Is loss of profit a consequential loss?

Are losses of profit always indirect losses?United Kingdom 29.10.2014Available languages: ENThis article was produced by Nabarro LLP, which joined CMS on 1 May 2017.The Court consi

Is loss of profit a consequential loss?

Are losses of profit always indirect losses?United Kingdom 29.10.2014Available languages: EN

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
The Court considered the application of two clauses seeking to exclude and limit liability in the case of Polypearl Limited v E.On Energy Solutions Limited [2014] EWHC 3045 (QB).

E.On had entered into a master and supplement agreement for the supply of certain products to Polypearl in May 2011. Polypearl alleged that E.On had breached the agreements by failing to deliver a certain amount of products thereby causing it the following loss:

  • £2,103,542 as loss of profit; and
  • 4,318,037 in loss of opportunity.

E.On denied the breach, claiming that it was not under an obligation to supply a certain amount of products and, in any event, sought to rely on two clauses within the master agreement which excludes and limits its liability as follows:

  1. (10.1) "Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profit, loss of business, depletion of goodwill and like loss) howsoever caused (including as a result of negligence) under this Agreement, except in so far as it relates to personal injury or death caused by negligence."
  2. (10.7) "Subject to the above, the aggregate liability of each Party under this Agreement for any damage or direct loss howsoever caused (other than death or personal injury caused by the indemnifying party's negligence) will (save in respect of E.ON's obligation to pay the Charges or Polypearl's obligation to reimburse any of the charges) be limited to £1,000,000."

The Court was directed to consider the following preliminary issues on the assumption that the breach had in fact occurred:

  • whether clause 10.1 excludes E.On's liability for Polypearl's losses; and
  • if not, whether clause 10.7 limits E.On's liability for Polypearl's losses to the sum of £1,000,000.

Decision

Whilst the Court found that clause 10.7 was "clear and unambiguous" the same could not be said for clause 10.1.

The Court stated that the ambiguity arose due to the wording "indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profit" as it is not clear if the words in parenthesis are designed to cover either all loss of profit claims or only indirect loss of profit claims.

The Court stated that "as a matter of general law, a claim for loss of profits may be either a direct or an indirect loss" and noted that the loss of profit claimed in this case was a direct loss. Therefore, in order for the loss of profit claimed in this case to fall within the application of clause 10.1, the Court would be deeming all loss of profit claims as indirect losses which the Court considered was not intended by the parties. Further, the Court stated that the "most likely (and often the only) damage" that Polypearl would have suffered as a result of E.On's breach of contract would be a direct loss of profit and therefore it was "unlikely that a business man would wish to exclude this direct loss".

On that basis the Court found that:

  • clause 10.1 did not exclude E.On's liability for Polypearl's liability; and
  • clause 10.7 did limit E.On's liability to £1,000,000.

Comment

This case highlights the importance of clear and unambiguous drafting. If parties intend on excluding or limiting liability consideration needs to be taken of the most likely losses to be suffered in the event of a breach of each particular contract (as this case demonstrates what may be a direct loss in one contract may be an indirect loss in another) and ensuring that examples under heads of loss are categorised accordingly.

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