In EE Limited v. Virgin Mobile Telecoms Limited,[1] the High Court found that the claimant’s claim for ‘charges unlawfully avoided’ under a telecommunications supply agreement was in fact a claim for loss of profits, which were excluded by an exclusion clause in the agreement.
Background
EE Limited supplied various services – including the provision of access to its mobile network “to Virgin Mobile Telecoms Limited, pursuant to a telecommunications supply agreement. EE claimed that Virgin Mobile breached the exclusivity provisions in the agreement by providing network services to customers using EE’s competitors’ networks. EE claimed damages of approximately £24.5 million, representing the revenue EE would have received from Virgin Mobile under the terms of the agreement for the services that Virgin Mobile’s customers would have consumed had they remained on or been added to the EE network. EE brought a claim for ‘charges unlawfully avoided’, which it submitted was a ‘different beast’ entirely from loss of profits or wasted expenditure claims. Virgin Mobile denied that it acted in breach of the exclusivity provisions and denied that ‘loss of revenue’ represented the correct measure of damage, contending instead that the correct measure would be EE’s loss of profit, which was excluded by the following exclusion clause in the agreement: ‘… neither Party shall have liability to the other in respect of: (a) anticipated profits; or (b) anticipated savings.’ Virgin Mobile applied for strike out and/or reverse summary judgment on the grounds that EE’s claim for loss plainly fell within the clear and natural meaning of the words ‘anticipated profits’ and was therefore excluded.
The High Court’s decision
There was broad agreement by the parties as to the principles to be applied to the construction of contracts generally – and more specifically, the construction of exclusion clauses. With regard to the general interpretation of contracts, the court stated the approach to be taken with reference to a number of recent Supreme Court and lower court judgments, as follows:
‘The court construes the relevant words of a contract in their documentary, factual and commercial context, assessed in the light of: (i) the natural and ordinary meaning of the provision being construed, (ii) any other relevant provisions of the contract being construed, (iii) the overall purpose of the provision being construed and the contract or order in which it is contained, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions’ (see Lamesa Investments Limited v. Cynergy Bank Limited[2]). The court then summarised the principles to be borne in mind when interpreting exclusion clauses which were as follows:
- The exercise must be undertaken in accordance with the ordinary methods of contractual interpretation, and the principle of freedom of contract requires the court to respect and give effect to the parties’ agreement.
- However, in construing an exclusion clause, the court will start from the assumption that in the absence of clear words, the parties did not intend to derogate from those normal rights and obligations.
- The more valuable the right, the clearer the language will need to be if it is to be given effect.
- Unclear words will not suffice, and any ambiguity must be resolved against the party seeking to exclude liability.
- The court will not place a strained construction on words in an exclusion clause which are clear and fairly susceptible of one meaning only when a commercial contract has been negotiated between businesses capable of looking after their own interests and deciding how risks inherent in the performance of various kinds of contract can be economically borne.
- Notwithstanding the points mentioned in numbers 1 to 5 above, an exemption will not normally be interpreted as extending to a situation which would defeat the main object of the contract or create a ‘commercial absurdity’.
- However, even in this context, where language is fairly susceptible of one meaning only, that meaning must be attributed to it unless ‘the meaning is repugnant to the contract’ – i.e., the principle in number 6 above should be seen as one of ‘last resort’.
Applying these principles, the court held that on a true interpretation of the exclusion clause, any liability on Virgin Mobile’s part for damages for the unlawful diversion of its customers to alternative networks came within the terms of the exclusion for the following reasons:
- On its face, the language of the exclusion clause was clear and unambiguous – with one exception (which did not impact the court’s decision): Liability for anticipated profits was excluded without limitation. Therefore, it had been the intention of the parties to cast the net as widely as possible.
- EE’s claim was one for loss of profits. EE was seeking to recover the profit it would have made if Virgin Mobile’s customers had used the services offered by EE under the terms of the agreement. It could not be said it was properly a claim for ‘charges unlawfully avoided’ because the charges were never delivered.
- A claim for loss of profits was encompassed by the exclusion clause. Giving the words ‘anticipated profits’ their natural meaning in the context of the exclusion clause, the parties were seeking to exclude damages claims for loss of profits of any kind which foreseeably would be made by either party; there was therefore no distinction between ‘anticipated profits’ and ‘lost profits’.
- There was nothing in the context or surrounding clauses of the agreement which supported any different construction and no evidence of any factual matrix material – including with regard to the importance of exclusivity – that affected the position. In fact, the agreement was a bespoke, lengthy and detailed contract negotiated by two sophisticated parties in the field of telecommunications. Detailed consideration had gone into the risks and rewards for each party, including a minimum revenue commitment. The relevant clause of the agreement generally contained ‘detailed provisions governing the parties’ rights to remedies as between each other’; the exclusion clause used clear express words, and its specific wording indicated the parties expressly applied their minds to its scope; and the clause did not exist for the benefit of one party alone. Therefore, the parties could be taken to have meant what they said. In addition, remedies remained available to EE if there had been a breach of the exclusivity clause, including for injunctive relief.
- Inconsistency in the way EE argued its case ‘exposed the difficulty for EE in seeking to deny the obvious and natural meaning of the words’ in the exclusion clause.
Takeaways
While the judgment does not break any new ground, it is a helpful restatement of the courts’ approach to the general interpretation of contracts and – more specifically – exclusion clauses. As ever, parties are reminded that the name of the game when drafting exclusion clauses is clarity. Provided the terms of the clause are clear, the courts are likely to give effect to the ordinary meaning of the words unless the exemption would defeat the main object of the contract.
[1] [2023] EWHC 1989 (TCC) (31 July 2023).
[2] [2020] EWCA Civ 821 at [18].
Contributors
Ollie McGlashan