The Court of Appeal has handed down a judgment that considered the effect of an exclusion clause that sought to exclude liability for claim for damages in respect of “anticipated profits”.

The case is noteworthy in a number of respects. First, it is a cautionary reminder of the limited utility in disputes like this of relying on previous cases that may have involved similar contractual wording, since the Court was at pains to point out that each case will be determined on its own facts. Second, it provides a helpful summary of the law on the interpretation of exclusion clauses. Third, the judgment of the Court of Appeal is a fascinating insight into the reasoning of judges when a case is by no means straightforward: each judge wrote his own opinion, Lord Justice Phillips dissenting from Lord Justice Zacaroli, and it fell to Lord Justice Coulson to break the tie, whilst acknowledging that he did “not find the central issue in this case easy to decide”.

Background

The case concerned a Telecommunications Supply Agreement between EE Limited (“EE”) and Virgin Mobile Telecoms Limited (“Virgin Mobile”). Under the Agreement, EE would provide Virgin Mobile with access to its mobile network so that Virgin Mobile customers could use 2G, 3G, and 4G mobile services. The Agreement also contained an exclusivity clause providing that Virgin Mobile would use EE’s network exclusively for a designated period.

The Agreement did not at first include any provisions about 5G services. It was subsequently amended to provide for a potential agreement between EE and Virgin Mobile in relation to 5G services, but also stated that, in the absence of an agreement, Virgin Mobile would be entitled to provide 5G services to its customers from a different Mobile Network Operator (“MNO”). It further provided that where a customer was provided with 5G from an alternative MNO, Virgin Mobile was entitled also to provide those customers with 2G, 3G and 4G services from that same alternative MNO to avoid them having multiple service providers.

After the launch of 5G services by EE, and in the absence of an agreement with EE for those services, Virgin Mobile entered into an agreement with Vodafone for the supply of 5G services. It subsequently began migrating customers from the EE network to the Vodafone network.

EE claimed that the migration of customers to Vodafone for not only 5G services but also 2G, 3G and 4G  meant that Virgin Mobile was in breach of the exclusivity clause in the Agreement. Virgin Mobile denied the breach, but also argued that, in any event, the loss and damage that EE claimed was for “anticipated profits” which fell within an exclusion clause in the Agreement which stated the following:

34.5 Except for any damages claims by VM pursuant to Clause 34.2(c), to which Clause 34.3 applies (which EE acknowledges may include claims of damages for loss of profits), and for no other damage claims whatsoever, neither Party shall have liability to the other in respect of:

(a) anticipated profits; or

(b) anticipated savings.

High Court Judgment

Virgin Mobile applied for a strike out/summary judgment application on the basis that EE’s claim was one for “anticipated profits” and, as such, was caught by the exclusion clause. In Virgin Mobile’s view, “anticipated profits” ought to be interpreted widely so as to be akin to “loss of profits”.

EE denied that its claim was for “loss of profits”, but instead was for “charges unlawfully avoided”. As such, the exclusion clause did not bite. It also added that the broad interpretation of “anticipated profits” suggested by Virgin Mobile meant that the exclusivity clause in the Agreement would be “deprived of all contractual force and would be reduced to a mere statement of intent”.

The judge surveyed in detail the relevant case law on interpreting contracts generally, and exclusion clauses in particular (which are set out at the end of this article). Ultimately, she held that EE’s argument that its claim was for something other than a claim for loss of profits was “fanciful”.

Turning to the true construction of “anticipated profits” – and having considered the admissible surrounding circumstances and the natural and plain meaning of the words – the judge held that “anticipated profits” was susceptible of one meaning only: “it sought to exclude damages claims for loss of profits of any kind which it was foreseeable would be made by either party”. She also rejected EE’s argument that a broad interpretation of “anticipated profits” would reduce the exclusivity clause to a mere statement of intent, explaining that the Agreement still afforded remedies to EE in the event of a breach of the exclusivity obligation, including injunctive relief.

Court of Appeal

Lord Justice Zacaroli delivered the leading judgment and neatly summarised the nature of the appeal before the court: “the core issue between the parties is whether a claim in respect of anticipated profits means, on the true construction of clause 34.5(a), a claim for loss of profit other than expectation loss. Put another way, whether it is something other than the loss that consists in the value to EE of the contractual performance which would have been provided by [Virgin Mobile] but for the breach of contract”.

