A year ago we reported on a High Court case (Scottish Power UK Plc v BP Exploration Operating Company Ltd ([2015] EWHC 2658, 25 September 2015)) which considered some interesting and relevant issues on the subject of excluding or limiting the liability of the parties to the contract.  This was appealed to the Court of Appeal whose judgment (Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors [2016] EWCA Civ 1043 (01 November 2016)) was delivered just a couple of days ago on 1^st November.  The Court of Appeal agreed with the conclusion of the High Court and in doing so made a number of interesting observations.

To recap, most commercial contracts contain provisions excluding or limiting the liability of the parties to the contract.  It has become an accepted part of most businesses’ risk management processes that they will be very reluctant to enter into contracts where their liability is uncapped.  The law places certain limits on the amount that can be recovered in a claim for breach of contract and, of course, there will always be practical limits on what can actually be achieved in these circumstances. 

This complicated case involved a take or pay contract for North Sea gas.  This type of contract obliges the buyer (in this case Scottish Power) to take delivery of a predetermined minimum quantity of gas each year and if that amount is not taken, then to pay for it in any event.  The dispute arose because the seller (BP together with some other parties) ceased to deliver gas for over three and a half years while the field was shut down for modifications to the platform and facilities.

The contract anticipated situations like this and the dispute reached the court because of disagreement over the meaning of two clauses.  The first was a limitation of liability clause which stated “Save as expressly provided elsewhere in this Agreement, neither Party shall be liable to the other Party for any loss of use, profits, contracts, production or revenue or for business interruption howsoever caused and even where the same is caused by the negligence or breach of duty of the other Party”.  The other clause was argued by BP to be the sole remedy available to Scottish Power for BP’s failure to deliver gas during the shutdown.  We’ve edited what was quite a wordy piece of drafting, but in essence it stated: "The delivery of Natural Gas at [a 30% discount to the contract price]….. shall be in full satisfaction and discharge of all rights, remedies and claims howsoever arising whether in contract or in tort or otherwise in law on the part of the Buyer against the Seller in respect of underdeliveries by the Seller under this Agreement, and.…., the Buyer shall have no [other] right or remedy and shall not be entitled to make any claims in respect of any such underdelivery"    In other words, once the gas field was working again, the amount of gas which should have been delivered during the shutdown would be provided at a 30% discount, but beyond that Scottish Power could not make any further claim.

The judgement reminds commercial lawyers that when the courts interpret commercial contracts, they do not take into account what the parties actually intended.  This may come as a surprise to those who are not regularly involved in drafting or litigating commercial contracts, but the test is an objective one.  In other words, the courts will ask what a reasonable person in the situation of the parties would have intended and they will take into account straightforward commercial common sense when deciding this.  Lord Justice Christopher Clarke, who gave the leading judgement for the Court of Appeal in this case, re-emphasised this point a number of times.  Rejecting an argument made by Scottish Power’s QC he said “That would seem to me to involve a degree of legal finesse which commercial men are unlikely to have contemplated”.  Later in the judgment he went on to quote (perhaps inadvertently!) Baldrick from the BBC Blackadder series when he said “I do not think that reasonable persons in the position of the parties would have had in mind the cunning plan whereby Scottish Power would nominate enough to ensure that it did not fall foul of the Take and Pay provision but less than it in fact required in order to claim more than a Default Gas entitlement…”.

He also acknowledged the well-established legal presumption that clear words are required to exclude or limit rights or claims which the general law gives to a party, but qualified this with the equally well-established principle that the court should apply all its tools of linguistic, contextual, purposive and common sense analysis to discern what a clause really means.  If as a result of doing that the answer becomes clear, the court should give effect to it even though the interpretation may deprive a party of a right at law which he might otherwise have had.  In other words, it is open to parties to come to an an agreement which has that effect.  In this case, the clause in question replaced common law rights with a different contractual remedy which could, in certain circumstances, have been more valuable than the right to damages.  That was an acceptable and reasonable commercial bargain for the parties to have struck.

It’s worth reminding ourselves of a few other points which were made in the original judgment and which are relevant to many commercial contracts.  Any court considering a dispute such as this will start with the legal presumption that each party to a contract is entitled to all those remedies for its breach which arise by operation of law.  If the parties want to exclude or modify the availability of such remedies they can do so, but they must use sufficiently clear language.

On the face of it, the limitation of liability clause in this case appeared extremely comprehensive.  It seemed to say that any financial loss – even loss caused negligence – is excluded.  But the judge decided that it was clear that the clause was not intended to exclude liability for all losses caused by the other party's breach of duty – otherwise it would have said so.  His interpretation was that it excluded liability for certain specified types of loss only.  

The courts have considered in many cases whether a complete exclusion of liability in a commercial contract could be effective.  While it might be possible to advance a technical legal argument that this can be done, the reality is that when tested, the courts will endeavour to defeat this.  They have the latitude to do this either by applying a restrictive interpretation to the clause or as Lord Diplock did in the Photo Production case in 1980, simply by deciding to strike it out as “repugnant”!

In this case the Court of Appeal upheld the original High Court decision that even though the limitation clause did not exclude all financial remedies, the circumstances of the claim meant that Scottish Power’s right of recovery was limited to the sole contractual remedy of discounts to future gas supplies.

These are issues which we deal with regularly at Ortolan Legal.  By its nature the law is in a constant state of change so we strongly recommend you review the wording you use in your commercial contracts to ensure it is up to date and consistent with the current approach and decisions of the courts.  Relying on precedent contracts which have not been regularly reviewed could expose a business to the very risks it is seeking to manage.