“Loss of profit” versus “loss of revenue” and the minefield of exclusion clauses

Speed read

The Court of Appeal has confirmed that a claim brought by EE Limited (‘EE’), framed as “lost revenue” against Virgin Mobile Telecoms Limited (‘VM’) was essentially a claim for “anticipated profits” and therefore excluded under the limitation clause in their contract.

The dispute

The dispute arose out of an exclusivity agreement contained within a Telecommunications Supply Agreement (‘TSA’) where EE provided VM access to its mobile network. Certain of the charges payable by VM to EE depended on the level of usage by VM’s customers. In the absence of an agreement between EE and VM as to the provision of 5G services, VM was entitled under the TSA to provide 5G services to its customers using a different network (as well as 2G, 3G and 4G services to those 5G customers).

EE claimed that, in breach of the exclusivity clause, VM had migrated non-5G customers onto the alternative supplier’s network, resulting in “lost revenue” in the provision of 2G, 3G and 4G services to those customers, or “charges forgone”, in the region of £25 million. The lower court held the claim fell within the exclusion clause, and this decision was appealed by EE.

The parties’ arguments

EE stated that to conclude its claim was captured by the exclusion clause was to render the TSA devoid of any contractual content and to deprive it of any remedy for VM’s breach. EE argued that the claim was for diminution in price, not loss of profits, and thus should not be excluded under clause 34.5(a). They asserted that the phrase “anticipated profits” should be narrowly construed as profits anticipated to be earned outside the performance of the TSA and that their losses were not hypothetical but capturable from the pricing language in the contract.

VM stated that EE’s claim was in fact one for loss of profits and accordingly cl.34.5(a) of the TSA applied, which excluded damages claimed by either party in respect of “anticipated profits”.

The decision

The Court of Appeal (by a majority of 2:1) upheld the decision that EE's claim fell within the scope of the exclusion clause for "anticipated profits". The Court was not persuaded by EE's argument that its “lost revenue” was outside the exclusion's scope; describing the claim as "charges foregone” was an inaccurate formulation of the legal basis of the claim. The losses gave rise to a claim for damages as a result of VM's alleged breach of the exclusivity obligation, calculated on the expectation loss basis. The Court reasoned that the exclusion clause must be interpreted according to its plain language. There was no difference between the phrase “anticipated profits” and “lost profits” which were terms used interchangeably within the exclusion clause. Here, “anticipated profits” included expectation losses, being the profits EE would have made had the contract been performed.

The Court determined that the detailed risk allocation within the TSA warranted upholding the exclusion clause as written, without distinguishing between different types of profit losses, or focusing the interpretive analysis on the particular breach that had occurred. The Court rejected EE’s argument that it was left with no remedy, finding that there were a range of possible claims that would have been in the contemplation of the parties at the time the TSA was made, including a claim for wasted expenditure in cases of repudiatory breach, or injunctive relief for specific performance. The surrounding circumstances, including the extensive negotiation and drafting of the contract by experienced parties, supported this interpretation.

Commentary

The fact that the Court of Appeal decision was not unanimous is illustrative of the complexities of interpreting exclusion clauses. All three Lord Justices tussled with the meaning of the exclusion clause and took different approaches to certain issues, Coulson LJ noting that it had not been an easy issue to decide. He referred to the authorities cited as “something of a ragbag of particular results in particular types of cases”, which cannot be “woven together to comprise any sort of principle”. The decisions have come down to the words used and the commercial background against which the words must be construed, rendering previous authorities as having limited utility.

The judgment alludes to the possibility of an alternative claim for wasted expenditure, which was not advanced in this case, however, in his dissenting judgment, Phillips LJ suggested that the alternative actions identified would have been an unrealistic remedy in the factual context. Disagreeing with the majority decision, Phillips LJ took the view that excluding the right to claim for lost charges caused by a diversion of customers away from EE, in breach of the exclusivity provision, undermined the bargain reached between the parties and as such would have allowed the appeal.

It will be interesting to see whether a further appeal will take place and whether the Supreme Court will have the opportunity to express their view.

Key takeaways when considering exclusion clauses:

• the courts are inclined to uphold the parties’ apparent apportionment of liability and an express, clearly drafted and negotiated broad limitation of liability clause is likely to be given its literal meaning
• to exclude valuable rights, the court will start from the assumption that in the absence of clear words the parties do not intend to depart from common law rights and obligations
• categorisation of the loss claimed will not in itself escape the claws of an exclusion clause where the nature of the claim falls within its scope
• each case will turn on its own facts and reliance on previous decisions will have limited utility
• when drafting exclusion clauses, careful consideration should be given to the language used when excluding liability for profits – it must be clear whether these are direct, indirect or consequential losses. Parties would be wise to stipulate how the word ‘anticipated’ should be construed if being used