The judgment makes for interesting reading because of the different conclusions that each of the Lord Justices reaches. However, Lord Justice Coulson provides an important reminder that judgments like this will rarely have much precedential value: “in the end, of course, these decisions almost always come down to the words used and the commercial background against which the words must be construed, so other cases are always of limited utility”.

In this case, it fell to Lord Justice Coulson to cast the ‘deciding vote’ after Lord Justice Zacaroli rejected the appeal, and Lord Justice Phillips allowed it. Lord Justice Coulson explained that he was initially attracted to Lord Justice Phillips’ analysis which posited that “it would be surprising if the parties intended that Virgin Mobile could breach the key exclusivity provision, unlawfully diverting its customers to a third party supplier, without incurring liability to pay EE damages reflecting the loss of revenue resulting from that breach. A right to claim for the amount of lost charges (less costs savings, in the unlikely event that there were any) by reason of such diversion would be conventional, straightforward and would simply reflect the commercial bargain made. To exclude that right would undermine the bargain and it is unclear why the parties would have so provided consistently with business common sense”.

However,  Lord Justice Coulson ultimately sided with Lord Justice Zacaroli, although he suspected that he had reached his conclusion “with a little more reluctance than Zacaroli LJ”, and he admitted that he had “not found the central issue in this case easy to decide”. As he explained, for EE’s claim to fall outside the exclusion clause, EE would have to argue that, as a matter of construction, “anticipated profits” referred to profits anticipated to be earned outside the Agreement. In his view, that required “the insertion of words that are just not there.” Instead, he preferred the analysis of Lord Justice Zacaroli who held that the natural and ordinary meaning of the phrase ‘liability…in respect of anticipated profits’ “merely refers to liability in respect of profits that it was anticipated would be, or would have been, made, but which will not be, or were not, made because of the breach of contract. In other words, it has the same meaning as the phrase “claims for lost profits“.

As for the commercial consequences of reaching the conclusion that EE’s claim fell within the exclusion clause, both Lord Justices Coulson and Zacaroli rejected the idea that this created a commercial absurdity. Lord Zacaroli cited with apparent approval the view that “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”. However, he explained that “I do not think that the judge’s construction is to be rejected on the basis that it is uncommercial…it is part of a carefully drafted agreement which allocates risk between the parties. On the judge’s construction, exclusion of claims for loss of expectation leaves the parties with valuable contractual rights, readily enforceable in a range of circumstances by specific performance or injunction, or by awards of damages based on wasted expenditure”.

To read the judgment in full, click here.

Helpful summaries from the case on interpreting contracts and exclusion clauses:

Interpreting contracts generally

• The court construes the relevant words of a contract in their documentary, factual and commercial context, assessed in the light of (i) the natural and ordinary meaning of the provision being construed, (ii) any other relevant provisions of the contract being construed, (iii) the overall purpose of the provision being construed and the contract or order in which it is contained, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions – see Arnold v Britton [2015] UKSC 36, [2016] 1 All ER 1, [2015] AC 1619 per Lord Neuberger PSC at paragraph 15 and the earlier cases he refers to in that paragraph;
• A court can only consider facts or circumstances known or reasonably available to both parties that existed at the time that the contract or order was made – see Arnold v. Britton (ibid.) per Lord Neuberger PSC at paragraph 20;
• In arriving at the true meaning and effect of a contract or order, the departure point in most cases will be the language used by the parties because (a) the parties have control over the language they use in a contract or consent order and (b) the parties must have been specifically focussing on the issue covered by the disputed clause or clauses when agreeing the wording of that provision – see Arnold v. Britton (ibid.) per Lord Neuberger PSC at paragraph 17;
• Where the parties have used unambiguous language, the court must apply it – see Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER (Comm) 1, [2012] 1 Lloyd’s Rep 34 per Lord Clarke JSC at paragraph 23;
• Where the language used by the parties is unclear the court can properly depart from its natural meaning where the context suggests that an alternative meaning more accurately reflects what a reasonable person with the parties’ actual and presumed knowledge would conclude the parties had meant by the language they used but that does not justify the court searching for drafting infelicities in order to facilitate a departure from the natural meaning of the language used – see Arnold v. Britton (ibid.) per Lord Neuberger PSC at paragraph 18;
• If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other – see Rainy Sky SA v. Kookmin Bank (ibid.) per Lord Clarke JSC at paragraph 2 – but commercial common sense is relevant only to the extent of how matters would have been perceived by reasonable people in the position of the parties, as at the date that the contract was made – see Arnold v. Britton (ibid.) per Lord Neuberger PSC at paragraph 19;

