The High Court recently considered whether a “consequential loss” exclusion clause of the type commonly found in the oil and gas industry that sought to exclude liability for loss of expenses and profits extended to excluding damages under Sections 50(2) and (3) of the Sale of Goods Act 1979 (the “Act”). Interestingly, the High Court decided that the exclusion clause did not prevent the claimant from claiming damages under the Act.

Background

The case of Glencore Energy UK Ltd (“Glencore”) v Cirrus Oil Services Ltd (“Cirrus”) [2014] EWCH 87 (Comm) considered a contract for the sale and purchase of crude oil from the Ebok field in Nigeria (the “Sales Contract”) and a subsequent claim brought by Glencore against Cirrus for repudiation of the Sales Contract.

Under the Sales Contract, Glencore agreed to sell crude oil to Cirrus, which it had in turn agreed to purchase under another contract from its supplier, Socar Trading SA (“Socar”). After the Sales Contract had been entered into, Cirrus refused to proceed with the purchase of crude oil after learning that the product was blended. Glencore accepted that Cirrus had repudiated the Sales Contract and subsequently terminated its contract with Socar since it could longer sell the crude oil to Cirrus. Glencore then brought a claim against Cirrus for non-acceptance under Sections 50(2) and (3) of the Act.

Section 50(1) of the Act states that where a buyer wrongfully neglects or refuses to accept and pay for goods, the seller may maintain an action against him for damages for non-acceptance. Section 50(2) of the Act states that  “the measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer's breach of contract” and section 50(3) of the Act states that “where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted or (if no time was fixed for acceptance) at the time of the refusal to accept”.

Cirrus argued that Glencore’s claim under Sections 50(2) and (3) of the Act was simply a claim for loss of profit that Glencore would have earned had the transaction been completed. Cirrus stated that all liability for such loss of anticipated profits was excluded by the relevant exclusion clause, regardless of whether or not such losses were seen to be indirect or consequential losses or expenses.

Exclusion Clause

The Sales Contract incorporated Section 32 of the BP General Terms and Conditions for the Sale and Purchase of Crude Oil by reference which stated:

“Except as specifically provided in the Special Provisions or in Section 12.4, in no event, including the negligent act or omission on its part, shall either party be liable to the other, whether under the Agreement or otherwise in connection with it, in contract, tort, breach of statutory duty or otherwise, in respect of any indirect or consequential losses or expenses including (without limitation) if and to the extent that they might otherwise not constitute indirect or consequential losses or expenses, loss of anticipated profits, plant shut-down or reduced production, loss of power generation, black outs, or electrical shutdown or reduction, hedging or other derivative losses, goodwill, use, market reputation, business receipts or contracts or commercial opportunities, whether or not foreseeable”.

Decision

The High Court did not accept Cirrus’s submissions and held that Glencore could recover damages from Cirrus. The High Court held that the difference between the contract price and the market price was not a computation of lost profit and that the measure of damage constituted by Section 50(2) and (3) of the Act was designed to compensate the seller for loss of bargain by calculating the situation that the seller would be in if he sold the goods in question to a substitute buyer at the time of the breach. Since this calculation was not a calculation of lost profits, the exclusion clause did not operate to exclude Glencore’s claim. The High Court further held that if Cirrus’s statements were correct then Glencore would not be entitled to recover any sums of money from Cirrus since it suffered no losses itself in terminating its contract with Socar. Such an outcome would require very clear words, which were not found within the wording of the Sales Contract.

Drafting Tips

This case provides yet another example of the need to draft clauses which exclude certain heads of loss within a consequential and indirect loss exclusion clause very clearly. The Courts construe exclusion clauses strictly and absent express wording to exclude a particular type of loss, the Courts will be slow to give an expansive interpretation to an exclusion in a contract. If the parties intend to exclude claims for a specific type of loss then this should be very clearly stated within such a clause.

For the full case please click here.