Legal Briefing

Excluding liability for refusal to perform a contract

The In-House Lawyer Logo

Corporate and commercial | 01 October 2013

Exclusion clauses are a key mechanism for managing risk in contractual arrangements. In particular, exclusion clauses are commonly used to exclude liability for breaches of the contract, or other contractual claims arising out of it, although they may also seek to exclude liability more widely. 
 

The courts have historically taken a restrictive approach when construing exclusion clauses and have sought to limit their use, where possible, to circumstances in which it was considered fair and reasonable for parties to rely on them. However, this approach has changed in more recent times, which may largely be attributable to the enactment of the Unfair Contract Terms Act (UCTA) 1977 and the way it limits a party’s ability to rely on clauses which seek to exclude or limit liability for death or personal injury, breach of implied statutory terms, or those that are not considered to pass a test of reasonableness. As Lord Justice Moore-Bick acknowledged in Tradigrain SA v Interlek Testing Services (ITS) Canada Ltd [2007]:

‘… in recent years, [the courts have] been increasingly willing to recognise that parties to commercial contracts are entitled to apportion the risk of loss as they see fit and that provisions which limit or exclude liability must be construed in the same way as other terms’.

Moore-Bick’s comments suggest a willingness to allow the parties to rely on exclusion clauses, but as can be seen from the Court of Appeal’s decision in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013], a party will be prevented from relying on an exclusion clause where both parties cannot reasonably have intended it to have the effect claimed by the party seeking to rely on it. Accordingly, those clauses seeking to exclude all liability whatsoever and, in particular, liability for 
non-performance of a contract, will be construed more strictly than clauses that might only seek to limit liability, or exclude liability in narrowly specified circumstances.

KUDOS


The facts

Manchester Central Convention Complex Ltd (the Convention Complex) operated a conference centre and an exhibition venue. In April 2007, the Convention Complex entered into a contract with Kudos Catering (UK) Ltd (Kudos) whereby Kudos was to cater for events held in the Convention Complex’s venues for a term of five years. Kudos would earn its revenue directly from 
third-party event organisers, and would pay the Convention Complex a share of this income.

A little over three years into the contract a dispute arose between the parties and the Convention Complex wrote to Kudos seeking to terminate the agreement. Kudos treated the Convention Complex’s letter as a repudiatory breach of the agreement, which it accepted as terminating the contract. Kudos sued the Convention Complex for £1.3m of lost profits that it claimed it would have earned during the remaining 20 months of the contract. The Convention Complex denied repudiating the contract and argued that, in any event, it could not be liable for lost profits due to the operation of the following clause in the contract:

‘18.6 [Kudos] hereby acknowledges and agrees that [the Convention Complex] 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 [Kudos] or any third party in relation to this agreement…’

Kudos argued that clause 18.6 was not part of the contract and, in any event, it could not be properly construed as excluding 
the Convention Complex’s liability for 
non-performance of the contract.

The issue of whether clause 18.6 could exclude the Convention Complex’s liability was tried as a preliminary issue. It was assumed for the purposes of that trial that the Convention Complex had repudiated the contract and that Kudos had accepted the repudiation as terminating the contract.

The first instance decision

His Honour Judge Seymour QC, sitting as a deputy judge, held that the Convention Complex was entitled to rely on clause 18.6 to exclude any potential liability for repudiating the contract. Seymour QC appears to have considered clause 18.6 in isolation from the remainder of the contract and interpreted the clause as being ‘perfectly clear’ and held that it was not necessary:

‘… for the court to consider what the parties could possibly have intended if what they have actually stated is clear and unambiguous.’

Although Kudos had argued that the parties could not have intended that the Convention Complex could refuse to perform the contract and then be entitled to limit its liability in respect of that refusal, Seymour QC rejected that submission on the basis that Kudos could have refused the repudiation and resorted to other remedies to seek performance of the contract.

Kudos appealed the decision.

The Court of Appeal’s decision

The Court of Appeal overturned the 
decision of Seymour QC. Lord Justice Tomlinson, who delivered the leading judgment, found that Seymour QC was wrong to conclude that Kudos could have chosen to enforce the contract so as not to suffer financial loss. On that basis, he found that Seymour QC’s interpretation of clause 18.6 was to devoid the contract of content as it effectively removed any sanction for non-performance by the Convention Complex, which cannot have been what the parties had intended.

Could Kudos have refused repudiation and continued to perform the contract?

It had been submitted on behalf of the Convention Complex that Kudos had not been bound to accept repudiation and, had it wanted to enforce the contract, it would have been able to continue to perform. However, Tomlinson LJ reviewed the various provisions of the contract in some detail and concluded that, as the ongoing performance of the contract required mutual co-operation, the suggestion that Kudos could continue to perform in light of the Convention Complex’s repudiation was ‘wholly unsustainable’.

