Excluding Liability for Loss of Profits

In Motortrak v. FCA Australia Pty Ltd [2018] EWHC 990 (Comm), the High Court found an exclusion clause for loss of profits valid even though this left the non-defaulting party with no substantive remedy in the wake of the other party's repudiatory breach.

Background

In December 2010, Motortrak Ltd and FCA Australia Pty Ltd entered into an agreement whereby Motortrak would provide web-based marketing services to FCAA. Having been extended a number of times, the agreement was ultimately due to expire at the end of 2019. In June 2016, however, FCAA repudiated the agreement when it notified Motortrak that it no longer required it to provide the services and ceased paying Motortrak's invoices.

Motortrak claimed against FCAA for damages representing the loss of profits that it would have received had the agreement continued for the outstanding term.

The agreement contained a mutual clause which excluded the parties' liability for loss of profit. It was worded very clearly as follows:

"Neither party shall be liable to the other for:

(a) any indirect or consequential loss or damage at all; or

(b) any loss of business, capital, profit, anticipated saving, reputation or goodwill, arising out of or in connection with the Agreement or its subject matter."

It was Motortrak's case that the exclusion of liability for loss of profits should only apply where the loss has been suffered "in connection with the performance" of the agreement; and not where the loss of profits has arisen as a result of the defaulting party's non-performance.

The court's Interpretation

The court had to consider how to interpret the exclusion clause in order to determine whether or not FCAA's liability for loss of profits was excluded, in which case Motortrak's claim would fall down.

Motortrak relied on the case of Kudos Catering (UK) Ltd v Manchester Central Convention Complex Limited [2013] EWCA Civ 38 where the judge had distinguished between a party's defective performance of a contract and its refusal to perform it or to be bound by it.

The judge in Motortrak, however, found that the conclusion reached in Kudos had come about "primarily by the position and context of the relevant sub-clause", which excluded the defendant's liability for loss of profits. The context of Kudos had meant that the loss in question could only have been suffered as a result of the defendant's negligent performance (as opposed to non-performance) which was simply not the case in Motortrak. Considering both the factual background and the agreement as a whole, the Court in Motortrak could find no reason to override the clearly worded language of the exclusion clause by reading additional words into it. As a result, the exclusion of FCAA's liability for loss of profits held good.

FCAA contended that Motortrak could have rejected the repudiation by affirming the agreement (i.e. continuing to perform its obligations) and then making a claim against FCAA in debt. The court, however, did not agree because for this to be the case, Motortrak's right to receive payment would have to be independent of its obligation to perform the services, which it was not as FCAA could not perform its obligations without Motortrak's co-operation.

The court's decision left Motortrak with no remedy except for a claim for wasted costs.

Conclusion

This case demonstrates the power of a clearly worded contract clause, especially where the parties are of equal bargaining power and the clause has been drafted for the mutual benefit of both parties.

In Motortrak, the court adopted a literal interpretation of the exclusion clause and was not prepared to override the language that had been used even though this deprived the non-defaulting party of any substantive remedy for the repudiation. If Motortrak had not wanted the exclusion clause to apply in the situation where FCAA failed to perform, the clause should have clearly stated that this was the case.

Further, it is important to consider exclusion clauses in the context of the specific deal and to identify the key areas of risk. Motortrak's claim centred around loss of profits due to the way that it operated it business. Before agreeing to an exclusion clause, it is vital for a party to consider the types of loss it might suffer and therefore want to recover in the event of the other party's breach.

For more information on this article, please contact Joanna Roberts.