Commercial contracts will generally include provisions seeking to limit or exclude the liability of one party to the other. Typically, we will see caps on overall liability under the contract and often more specific limits and exclusions in relation to different aspects of the contract. These contracts can be standard form terms and conditions of business or negotiated contracts for specific services or goods.

Commercially, it is an important element to the contract because it is one of the principal methods of allocating and managing financial risk. The main piece of legislation which applies to limitation clauses in B2B contracts today is the Unfair Contract Terms Act 1977.  But, in addition to this, there is a complex web of constantly evolving case law.

Exclusion clauses are always at risk of being strictly interpreted by the courts. Until this month, it was generally felt (and the courts had been following this trend) that an old rule of contractual interpretation, known by its Latin tag contra proferentem, was of little relevance to modern day, negotiated B2B commercial contracts.  When it does apply, the rule says that a contract or clause may be strictly interpreted against a party where that party has drafted it for its own benefit or the clause operates to its benefit.  The reasoning of the courts for not generally applying the rule has been that commercial parties should be entitled to allocate between themselves the risks of something going wrong in their contractual relationship in any way they choose.  So, just because an exclusion clause might benefit one party by limiting their liability in specified circumstances, that was the commercial bargain that had been negotiated and it was not right for the courts to interfere with that.

The judgment

In a Court of Appeal judgement handed down last week (Nobahar-Cookson & Ors v The Hut Group Ltd [2016] EWCA Civ 128 (22 March 2016)), Lord Justice Briggs made some interesting observations.  The case was between the sellers of a sports nutrition business known as "MyProtein” and the buyers of that business, the online retail business called The Hut Group.  Both parties claimed against the other for breach of financial warranties in the sale and purchase agreement.  The Court of Appeal was asked to decide whether a clause imposing a time limit for the making of a warranty claim by The Hut Group pursuant to the share purchase agreement was effective.  If it was, then their claim would fail.

The time limit was a limitation of liability clause. It said that the sellers of the MyProtein business would not be liable for such a warranty claim unless the buyer “serves notice of the Claim on the Sellers… as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter”.  I’ve included the actual wording of the disputed clause here because it is this which led the Court to consider how best to decide its meaning.

The question for the Court of Appeal was whether that wording was sufficiently clear so as to exclude the sellers’ liability for an otherwise valid warranty claim provided notice hadn’t been served on them within the time limit. As the claim was valued around £4.3 million, it was undoubtedly an important commercial issue for all parties to the case.

The approach the Court took was first to decide if the meaning of the clause could be clearly understood by looking at the language actually used, the context in which it was written and the purpose of the clause. There had been considerable argument by learned QCs for all parties about the meaning of the words “aware of the matter”.  Having considered all of these points, Lord Justice Briggs concluded that there were still some unresolved ambiguities.  In fact, he described it as a “seriously ambiguous exclusion clause..”.   Because of this, he felt able to apply the contra proferentem principle which supported his decision to dismiss the appeal and uphold the liability of the Sellers for the warranty claim made by the Buyer.

Comment

It would be wrong to make too much of this case. It is clear that the decision was very specific to the facts of the dispute, but nonetheless, it has served as a reminder that exclusions and limitations of liability must always be very carefully drafted.  The modern approach of the courts to negotiated commercial contracts has not changed and they will normally give full effect to whatever allocation of risk the parties have expressly agreed.  But that must be expressed in crystal clear language.  If the clause in question had been certain as to its meaning and effect then there is little doubt that the Court would have upheld it.  In that case, a warranty claim served outside the required 20 day period would have been invalid and the sellers would have been successful in excluding their liability for the claim.  And of course, they would have been £4.3 million (plus legal fees!) better off as a result.