The extent to which exclusion clauses in commercial contracts can be enforced against the other party is an issue which frequently comes before the court. The award-winning litigation lawyers at ParrisWhittaker are specialists in advising businesses on their contractual terms and have a successful track record in support businesses in disputes.
Exclusion clauses are a common feature in commercial contracts, playing a vital role in limiting or excluding the rights of one party in certain circumstances. However, they need to be carefully drafted given that they can be unreasonable or unfair.
In a recent case1, the UK’s Court of Appeal considered the construction of an exclusion clause and whether it was drafted so as to exclude wasted expenditure. More than £80m turned on the issue.
What’s the background?
The claimant company agreed to provide tech giant IBM with a new IT system, but things went wrong with its delay. It was never implemented. A dispute arose in relation to an unpaid IBM invoice for £2.9m and the contract was then terminated by IBM, though both blamed each other for the termination.
The claimant sought £132m in damages from IBM claiming that it had wrongfully repudiated the contract. IBM counterclaimed for the unpaid invoice. The trial judge found in favour of IBM but his decision was overturned on appeal, in an interesting ruling on construction and the nature of financial losses and costs.
Proper construction
The contract included an exclusion clause which expressly excluded claims including for loss of profit and revenue savings. A key issue for the court was whether the exclusion clause also excluded liability for wasted expenditure.
The Court of Appeal ruled that the natural and ordinary meaning of the words used in the clause did not exclude wasted expenditure.
The court gave a useful reminder of the proper approach to be taken to exclusion clauses. “The more valuable the right, the clearer the language of any exclusion clause will need to be; the more extreme the consequences, the more stringent the court must be before construing the clause in a way which allows the contract-breaker to avoid liability for what may be his catastrophic non-performance…”
It found that there was nothing in the exclusion clause here to suggest that the costs inevitably incurred by the claimant in the expectation that the IT project would be completed satisfactorily, would somehow be irrecoverable if IBM repudiated the contract.
Different types of losses
Importantly, the court distinguished between different types of losses, for example loss of profit versus wasted expenditure. Claims for wasted expenditure are, it said, “an entirely different animal” to consequential losses.
To be able to claim such wasted expenditure is a valuable right – it made commercial sense that wasted expenditure was not excluded by the exclusion clause.
What does this mean?
This ruling illustrates the importance of applying the correct approach to contractual interpretation and the relevance of good business sense in drafting and interpreting exclusion clauses. The different types of loss need to be considered and, if required, expressly included within the exclusion cause to avoid any risk of liability for the loss in the case of a claim.
It’s also vital to remember that effective contract drafting is rarely a simple task. Great care needs to be taken in the wording used to ensure your rights are adequately protected should things go wrong.
The solicitors at ParrisWhittaker are experienced in advising and representing commercial clients in all sectors on their commercial relationships, including the financial implications when contracts are terminated.
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