The High Court has held that a supplier under a contract was not able to claim for loss of profits that arose when the other party to the contract repudiated it by refusing to carry on its obligations.The claim arose out of outstanding invoices owed by the defendant (“FCAA”) to the claimant (“Motortrak”) under a contract which provided for the supply of web-based marketing services by Motortrak to FCAA. Motortrak is a web based supplier of marketing services and the FCAA is the Australian subsidiary in the Fiat Chrysler group.
The reason for non-payment by FCAA was that they believed Motortrak had paid bribes to a company owned by the FCAA’s previous managing director to ensure that FCAA entered into a contract with Motortrak. FCAA therefore sent Motortrak a letter to inform them that they were refusing to continue their obligations of payment under the contract. In response to this repudiatory breach, Motortrak terminated the contract, and sued for the outstanding invoices and claimed damages for loss of future profits on the remainder to the term of contract.
Amongst other issues, the two principle concerns for the court to determine were as follows:
- whether the FCAA affirmed the contract; and
- if Motortrak’s claim for loss of profits was excluded by virtue of the limitation of liability in the exclusion clause in the contract.
Affirmation of the contract
The question on affirmation of the contract arose because once FCAA found out about the bribe, they did not immediately stop making payments to Motortrak and instead waited six months before they informed Motortrak they were stopping payments. FCAA argued that while they were aware of the bribes for the six months, they had good commercial reasons to delay rescission as no alternative service provider was immediately available which would have caused significant harm to their business.
However, the court confirmed that FCAA was not entitled to rescind the contract as right to rescission is lost in a contract if affirmed, emphasising that affirmation is a question of fact. Although the court appreciated FCAA’s commercial reasons, there was no legal basis for the delay. Therefore, while FCAA had intended to rescind the contract throughout the time period, this did not matter as they were still taking on a benefit under the contract and in effect ‘affirmed the contract’. As a result, from the moment FCAA stopped paying Motortrak, they were in repudiatory breach of contract, by refusing to perform their obligations. This means that as the non-defaulting party, Motortrak was entitled instead to terminate the contract and claim for damages for loss of profits and payment for its outstanding invoices.
Concerning the outstanding invoices, the court held that FCAA owed no obligation to pay the invoices based on analysis of when the parties intended timing of payments to be due. The timing of payments was unclear as to whether payment arose prior to, or after, termination of the contract as the parties had agreed for charges to paid quarterly in advance. On interpretation of which construction of the clause was correct, the court cited the recent case of Wood v Capita, having regard to context and considering the clause in light of the rest of the provisions of the contract as a whole.This is good news for businesses as it shows the courts’ increasing willingness to check the construction of terms of business against common business sense to analyse the commercial consequences the parties would have intended where there is ambiguity.
Loss of profits
As mentioned, Motortrak also claimed damages for loss of profits for the outstanding term of the contract. FCAA refuted this stating it was not liable for loss of profits as this was explicitly excluded in the exclusion clause. The relevant part of the exclusion clause stated the following:
“Neither party shall be liable to the other for: (i) any indirect or consequential loss or damage at all; or (ii) any loss of business, capital, profit, anticipated saving, reputation or goodwill, arising out of or in connection with the Contract or its subject matter”.
Motortrak argued that the exclusion should apply only where loss of profits arises “in connection with the performance” of the contract, and not in situations where one party simply refuses to perform the contract. Interestingly, a claim for loss of revenue was not excluded as this is considered a direct loss, however, as Motortrak’s loss consisted almost exclusively of loss of profits due to the way it ran its business, it was unable to claim much for loss of revenue. FCAA argued on the other hand that Motortrak’s claim was excluded as the exclusion clause clearly excluded any liability for loss of profits.
In examining its approach to interpretation of the exclusion clause, the court favoured standard principles of interpretation looking to the ordinary meaning of the language used by the parties, commenting on the use of the contra proferentem rule. Under this rule, any ambiguity in non-negotiated contracts are resolved against the party relying on it. As the exclusion clause was clear and unambiguous the court was not required to read additional wording into the clause to give effect to commercial intentions. More so, as the exclusions applied mutually and both parties were of equal bargaining power, even if this left Motortrak in the undesirable position with having essentially no recourse. Therefore, as thecontra proferentemrule was not applicable, the court accordingly ruled against Motortrak, meaning they were unable to claim for any loss of profits.
The court’s examination of the contra proferentemrule in relation to an exclusion clause highlights two important limits to note when parties are seeking to rely on it:
- if the clause contains mutual exclusions that apply equally to both parties, the rule will not be triggered; and
- the exclusion clause must be ambiguous for the rule to apply.
Traditionally, the courts have favoured a very strict interpretation of clauses purporting to exclude certain types of liability. Most recently in Persimmon Homes v Ove Arup, the court confirmed that the contra proferentem rule now has a very limited role in the interpretation of commercial contracts negotiated between parties of equal bargaining power (for more information on this, please click here to read our previous article).This case is significant as it shows how a clearly drafted exclusion clause can result in a party having, in effect, no recourse as the court will look to the ordinary principles of interpretation in commercial contexts. This serves as an important reminder for careful drafting considerations in relation not only to exclusion clauses in relation to the contract, but to consider how the party operates commercially within a specific deal and to identify during negotiations any key areas of risk. For example, it is essential for parties to consider each type of loss they may suffer and how much they would want to recover for each loss.
For more information on drafting exclusion clauses and commercial contracts, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.