The High Court recently published its judgment in the case of Polypearl Ltd v E.On Energy Solutions Ltd EWHC 3045. The case was a preliminary issue on the interpretation of the exclusion clause.
The parties entered into two written agreements under which Polypearl was to supply E.On with cavity wall insulation products. Polypearl’s claim was based on there being an obligation on E.On to buy a minimum quantity of the products which E.On had not taken. Polypearl claimed loss of profits (around £2million) and loss of opportunity to receive its share of the carbon savings that would have been achieved but for the breach of contract (around £4.2 million). E.On denied that it was obliged to buy the minimum quantity and also pointed to the exclusion clause which it argued meant Polypearl could not recover loss of profits.
The Judge pointed out that a claim for loss of profits may be either a direct or an 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.
Clause 10.1 of the agreement stated that neither party would be liable for indirect or consequential loss “(both of which include, without limitation, … loss of profits….)”. Clause 10.7 capped direct losses to £1million. The Judge saw ambiguity in clause 10.1 because of the words in brackets. He stated: “It is to my mind not clear whether the words “both of which include, without limitation … loss of profits” mean that all loss of profits claims are included whether or not they are indirect losses… or whether it refers only to indirect loss of profits claims”. However, he went on to conclude that 10.1 only excluded indirect loss of profits claims. Polypearl’s claim for loss of profits, in the circumstances of the case, was for a direct loss so was not excluded. But, the amount which potentially could be recovered was limited by the cap in 10.7. He reached his conclusion for the following reasons:
- If it had been intended to provide that all loss of profits claims were to be deemed to be indirect and so excluded it would have been relatively easy to draft for that.
- The words in brackets 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 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.
- The most likely loss was a loss of profits and a construction of the contract which allowed a claim for that direct loss was consistent with business common sense.
This decision highlights how important it is to draft an exclusion clause carefully having considered the losses likely to result from a breach. If parties want to exclude all loss of profit claims, the clause must be clearly and unambiguously drafted to say so.