It is crucial to cover the full range of potential losses in exclusion clauses. We consider exclusion clauses in sale of goods contracts in light of the recent Commercial Court decision of Glencore Energy Ltd v Cirrus Oil Services.
Non-acceptance of goods
Where a buyer refuses to accept goods under a contract, the seller has the right to claim damages. According to the Sale of Goods Act 1979 (the Act), if there is an available market at the relevant time for the goods in question, the measure of damages will usually be treated as the difference between the price under the contract and the market price at the time of the non-acceptance.
In other words, if the contract price was the same as the general market price, then the seller will not be viewed as suffering any loss - he could simply sell the goods to another buyer at the same price and would not be out of pocket. However, if the contract price was higher than the market price, then the seller has missed out on the opportunity of selling the goods at the higher price, and will be entitled to be compensated for this "loss of a bargain".
The seller will also be entitled to claim damages for any other reasonably foreseeable losses suffered, i.e. potential losses that the parties are treated as having foreseen at the time of entering into the contract either because:
- the loss was foreseeable in the "ordinary course of things"
- the loss was foreseeable in the circumstances because of actual knowledge held by the parties
However, the parties may look to exclude liability for some or all of the above potential losses through the use of exclusion clauses.
The recent Commercial Court decision Glencore Energy UK Ltd v Cirrus Oil Services Ltd  EWHC 87 (Comm) concerned a contract for the sale of crude oil by Glencore to Cirrus, who planned to sell the oil on to a third party. When the third party refused to accept the oil from Cirrus, Cirrus in turn refused to accept it from Glencore.
Glencore claimed damages from Cirrus for its repudiation of the contract. Cirrus defended the claim on the basis that Glencore's claim was for loss of profits and there was an exclusion clause in the contract excluding liability for loss of anticipated profits (although there was a question mark over whether the clause only covered loss of profits that came under the second category of foreseeable losses set out above).
The judge decided that Glencore's losses were not covered by the exclusion clause, with the result that it was entitled to damages of over $2.5 million. Cooke J reiterated that, where a buyer refuses to accept goods under a contract, the seller's loss is calculated under the Act by "how much worse off the seller would be, if at the time of the breach, he had sold the goods to a substitute buyer".
In the court's view, this measure of a loss of a bargain is different to claiming for lost profits, which would be calculated by working out the difference between the total net cost to the seller of bringing the goods to market and the net sale price under the contract.
It was held that whether the exclusion clause covered all losses of anticipated profits or only those under the second category of foreseeable losses did not affect the outcome in this case, since Glencore's claim was not for loss of profits. If Cirrus had wished to exclude liability for loss of a bargain under the contract, in addition to liability for loss of profits, then they should have made this clear in the wording of the exclusion clause.
Glencore were therefore entitled to the difference between the contract price and the price that would have been paid by a willing buyer to a willing seller for the oil at the time of the non-acceptance (even though Glencore had not, in fact, sold the goods to a replacement buyer in this case). The market value was based on actual commercial deals that went on in the market at that time.
- Commercial parties should review the exclusion clauses in their standard terms to ensure that they clearly cover all the potential losses that they are intended to cover.
- In particular, it is crucial for buyers of goods to check that their exclusion clauses deal separately with loss of a bargain, as well as loss of profits, whether direct or consequential.
If you are in any doubt about the drafting or effectiveness of exclusion clauses, seek legal advice.