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Are you still agreeing to mutual exclusion of liability for loss of profit?

Are you still agreeing to mutual exclusion of liability for loss of profit?

It has become almost customary for parties in commercial agreements to exclude liability for loss of profit. The High Court’s decision to uphold the ruling in Motortrak V FCA Australia Pty Ltd [2018] EWHC 990 (Comm), has highlighted the importance of considering exclusion clauses in the context of the specific deal and to identify key areas of risk.

In December 2010, Motortrak Ltd and FCA Australia Pty Ltd entered into an agreement whereby Motortrak would provide web-based marketing services to FCA. The agreement was due to expire at the end of 2019, however, In June 2016 FCA repudiated the agreement when it notified Motortrak that it no longer required the services and ceased paying Motortrak’s invoices. Motortrak claimed against FCA 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. Providing 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, relying on Kudos Catering (UK) Ltd V Manchester Central Convention Complex Limited [2013] EWCA Civ38. In this case the judge distinguished between a party’s defective performance of a contract and its refusal to perform it or 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 FCA’s liability for loss of profits held good.

The above is a prime example of the importance of clarity in contract clauses, especially where the parties are of equal bargaining power.

If you have a query or would like to book an appointment please get in touch with Tertius Alberts on 01256 320555 or email talberts@clarkeandson.co.uk.

Tertius Alberts

Corporate & Commercial Solicitor

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