• alance between the indications given by the language and those arising contextually, the court must consider the quality of drafting of the clause and the agreement in which it appears – see Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2018] 1 All ER (Comm) 51, [2017] AC 1173 per Lord Hodge JSC at paragraph 11. Sophisticated, complex agreements drafted by skilled professionals are likely to be interpreted principally by textual analysis unless a provision lacks clarity or is apparently illogical or incoherent– see Wood v Capita Insurance Services Ltd (ibid.) per Lord Hodge JSC at paragraph 13; and
• A court should not reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight, because it is not the function of a court when interpreting an agreement to relieve a party from a bad bargain – see Arnold v. Britton (ibid.) per Lord Neuberger PSC at paragraph 20 and Wood v. Capita Insurance Services Limited (ibid.) per Lord Hodge JSC at paragraph 11″.

Interpreting Exclusion Clauses

• The exercise of construing an exclusion clause must be undertaken in accordance with the ordinary methods of contractual interpretation. Commercial parties are free to make their own bargains and to allocate risks as they think fit; exclusion and limitation clauses are an integral part of pricing and risk allocation. The principle of freedom of contract requires the court to respect and give effect to the parties’ agreement (see Interactive E-Solutions JLT v O3b Africa Ltd [2018] EWCA Civ 62 at [14] per Lewison LJ and Triple Point Technology Inc v PTT Public Co Ltd [2021] AC 1148 at [108] per Lord Leggatt with whom Lord Burrows agreed).
• However, a vital part of the setting in which parties contract is a framework of rights and obligations established by the common law. In construing an exclusion clause, the court will start from the assumption that in the absence of clear words the parties did not intend to derogate from those normal rights and obligations. (Modern Engineering (Bristol) Ltd v Gilbert Ash (Northern) Ltd[1974] AC 689 per Viscount Diplock at page 717H; Triple Point at [108]-[110]; Soteria v IBM at [34] and Sara & Hossein Holdings Ltd v Blacks Outdoor Retail Ltd [2023] 1 WLR 575 per Lord Hamblen at [48]).
• The more valuable the right, the clearer the language of the exclusion clause will need to be if it is to be given effect (Stocznia Gdynia v Gearbulk Holdings[2009] EWCA Civ 75, per Moore-Bick LJ at [23]; Triple Point at [110] and Soteria v IBM at [35], [37] and [60]).
• Unclear words will not suffice; if linguistic, contextual and purposive analysis do not disclose an answer to the question with sufficient clarity, any ambiguity or lack of clarity must be resolved against the party seeking to exclude liability (Dairy Containers Ltd v Tasman Orient Line CV (The Tasman Discoverer)[2004] UKPC 22 at [12], per Lord Bingham of Cornhill and Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128 at [16]-[19] and [21] per Briggs LJ).
• However, “[i]n commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne…it is…wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only…” (Photo Production Ltd v Securicor Transport Ltd[1980] AC 827 per Lord Diplock at page 851 and Fujitsu at [49]).
• Notwithstanding (1)-(5) above, an exemption clause will not normally be interpreted as extending to a situation which would defeat the main object of the contract or create a commercial absurdity, notwithstanding the literal meaning of the words used. This is a context in which it is open to the court to strain to avoid a particular construction, rather than one which requires ambiguity on a fair reading before the principle comes into play, because it is inherently unlikely that the parties intended that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force such that the contract becomes ‘a mere declaration of intent’ (Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd[2013] EWCA Civ 38, per Tomlinson LJ at [19] citing from the speech of Lord Wilberforce in Suisse AtlantiqueSociete d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 at pages 431-432; CNM Estates (Tolworth Tower) Ltd v VeCREF I Sarl [2020] 2 CLC 243, per Foxton J at [33]).
• However, even in this context, where language is fairly susceptible of one meaning only, that meaning must be attributed to it unless “the meaning is repugnant to the contract” (see Kudos at [20]). It is a principle which “should be seen as one of last resort and there is authority that it applies only in cases where the effect of the clause is to relieve one party from all liability for breach of any of the obligations which he has purported to undertake: see Great North Eastern Rly Ltd v Avon Insurance plc [2001] EWCA Civ 780, [2001] 2 ALL ER (Comm) 526…Only in such a case could it be said that the contract amounted to nothing more than a mere declaration of intent” (Transocean Drilling UK Ltd v Providence Resources plc (The GSF Arctic III) [2016] EWCA Civ 372, per Moore-Bick LJ at [27]).