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Excluding And Limiting Liability In Commercial Contracts - Implications of a recent High Court decision

Most commercial contracts contain provisions excluding or limiting the liability of the parties to the contract. It has become an accepted part of most businesses’ risk management processes that they will not enter into contracts where their liability is uncapped.  The law places certain limits on the amount that can be recovered in a claim for breach of contract and, of course, there will always be practical limits on what can actually be achieved in these circumstances.  It’s an area of law which is regularly tested in the courts and the recent High Court case of Scottish Power UK Plc v BP Exploration Operating Company Ltd ([2015] EWHC 2658, 25 September 2015) has underlined a few points which are worth highlighting.

This was a complicated case involving a take or pay contract for North Sea gas. This type of contract obliges the buyer (in this case Scottish Power) to take delivery of a predetermined minimum quantity of gas each year and if that amount is not taken, then to pay for it in any event.  The dispute arose because the seller (BP together with some other parties) ceased to deliver gas for over three and a half years while the field was shut down for modifications to the platform and facilities.

The contract anticipated situations like this and the dispute reached the court because of disagreement over the meaning of two clauses. The first was a limitation of liability clause which stated:

Save as expressly provided elsewhere in this Agreement, neither Party shall be liable to the other Party for any loss of use, profits, contracts, production or revenue or for business interruption howsoever caused and even where the same is caused by the negligence or breach of duty of the other Party”.

The other clause was argued by BP to be the sole remedy available to Scottish Power for BP’s failure to deliver gas during the shutdown. We’ve edited what was quite a wordy piece of drafting, but in essence it stated:

The delivery of Natural Gas at [a 30% discount to the contract price]….. shall be in full satisfaction and discharge of all rights, remedies and claims howsoever arising whether in contract or in tort or otherwise in law on the part of the Buyer against the Seller in respect of underdeliveries by the Seller under this Agreement, and.…., the Buyer shall have no [other] right or remedy and shall not be entitled to make any claims in respect of any such underdelivery”.

In other words, once the gas field was working again, the amount of gas which should have been delivered during the shutdown would be provided at a 30% discount, but beyond that Scottish Power could not make any further claim.

As a High Court decision, Mr Justice Leggatt’s judgment is only binding on lower courts so this does not set a strong judicial precedent. It does, however, consider many of the recent authorities in this area of commercial law and reminds us of the effect and scope of these commonly included contractual provisions.

Interpreting commercial contracts

The judgment reminds commercial lawyers that when the courts interpret commercial contracts, they do not take into account what the parties actually intended. This may come as a surprise to those who are not regularly involved in drafting or litigating commercial contracts, but the test is an objective one.  In other words, the courts will ask what a reasonable person in the situation of the parties would have intended and they will take into account straightforward commercial common sense when deciding this.

Presumption that all remedies for breach are available

The starting point in a dispute such as this is the legal presumption that each party to a contract is entitled to all those remedies for its breach which arise by operation of law. This means that sufficiently clear language is required in the contract to exclude or modify the availability of such remedies.

The courts interpret limitation clauses restrictively

On the face of it, the limitation of liability clause in this case appears extremely comprehensive. It seems to say that any financial loss – even loss caused negligence – is excluded.  But the judge took a different view.  He said that it was clear that the clause was not intended to exclude liability for all losses caused by the other party's breach of duty – otherwise it would have said so.  His interpretation was that it excluded liability for certain specified types of loss only.

Total exclusions of liability will rarely if ever be effective

Many cases have considered whether a complete exclusion of liability in a commercial contract can be effective. While it might be possible to advance a technical legal argument that this can be done, the reality is that when tested, the courts will endeavour to defeat this.  They have the latitude to do this either by applying a restrictive interpretation to the clause or as Lord Diplock did in the Photo Production case in 1980, simply by deciding to strike it out as “repugnant”!

In the end, the Judge in this case concluded that even though the limitation clause did not, in his opinion, exclude all financial remedies, the circumstances of the claim meant that Scottish Power’s right of recovery was limited to the sole remedy of discounts to future gas supplies.

These are issues which we deal with regularly at Ortolan Legal. By its nature the law is in a constant state of change so we strongly recommend you review the wording you use in your commercial contracts to ensure it is up to date and consistent with the current approach of the courts.  Relying on precedent contracts which have not been regularly reviewed could expose a business to the very risks it is seeking to manage.

Posted on 11/04/2015 by Ortolan

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