Published Summer 2011
Recent case law has scrutinised whether limitation of liability clauses can exclude the possibility of recovering certain types of losses.
Where there has been a breach of contract and a party suffers loss or damage, the loss or damage is recoverable, provided it is not too remote. Historic case law has established that losses falling into the following two categories will be recoverable:
- loss arising naturally from a breach, (direct loss); and
- loss that is in the contemplation of both parties at the time they made the contract, also known as special knowledge loss (indirect/consequential loss).
Traditionally, it is the second category of loss that parties to a business-to-business contract will try to normally limit and/or exclude in contracts. However, following the recent Court of Appeal case of GB Gas Holdings v Accenture (UK) Limited and others (2010), also known as Centrica v Accenture, businesses need to review, consider and most likely amend these standard exclusion clauses in their contracts. Accenture agreed to design, supply, install and maintain a new IT system (which included a billing system).
Shortly after work began on the system, problems arose between the parties, resulting in Centrica taking over completion of the final stages of the project itself. By the time the billing system was operational, substantial
problems had emerged with it, including:
- millions of customers being undercharged, overcharged or simply not charged at all; and
- Centrica having to raise thousands of invoices manually resulting in a large backlog of workload.
Centrica sued Accenture for damages and was successful in recovering the following losses (despite the contract containing an exclusion clause excluding consequential loss):
- £18.7 million in gas distribution charges overpaid by Centrica to wholesale gas distributors due to overestimates of gas usage as a result of a lack of automated meter readings;
- £8 million in ex gratia payments made to customers in an attempt by Centrica to limit damage to its reputation;
- £2 million in additional borrowing charges as Centrica incurred additional borrowings due to late billing or non-billing of customers;
- Over £300,000 in costs wasted in trying to enforce debts that weren’t actually due;
- Over £100,000 in stationery and correspondence costs.
The Court’s view was that the losses referred to above were direct losses and not indirect consequential losses and were therefore not excluded by the general exclusion of consequential/indirect losses within the Accenture contract. For example, the compensation payments to customers were treated as a direct loss because the Court found that Centrica had intended the billing system to improve its services and customer relations and therefore the failures with the billing systems had damaged this and Accenture had assumed responsibility for such failures (which in turn included responsibility for payment of compensation to ensure good customer relations). The gas distribution charges were found not to be indirect losses (although they were dependent upon contracts between Centrica and its suppliers, which Accenture was not a party to), as such charges arose directly from Accenture’s breach and not as a result of any special arrangements between Centrica and its suppliers. Also, although the exclusion of liability clause did set out a list of various losses that the parties would not be liable for the Court did not think these had been specifically tailored to the circumstances surrounding the contract.
This case highlights that the distinction between “direct” and “indirect” loss is no longer clear-cut. There is no simple way to determine whether a particular category or type of loss will be direct or indirect and whether it will come within the scope of an exclusion of consequential loss clause. Therefore, rather than simply excluding liability for consequential loss, a supplier should in some instances consider and provide for the types of loss that they foresee might arise from a breach of contract and then agree those they are prepared to accept responsibility for and those types of loss that they are not prepared to accept liability for.
Best endeavours or reasonable endeavours
The use of the terms “best” and “reasonable” endeavours are often debated when negotiating contracts. But practically what do these terms mean and what is the difference between them? The case of CPC Group Limited considered this issue.
The Court held that “all reasonable endeavours” does not equate to best endeavours and does not always require a party to sacrifice its own commercial interests. The High Court, however, has recently added further
confusion. In the case of jet2.com Ltd v Blackpool Airport Ltd 2011, it rejected Blackpool Airport’s argument that a duty to use all reasonable endeavours did not require it to act against its own commercial interests.
What is apparent from this case is that the Courts will consider all circumstances surrounding the matter in question. Here the parties had agreed that “best endeavours” meant the same as “all reasonable endeavours”. It also reminds us that parties to a contract should set out clearly what they require the other party to do in relation to a particular obligation.
As a general rule, by adding any element of endeavours to an absolute obligation, you are watering down such an obligation from a strict obligation to one where a party can to a certain extent take their own commercial interests into account along the basis of the following sliding scale:
Entire agreement clauses
Entire agreement clauses are provisions which seek to prevent parties from relying on any statements or representations that are not expressly set out in an agreement and can therefore be a method of limiting or excluding a party’s liability. The recent Court of Appeal case of AXA Sun Life Services plc v Campbell Martin Ltd, considered entire agreement clauses and their effectiveness to exclude or limit liability.
Following this case, a general statement in a contract which states “the agreement constitutes the entire agreement between the parties and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, between them” will not have the effect of excluding liability for negligent misrepresentation (a statement of fact made in discussions concerning a contract that does not itself appear in the contract). In order to do so, your agreement must clearly state that liability for misrepresentation is excluded. Also, entire agreement clauses that specifically exclude implied terms may not prevent those terms that are necessary to give the contract business efficacy but would exclude other implied terms.
As a result of the recent changes in case law, detailed above, you should review and if necessary update your contracts to ensure they are sufficiently robust to protect your business.