The Court of Appeal has, yet again, held that a widely drafted exclusion clause represented the allocation of commercial risk between two parties in the satellite telecoms industry. The exclusion clause precluded the claimant from establishing a cause of action within a standard fraud carve-out from the exclusion clause, even where the defendant’s subcontractor had made false statements to the relevant regulatory body: (1) Interactive E-solutions JLT (2) Interactive E-solutions DMCC v O3B Africa Ltd [2018] EWHC 186 (Ch), 8 February 2018

Under a contract between the parties, O3B provided satellite services in Pakistan and Interactive provided satellite-based infrastructure. A dispute arose when Interactive refused to pay service fees to O3B. The relevant fees fell due when the relevant satellite system had been “successfully placed into commercial operation”, which was dependent upon receiving approval from the Pakistan Telecommunication Authority (PTA).

As a result of Interactive’s non-payment of the service fee, O3B purported to terminate the contract. Interactive brought an action for specific performance of the contract or, in the alternative, counterclaimed damages of USD55 million for breach of contract.

The contract contained a wide (and verbose) exclusion clause which excluded O3B’s liability for anything bar fraud, and also a clause that provided “Nothing… limits the liability of either Party arising from fraud”.

At first instance, Mr Richard Salter QC found that Interactive had been unable to establish an arguable cause of action not barred by the exclusion clause, and that only fraud claims fell outside the scope of the exclusion of liability.

What is a claim ‘arising from fraud’?

Interactive tried to bring its claims within the fraud exception to the exclusion clause. A key issue for the court was whether the allegations by Interactive were sufficient to make its claims ‘arising from fraud’.

Interactive argued that in the course of liaising with the PTA to obtain approval, O3B’s subcontractor had written a letter containing statements which Interactive alleged the subcontractor knew to be untrue and that O3B had “likely” been aware of. Interactive also claimed that O3B had known (i) that its infrastructure was not compliant; and (ii) that it had not been entitled to apply for approval from the PTA. Interactive therefore claimed that both O3B’s application for regulatory approval and its claim for payment from Interactive had been made fraudulently.

The Court of Appeal held that the clause “Nothing… limits the liability of either Party arising from fraud” means “liability in relation to which fraud is a necessary averment, otherwise the ‘liability’ would not arise from fraud. It would arise from something else”. That begged the question: what is fraud? O3B successfully argued that fraud had to mean a cause of action in which dishonesty is a necessary ingredient.

This was a problem for Interactive, as its claim was not based on any allegation that either it or the PTA had been misled by anything said or done by or on behalf of O3B. As such, Interactive did not claim that O3B was liable as a result of any dishonesty, but rather because its demand for payment had been invalid (because O3B had not been entitled to put the system into operation).

Interactive was therefore unable to invoke the ‘fraud’ carve-out and the Court of Appeal unanimously dismissed its appeal, finding that Interactive’s counterclaim did not fall within the words “excluding fraud”.

A commercial approach

Lewison LJ noted that although the courts were traditionally hostile to exclusion clauses, since the Unfair Contract Terms Act 1977, they had interpreted them less narrowly recognising (at least in commercial contracts made by parties of equal bargaining power) that exclusion and limitation clauses are “an integral part of pricing and risk allocation”. Lewison LJ noted that it had become common drafting practice to include fraud carve-outs to reflect that a contracting party might be willing to assume the risk of negligence by his counterparty, but not the risk of fraud.

Comment

As this decision demonstrates, bad behaviour (however serious) on the part of a defendant will not automatically bring a claimant’s cause of action within a fraud carve-out unless the claimant can establish a causal link between the fraud and the defendant’s purported liability.