caused by negligence."
Clause 10.7: "Subject to the above, the aggregate liability of each Party under this Agreement for any damage or direct loss howsoever caused (other than death or personal injury caused by the indemnifying party's negligence) will (save in respect of E.ON's obligation to pay the Charges or Polypearl's obligation to reimburse any of the charges) be limited to £1,000,000."
The Court referred to the law applying to exclusion and limitation of liability clauses as follows:-
- It is generally for the party seeking to rely on the clause to show that on its true construction, it covers the obligation or liability which it purports to restrict or exclude.
- In every case, it is a question of construction of the document as a whole.
- The exercise of construing the clause should be the same as that for construing any other term in a contract i.e. :
- The ultimate aim was to determine what the parties meant by the language used, which involved ascertaining what a reasonable person would have understood the parties to have meant.
- The reasonable person is one who had all the background knowledge which would reasonably be available to the parties in the situation they were in at the time of the contract.
- Where a contract term is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.
- Poorly drafted contracts did not attract a different approach, but the poorer the quality of the drafting, the less willing the court would be to be driven to semantic niceties to attribute to the parties an improbable or unbusinesslike intention.
- However, where the parties had used unambiguous language, the court must apply it.
The court held as follows:
- The general nature of the scheme envisaged by clauses 10.1 and 10.7 was clear. Liability for indirect losses was (subject to the specified exceptions) excluded and liability for direct losses was limited to £1,000,000. It was clear that the direct losses in clause 10.7 and the indirect losses in clause 10.1 were, as a matter of construction, intended to incorporate the whole spectrum of losses a party would suffer as a result of the breach of contract by the other. That was what a reasonable person would have understood the parties to have meant by those clauses.
- The loss and damage in Clause 10.7 was not limited to property damage or personal injury, as contended by Polypearl’s counsel. The reference in Clause 10.7 to "any damage or direct loss howsoever caused" was clear and unambiguous and there was no reason to limit it. The words "howsoever caused" were wide enough to include causation as a result of a breach of a central or fundamental term.
- The construction of Clause 10.1 was more difficult. The wording of Clause 10.1 was ambiguous. The starting point was that, as a matter of general law, a claim for loss of profits may be either a direct or indirect loss. It will be a direct loss if, at the time the contract was entered into, it was likely to result from the breach in question. It will be indirect if there are special circumstances known to the contract breaker at the time of the contract such that a breach would be liable to cause more loss.
- The ambiguity in Clause 10.1 arose because of the words in parenthesis. It was not clear whether the words "both of which include, without limitation … loss of profits" meant that all loss of profits claims were included whether or not they were indirect losses or whether it referred only to indirect loss of profits claims.
- The construction contended for by Polypearl’s counsel was to be preferred i.e. the words“both of which include, without limitation … loss of profits" was referring only to indirect loss of profits claims because:-
- The alternative construction contended for (i.e. that the words meant all loss of profits claims whether or not they were indirect losses) would involve the court in effect deeming a claim for direct loss of profits to be a claim for indirect loss of profits and the word “include” was not normally appropriate for such a construction. If it had been intended to provide that all loss of profits claims were deemed to be indirect and thus excluded it would have been relatively easy to do so.
- The words being in parenthesis were subordinate to the phrase "indirect or consequential loss". They were an explanation of it and not an attempt to place a direct loss in the indirect loss category.
- Clear express words must be used in order to rebut the presumption that neither party intends to abandon any remedies for a breach of contract arising by operation of law. The words in clause 10.1 did not clearly indicate that the parties intended to abandon a claim for direct loss of profits.
- Further, the most likely (and often the only) damage that Polypearl would suffer from a failure to order would be a loss of profits and it was unlikely that a business man would wish to exclude that direct loss.
Accordingly, the court answered the two questions before it as follows:
- Clause 10.1 of the Master Agreement did not exclude liability for Polypearl’s loss of profits or loss of opportunity.
- Clause 10.7 of the Master Agreement did limit liability for Polypearl’s loss of profits and loss of opportunity to ₤1million.
This case highlights the care that must be taken when drafting contractual clauses, (especially clauses seeking to limit the liability of a party in the event of a breach of the contract), to ensure that they are clear and unambiguous and reflect the parties’ true intentions. It is also noteworthy that the Court in arriving at its conclusion did not simply rely on the contra proferentem rule (i.e. a contract term will generally be construed against the drafter of the term if there is any ambiguity in its wording). Rather, the Court emphasized the importance of business common sense in interpreting a contract term.