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Contract Law – Interpretation of liability exclusion and sole remedy clauses in Supply Contract

  • United Kingdom
  • Construction and engineering - Articles
  • Energy and infrastructure

15-12-2015

Scottish Power UK plc v BP Exploration Operating Company Ltd and others [2015] EWHC 2658 (Comm)

Scottish Power entered into four long-term supply contracts with BP (and others) to purchase natural gas produced from the Andrew Oil & Gas Field in the North Sea. The court found that BP had breached the Supply Contracts by failing to supply gas from the Andrew Field for a period of 3½ years (while work was being performed on pipelines and other infrastructure).

As part of its claim, Scottish Power sought to recover general damages for the additional costs it incurred in purchasing replacement natural gas from third party suppliers at a higher price than BP had agreed to supply it. In its defence, BP relied upon an exclusion clause (Article 4.6) in the Supply Contracts, which read as follows:

Exclusion clause:  “…neither Party shall be liable to the other Party for any loss of use, profits, contracts, production or revenue or for business interruption howsoever caused and even where the same is caused by the negligence or breach of duty of the other Party.”

Furthermore, as each Supply Contract contained a financial compensation mechanism, under which BP was obliged to supply gas to Scottish Power at a reduced price (once gas production had been resumed) to compensate Scottish Power for the gas that BP failed to supply during the shutdown period, BP argued that this provision was Scottish Power’s sole remedy for BP’s breach. The clause read as follows:

Sole remedy clause:  “The delivery of Natural Gas at the [lower] Default Gas Price and the payment of the sums due in accordance with the provisions of Clause 16.4 shall be in full satisfaction and discharge of all rights, remedies and claims howsoever arising whether in contract or in tort or otherwise in law on the part of the Buyer against the Seller in respect of under-deliveries by the Seller under this Agreement, and save for the rights and remedies set out in Clauses 16.1 to 16.5 (inclusive) [the compensation provisions] and any claims arising pursuant thereto, the Buyer shall have no right or remedy and shall not be entitled to make any claims in respect of any such under-delivery.”

BP argued that Scottish Power’s claim was one for “loss of use” or “loss of production” as it concerned Scottish Power’s inability to use gas produced from the Andrew Field or a lack of production of gas by BP from the Andrew Field. In addition, BP argued that Scottish Power’s purchase of replacement gas at a higher price had mitigated the loss of profit and loss of revenue that Scottish Power would otherwise have suffered had it been unable to source replacement gas and, therefore, their claim should be regarded as a claim for loss of profit or loss of revenue.

The judge (Mr Justice Leggatt), when forming his opinion, considered that, in the sale of goods, the basic, normal measure of loss for non-delivery of goods is the difference between the agreed contract price of the goods and their open market price and he did not believe that the exclusion clause was intended to exclude basic, normal losses (i.e. direct losses), as doing so would result in the clause excluding all financial losses of Scottish Power, which he regarded as a perverse idea.

In the judge’s view, the types of loss that the exclusion clause intended to exclude were:

  • secondary losses, which go beyond the normal or basic measure of loss (e.g. where replacement goods are unable to be found with the result that the purchaser's ability to trade is adversely affected); and
  • remoter losses, which would not in ordinary circumstances be expected to arise.

These secondary and remoter losses have in the past been referred to by the courts as "consequential" and "indirect" losses (falling within the second limb of the rule in Hadley v Baxendale [1854] EWHC J70) and require both parties to have specific knowledge as to the risk of such losses at the time of the parties entering into the contract.

Accordingly, the judge considered that the exclusion clause was meant to exclude various other types of losses, which had not occurred and were not being claimed by Scottish Power.

In explaining his conclusion, the judge provided his interpretation each type of loss in Article 4.6’s list of excluded losses (i.e. loss of profit, loss of revenue, loss of contracts, loss of production and loss of use) and, on his interpretation of these, the types of loss claimed by Scottish Power did not fall within the excluded categories of "loss of use" or "loss of production". (NB His approach was similar to that followed by the court in Transocean Drilling UK Ltd v Providence Resources PLC [2014]  EWHC 4260 (Comm) and reached the same conclusion as the court in Glencore Energy UK Ltd v Cirrus Oil Services Ltd [2014] EWHC 87 (Comm)).

However, as the Supply Contracts provided an express remedy for Scottish Power in respect of non-delivery, namely financial compensation in the form of a gas price reduction, the judge found that this compensation comprised Scottish Power’s sole remedy for BP’s breach of contract (as BP’s failure to deliver gas fell within the scope of the Clause 16 compensation mechanism) …and thereby excluded Scottish Power’s claim for any further damages.

These cases collectively emphasise that the Commercial Court will interpret exclusion clauses narrowly and will seek to ensure that a wronged party is not denied a contractual remedy in the event that the counterparty fails to perform …unless this has been expressly and clearly agreed and captured in the contract.

Some drafting techniques that may help to defend an exclusion of liability against such a narrow interpretation include:

  • listing the types of loss that are intended to be excluded, e.g. in a definition of “Indirect Loss”; and/or
  • expressly recording the circumstances justifying the existence of the exclusion clause – e.g. if an exclusion or limitation has been negotiated in exchange for a price reduction or other commercial concession, this could be stated in the contract (as doing so should help to reduce, but not eradicate, the scope for creative interpretation by a court).

 

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