firm news

Exclusion Clauses: Loss of profits
19 May 2015

The recent case of Polypearl Ltd v E.On Energy Solutions Ltd has shown that a loss of profit will not always be an indirect loss and may instead be a direct loss. The case highlights the importance of clear, unambiguous drafting, particularly in the context of the exclusion clause.  

In this case, the parties had signed two agreements under which Polypearl would supply E.On with cavity wall insulation products. Polypearl claimed that E.On was under an obligation to purchase a minimum quantity of products which E.On had not fulfilled.  Polypearl claimed that as a result, it had suffered loss of profit and loss of opportunity.

E.On denied that it was in breach of contract. Even if it was in breach, it pointed to the exclusion clause, arguing that Polypearl could not recover loss of profit.

Clause 10.1 of the master agreement stated that,

“Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation,… loss of profit…) howsoever caused.”

Clause 10.7 capped direct losses at £1 million.

The Court had to consider whether E.On’s liability was excluded and if it was not, whether it was limited to £1 million.

It was not clear from clause 10.1 whether the parties had intended to exclude all claims for loss of profit or only indirect loss of profit claims. The Judge concluded that the clause only excluded indirect loss of profit claims. The Judge explained that it was a matter of general law that a claim for loss of profits could be either a direct or an indirect loss. In this case, the claim was for a direct loss. As a result, E.On was unable to rely on clause 10.1 although the amount which could be recovered by Polypearl was subject to the cap in clause 10.7.

In summary, when a party brings a claim for loss of profits, the loss can be a direct or an indirect loss. If the parties intend to exclude liability for all loss of profit claims, then “loss of profits” should be set out as a separate head of loss as opposed to an example of indirect loss. We have seen a number of cases on this point in the past and it is clearly still an issue in commercial contracts. It is important to draft exclusion clauses very clearly, having first considered the losses likely to result from the breach. Parties should resist the temptation to use the same exclusion clause in every contract as a “one size fits all” approach is unlikely to work.

If you would like to discuss this further or find out more about how the Commercial & Technology team can help your business please contact Sarah Williamson on 0118 952 7247 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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