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Do your contractual limitation clauses cover all bases?

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18/12/2015

The effectiveness or otherwise of contractual terms purporting to limit or exclude liability for breach is a common battleground in commercial disputes. The difficulty is that each case turns on its particular facts and wording that is effective in one case may be ineffective in a different context.

The dispute in issue before the High Court in Scottish Power UK Plc v BP Exploration Operating Company Ltd [1] concerned contracts by which Scottish Power agreed to buy gas from an oil and gas field in the North Sea. During a shutdown of the field, the seller failed to supply gas, in breach of their contract with Scottish Power. The contract contained a compensation mechanism by which the seller undertook to supply gas at a reduced price once production restarted to compensate for the gas it had failed to supply during the shutdown. The seller argued that this was Scottish Power’s sole remedy, relying on a sole remedy clause in the contract.

During the shutdown, Scottish Power [had] bought gas from elsewhere to meet its needs at a price higher than the contract price. It claimed the difference as damages. At issue in the High Court was the clause purporting to limit the seller’s liability for damages arising from its breach of contract.

The contract provided: “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 judge considered that the limitation clause was not intended to cover basic, normal losses, i.e. the difference between the contract price and the market price. To include such loss would mean that the limitation clause would exclude all financial loss, which the judge did not think could have been the parties’ intentions.

The judge considered that the clause was targeted at the specifically identified different categories of loss, each of which he considered individually:

  • Loss of use. This was the loss of a profit or benefit Scottish Power expected to gain from using the gas the seller had failed to supply.
  • Loss of profits. Profits might be lost if it was not possible to buy gas at market price to replace the contracted delivery, or loss of profits Scottish Power expected to make from using the gas that should have been delivered.
  • Loss of contracts. This meant the value of contracts that might be cancelled or not won because of the seller’s breach.
  • Loss of production. This was the loss caused if, because of the seller’s non-delivery, the buyer could not use the gas to produce something else, e.g. electricity.
  • Loss of revenue. This was similar to loss of profits. Revenue might be lost if it was not possible to buy gas at market price to replace the contracted delivery, or loss of revenue the buyer expected to make from using the gas that should have been delivered.
  • Business interruption. The judge simply said this overlapped with the other items.

The judge rejected the suggestion that Scottish Power’s losses fell within the “loss of use” or “loss of production” categories.

However, the contract did provide a remedy in the event of the failure to supply gas and this compensation was the sole remedy for the breach. The sole remedy clause therefore precluded any claim for further damages.

The failure of the limitation clause in this case shows why it is a good idea to give your terms and conditions a professional healthcheck. At first glance, the clause appeared to have all bases covered but the judge disagreed. In this case, including general wording stating that neither Party was liable for ‘financial loss’, and that ‘financial loss’ included the listed categories of loss, might have saved the clause.

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[1] [2015] EWHC 2658