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Court Interprets ‘Loss of Profits’ Exclusion Clause

ConferenceIn the context of a multi-million-pound contract dispute, the Court of Appeal has adopted a narrow interpretation of an exclusion clause and rejected arguments that it freed one of the parties from any potential liability, whether in tort or contract, in respect of loss of goodwill, business, revenue or profits suffered by the other. The court ruled that such an interpretation would ‘defy business common sense’ and make the contract so one-sided as to render it incapable of reasonable implementation.

Under a five-year contract, caterers had agreed to provide services at a major conference and exhibition centre. The agreement was performed for in excess of three years prior to a breakdown in the parties’ relationship. The company that owned the venue gave notice of termination and the caterers, in turn, purported to treat the company’s actions as a repudiatory breach of contract and to accept the same as terminating the agreement.

A dispute concerning the correct construction of a clause in the contract was tried as a preliminary issue. The clause stated that the caterers acknowledged and agreed that the company would have no liability whatsoever in contract, tort, (including negligence) or otherwise for any loss of goodwill, business, revenue or profits incurred by the caterers.

Allowing the caterer’s appeal against an earlier ruling in the company’s favour, the court ruled that the clause had to be interpreted within the context of the entire agreement, in line with commercial reality and taking into account the duty of mutual co-operation that was implicit in the relationship. If the clause were taken at face value and interpreted widely, the effect would be to remove any sanction for non-performance of the company’s obligations.

The court noted that if the parties had intended the clause to exclude all liability for financial loss in the event of the company refusing or being unable to perform its obligations under the contract it would be expected that that would be spelt out clearly. Read in its proper context, the clause was primarily intended to be a qualification on the company’s potential liabilities in respect of third-party claims against the caterers, the court concluded.