The legal authorities on 
interpreting exclusion clauses

Tomlinson LJ took into account various authorities in determining the correct approach to the construction of a clause that seeks to exclude liability for breach of contract, and specifically where the breach is repudiatory. He referred to the following judgments:

  1. Lord Wilberforce in Suisse Atlantique [1967] said that there must be a limit 
to the ambit of a clause that seeks 
to exclude liability for breach of contract. In that case, Lord Wilberforce concluded that parties cannot be 
taken to have contemplated that a clause should have such a wide ambit so as to deprive the parties of all contractual force.
  2. In EU Network Fiber v Abovenet [2007], Mr Justice Briggs said that if the language is ‘fairly susceptible of only one meaning’, then that is the meaning it should be given, unless it is repugnant to the contract.
  3. Lord Clarke in Rainy Sky v Kookmin Bank [2011] said the test in the exercise of construction was to: 
’… ascertain what a reasonable person… would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances.’
  4. In Co-operative Wholesale Society Ltd v National Westminster Bank [1995], Lord Justice Hoffmann acknowledged that it was not the job of the courts to rewrite the language that the parties had used, in order to make the contract conform to business common sense, but to the extent the wording could be given more than one construction: ‘… one chooses that which seems most likely to give effect to 
the commercial purpose of 
the agreement’.
  5. Lord Diplock in Modern Engineering v Gilbert-Ash [1974], said there is a presumption that neither party to a contract intends to abandon any remedies for its breach arising by operation of law and to rebut that presumption clear words must be used.
What had the parties intended?

Tomlinson LJ concluded on the basis of 
the authorities that the parties cannot 
have intended to exclude liability for 
non-performance of the contract as to do so would have been to devoid the agreement of any force. Given the presumption that the parties are not willing to abandon remedies for breach of contract arising by operation of law, the parties would have had to use very clear wording to exclude the Convention Complex’s liability in these circumstances.

Tomlinson LJ found that Seymour QC 
should have considered clause 18.6 in 
the context of the contract as a whole 
and, in particular, the context of the 
rest of the clause in which it appeared. 
He pointed out that the exclusion clause was a sub-clause of clause 18, which was entitled ‘indemnity and insurance’ and held that clause 18.6 was intended to qualify the wide ambit of clause 18.4 (an indemnity clause) which read:

‘18.4 The [Convention Complex] shall indemnify and keep indemnified [Kudos] against all actions, claims, demands, proceedings, damages, costs, charges and expenses whatsoever in respect of or in any way arising out of the provision of, or damage to, any property including property belonging to [Kudos] to the extent that it may arise out of the negligence of the [Convention Complex], its employees or agents.’

Tomlinson LJ added that both the content and the position of the exclusion clause suggested that it was intended to qualify the indemnity provided by clause 18.4, which provided wide-ranging indemnity, both for third-party claims made against Kudos and for charges incurred by Kudos itself as a result of the Convention Complex’s negligence. He reasoned 
that if the clause was intended to 
have a wider application, it would not 
have been positioned in the ‘indemnity 
and insurance’ section of the agreement 
and would have instead been presented 
as a freestanding clause elsewhere in 
the contract.

Tomlinson LJ held that something additional was intended than mere qualification of the indemnity offered in respect of the Convention Complex’s negligence and said that the reference to third parties in the exclusion clause was the key to its proper construction. The clause was intended firstly to limit the Convention Complex’s liability for third-party losses resulting out of the Convention Complex’s negligence that were brought home to Kudos; and secondly to limit the Convention Complex’s liability in respect of losses suffered by Kudos arising out of flawed performance of the contract. Tomlinson LJ’s reasoning was that the reference to third parties indicated that the circumstances in which the Convention Complex’s liability was intended to be excluded was similar to those which gave rise to an obligation to indemnify against third-party loss and that losses caused by negligence presupposed flawed performance of the contract rather than a failure to perform.

In Tomlinson LJ’s judgment, had the exclusion clause been intended to exclude liability for any breach of contract, including a failure to perform, there would have been no need to refer to third parties as a separate category because they would in any event have been excluded by the general words in the clause. He interpreted any ambiguity in the clause against the Convention Complex, as it was the party seeking to rely on the exclusion.

COMMENT

Kudos demonstrates that, despite the courts’ modern willingness to allow parties to apportion risk as they see fit, they will be reluctant to construe an exclusion clause in such a way that would exclude liability for repudiatory breach. It is apparent from Tomlinson LJ’s judgment and those authorities to which he referred, that parties could in theory exclude such liability, but the clause would need to contain very specific wording to that effect and it is unlikely parties will be willing to agree to a clause that prevents them from recovering damages where another party refuses to perform the contract. Perhaps the only circumstances where one can foresee such a clause being included in a contract is where it is included in standard terms and/or insisted upon by a party with much stronger bargaining powers, but in either scenario the exclusion clause is likely to fall foul of UCTA’s reasonableness test and be unenforceable in any event.

Consequently, it appears that, while parties remain able to exclude liability for defective performance of a contract, they cannot, in practice, exclude liability for a refusal or for an inability to perform. This is positive insofar as it protects parties from inadvertent consequences that might be said to follow from a natural reading of a clause contained within the contract, and prevents parties from protecting themselves from liability where they refuse to give effect to a contract they have entered into.

Parties should be entitled to apportion risk as they see fit, but it appears they will be prevented from abusing that entitlement.

By Christopher Pease, associate, and 
Nicole Gow, trainee, 
Edwards Wildman Palmer (UK) LLP.

E-mail: cpease@edwardswildman.com; 
ngow@edwardswildman.com.