The Court of Appeal (CA) has once again confirmed that an exclusion of liability for loss of profits will exclude a loss of profits – even if the claim is dressed up as a loss of revenue or avoided charges. This emphasises just how important it is to get contractual drafting right as the court expect to uphold the wording even if the outcome might with hindsight appear unfair.

Background

In the case of EE Limited v Virgin Mobile Telecoms Limited a dispute arose in relation to EE Limited's (EE's) provision of 2G, 3G and 4G (but not 5G) mobile network services to Virgin Mobile Telecoms Limited (VM). EE is one of four Mobile Network Operators (MNOs) and in that capacity owns and operates its own physical radio access network.

VM was a Mobile Virtual Network Operator, it did not have its own network and therefore had to contract with one or more MNOs to use their networks to provide services to its customers.

VM entered into an agreement with EE (the Agreement), the terms of which provided for VM to exclusively use EE's 2G, 3G and 4G mobile network services. In the absence of a further agreement VM was not required to use EE's 5G services and could provide those services to its customers from an alternative MNO.

Where 5G services were provided from an alternative MNO, VM could also use that alternative source to provide those same customers with 2G, 3G and 4G services (but only where the customers were signed up for 5G).

EE claimed that VM were in breach of the Agreement. EE alleged VM had in fact used a different MNO to provide 2G, 3G and 4G services to customers who had not signed up to 5G services. EE claimed for 'lost revenue' or for 'charges unlawfully avoided' in the region of £25 million.

VM asserted that EE's claim was excluded under the Agreement. Clause 34.5 provided that;

"neither Party shall have liability to the other in respect of:

(a) anticipated profits; or

(b) anticipated savings"

VM argued that EE's claim for lost revenue / charges unlawfully avoided was, in reality, a claim for anticipated profits and they applied to strike out EE's claim, or alternatively to obtain summary judgment.

What was the High Court decision?

The judge at first instance held that the essence of the claim was EE seeking to recover the profit it would have made if Virgin had not transferred the customers who should have remained on EEs 2G, 3G and 4G services.

Loss of anticipated profits meant the same as 'loss of profits'. In construing the clause in accordance with the ordinary methods of contractual interpretation it would be difficult to suggest that the claim was for anything other than loss of profits and the exclusion clause sought to exclude damages claims for loss of profits of any kind.

The judge therefore granted summary judgment in favour of Virgin, and EE appealed to the Court of Appeal (CA).

What was the Court of Appeal decision?

EE argued that the judge at first instance was wrong, in particular that:

  • the judge had been wrong to categorise the claim as one of loss of profits, it was a claim for diminution in price; and
  • the judge had incorrectly construed the exclusion of liability for anticipated profits as working to exclude their claim.

Zacaroli LJ held that the core issue to be decided was whether a claim in respect of anticipated profits, on a true construction of the clause in question, was a claim for something other than the loss of the value to EE of the contractual performance which would (but for the breach of contract) have been provided by VM. EE's arguments comprised three over-arching points:

  1. the judge's construction meant the exclusion clause excluding liability for loss of profit is capable of obliterating virtually every claim to recover expectation loss - and the courts had held on a number of occasions that not every claim for expectation loss fell within such a clause.
  2. the wording of the clause, and of other aspects of the Agreement, favoured the narrower construction that 'anticipated profits' only meant (and therefore only excluded claims in respect of) profits that were anticipated to be earned outside of the contract.
  3. the commercial consequences of the judge's construction – that EE would be left without a meaningful remedy for breach of the exclusivity obligation – should lead the court to give a narrower construction to the clause.

In handing down in his leading judgment, and dismissing the appeal, Zacaroli LJ found as follows:

Previous case law (no overarching principle)

There was no overarching principle of law that limits an exclusion of liability for loss of anticipated profits to losses other than expectation loss or diminution in price. There had been no repeated finding that not every claim for expectation loss would fall within such a clause, or that the cases cited by EE established that a calculation of loss based on diminution of price is not a loss of profit.

While in some cases a clause excluding 'loss of profits' had been found not to exclude the type of damage EE was seeking, those decisions were made on the facts of the particular cases in question

The contractual language

The language of the exclusion clause was clear and unequivocal:

  • The two subclauses (those excluding liability for indirect or consequential loss and excluding liability for anticipated profits) are to be read cumulatively - meaning that liability for anticipated profits was intended to indicate something additional to indirect or consequential losses. Loss of profits were to be excluded whether they fell under expectation loss or otherwise.
  • If the parties had intended anticipated profits to cover only direct loss of profit claims that did not fall within the ambit of expectation loss, the drafting would have said so expressly.

The commercial consequences

The consequences of the clause are commercially reasonable in all the circumstances of the Agreement. EE was not denied its only remedy for breach of the Agreement by VM (as it claimed). Remedies for injunctive relief and damages for wasted expenditure (which was not excluded, and which the CA had found previously was not the same as loss of profit) may still have been possible.

It was also relevant that the clause formed part of a lengthy contract drafted with the assistance of legal advice on both sides, and which involved the careful allocation of risk between the parties.

What do I need to think about?

The judgment in this case was a majority one, with Coulson LJ dissenting. Coulson LJ thought it was arguable that 'anticipated profits' should be more narrowly interpreted – accepting EE's argument that the exclusion clause as it was drafted would undermine the fundamental commercial agreement between the parties and leave EE without an effective damages claim for breach of a key provision.

However, the majority was happy that the clear and consistent language of the Agreement meant the exclusion clause worked to exclude EE's claim. It was not uncommercial (the majority considered) in circumstances where the Agreement had been carefully drafted with the assistance of legal advisors on both sides, where risk had been allocated between the parties, and they had contractual rights that could be enforced by other remedies.

If EE had intended that there should be a distinction between anticipated profits and loss of profits, or that the meaning of anticipated profits was to be interpreted narrowly just to include profits anticipated to be earned outside of the contract, that should have been made clear in the drafting of the Agreement.

This is yet another decision that illustrates the need for clear and precise contractual drafting, and for parties to make sure the drafting reflects what they think it does. It also reflects that cases around limitation provisions will almost always turn on their facts and specific drafting (rendering it even more important to take particular care when drafting, and to really scrutinise the provisions when contemplating bringing or defending a claim) – whilst past cases will inevitably provide useful guidance, the court will focus on interpreting the specific contract before it. Particular care should be taken when agreeing to potentially broad exclusions of certain categories of direct loss.

An exclusion of liability for loss of profit can sometimes be presented as a normal exclusion, but as this case demonstrates a loss of profit can often be the main or even only loss arising from a breach. Therefore, parties to a contract should carefully consider whether all liability for loss of profit should be excluded. In this case EE will regret excluding all loss of profit and would have preferred in hindsight to have had no exclusion for loss of profit (perhaps subject to a cap).

Finally, the Court did explain that whilst the remedy EE sought was not available to it, other remedies might have been. This should therefore serve as a reminder that the exercise of assessing all available options at the outset of a case is vital.

For more information on the issues discussed in this article, please contact Sean Adams, David Lowe or Andrew Smith.