Are you really excluded from liability?

Construction is about risk. All parties want to eradicate such risk as much as possible but, in the desire to do this, sometimes the drafting goes too far. Many construction contracts will include a general exclusion clause or a cap on liability – or sometimes both. This could attempt to restrict a party to recovering only certain types of loss and/or set an overall limit on the amount of damages a party will be liable for. What the parties may not realise is that the clauses they have included in their contracts could be interpreted in a way they had not intended, therefore leaving the parties inadequately protected and potentially liable for unexpected sums.

English law has historically taken a restrictive approach to exclusion clauses. However, this has changed in recent years, and the courts have been increasingly willing to accept that it is for the parties, not the courts, to agree how their losses are to be apportioned between themselves. However, the exclusion clause itself must be incorporated into the contract using clear, unambiguous language. If not, then the clause will be interpreted against the party seeking to exclude or limit its liability.

There has been a considerable amount of case law in recent years regarding exclusion clauses: whether or not they have been effectively incorporated into the contract, and if so, what losses they are actually excluding. The most recent is Polypearl Ltd vs E.On Energy Solutions Ltd [2014].

It is not uncommon for loss of profit, as a matter of law, to be construed as falling into the category of direct loss. In this case the court found that the loss of profits being claimed did fall into this category

Polypearl is in the business of cavity wall insulation and manufactures, and supplies polystyrene bead and adhesive. E.On is the well-known electricity supplier. The parties entered into contract in May 2011. Polypearl submitted that E.On was obliged to purchase 153,000 m3 of Polypearl’s product at £44.44 per m3, whereas in fact, only 39,295 m3 of the products were purchased. Polypearl therefore claimed that there was a breach of contract and claimed £2,103,542 for loss of profit and £4,218,037 for loss of opportunity to share in the carbon savings that would have been achieved had the breach of contract not occurred.

E.On argued that there was no obligation to purchase the remaining products. Further, it sought to rely on two clauses in the contract; one excluding liability for indirect losses and the other limiting liability for direct loss to £1,000,000. These clauses applied to both parties.

The clause excluding liability for indirect loss was as follows:

“Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profit, loss of business, depletion of goodwill and like loss) howsoever caused (including as a result of negligence) under this Agreement, except in so far as it relates to personal injury or death caused by negligence.”

It is not uncommon for loss of profit, as a matter of law, to be construed as falling into the category of direct loss. In this case the court found that the loss of profits being claimed did fall into this category. The question then was whether the words in parenthesis meant that this particular loss of profit was to be treated as indirect loss. The judge held that the wording of this exclusion clause was ambiguous as it is “not clear whether the words “both of which include, without limitation … loss of profits” mean that all loss of profit claims are included whether or not they are indirect losses … or whether it refers only to indirect loss of profits claims”.

Given the ambiguity in the drafting of this particular exclusion clause, the losses suffered by Polypearl did not fall within the scope of this exclusion and so were recoverable from E.On. The judge said that he had decided that the clause had been intended to be understood this way, as it was inconceivable that any businessman would wish to exclude any loss of profit from being recoverable as it was the most likely, and often the only, damage that the claimant would suffer from breach of this particular contract. However, he found that the limitation clause was properly drafted restricting Polypearl to only claim £1,000,000 for losses suffered by a breach as it was “clear and unambiguous”.

This case highlights the importance of ensuring that any exclusion or limitation clauses in your contracts are clearly drafted to cover the situations which you expect. Furthermore, one should bear in mind that whether or not a loss is “direct” or “consequential” can only be decided on a case by case basis. There is nothing inherently wrong with defining losses as either indirect or direct but the courts will still strain against an interpretation which effectively enables a party to get away scot free for breaching a contract.

Steven Carey is head of construction and engineering at Speechly Bircham