High Court upholds clause excluding liability for loss of profits and leaves suffering party with no remedy

High Court upholds clause excluding liability for loss of profits and leaves suffering party with no remedy

IFRS 16 and its impact on EBITDA/debt and financial covenants

The recent case of Motortrak Ltd v FCA Australia Pty Ltd [2018] EWHC 990 (Comm) served as a useful reminder of the importance of context when the court is deciding whether or not to give effect to a clause limiting a party's liability under a contract.

In June 2016, FCA Australia Pty Ltd (“FCAA”) repudiated an agreement for online marketing services (the “Agreement”) which it had entered into with Motortrak Ltd (“Motortrak”), which was not due to expire until late 2019. With FCAA having stopped making payment of the fees set out under the Agreement, Motortrak, the service provider, claimed damages for loss of profits in respect of the sums that it would have received from FCAA for the remainder of the term of the Agreement.

FCAA’s Arguments

FCAA argued that the fees payable under the Agreement were higher than they ought to have been due to Motortrak having bribed the previous managing director of FCAA.

In arguing that no payment to Motortrak was due, FCAA sought to rely upon the following mutual limitation of liability clause which was set out in the Agreement:

Neither party shall be liable to the other for:

(a) any indirect or consequential loss or damage at all; or

(b) any loss of business, capital, profit, anticipated saving, reputation or goodwill, arising out of or in connection with the Agreement or its subject matter.”

Motortrak’s Arguments

Motortrak denied FCAA’s suggestion of bribery and explained to the court the reasons for the payments that were made to associated companies of the managing director in question.

In respect of limitation of liability, Motortrak submitted that where the defaulting party has not performed its contractual obligation to pay, a limitation of liability clause should not have the effect of preventing a party from claiming for the revenue owed to it under the terms of an agreement, and for the court to consider this to be the case would render that agreement meaningless. In making this submission, Motortrak relied upon the case of Suisse Atlantique Societe d'Armement [1967] 1 AC 361, which stated that:

"the parties cannot in a contract have contemplated that the clause should have so wide an ambit as in effect to deprive one party's stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent."

The Court’s Findings

The court found that Mototrak had bribed a previous managing director of FCAA and as a result Mototrak had paid a higher price for FCAA’s services than it would have done were this not the case.

In a departure from the expected position, that an obligation to pay would be held as independent from a limitation of liability clause, the court held that the exclusion clause in question was clear and unambiguous and there was no factual reason in the case at hand to suggest that it should rule otherwise. The court appears in its judgement to have ensured an equitable outcome in light of its findings of bribery and excessive fees. Aside from a claim for wasted costs, Motortrak were left without a remedy for the revenue losses that it suffered following FCAA’s repudiation. The court in fact found in favour of FCAA’s counterclaim for damages in respect of the difference in the amounts paid for FCAA’s services and the sums that would have been charged in the absence of the bribes.

Given the findings that there had been illegal behaviour in this case that had given rise to the payment obligations in question it is perhaps unsurprising that the court found in favour of the defendant in this case. In finding that the limitation of liability provision excluded FCAA from an obligation to pay, the court did however depart from established contractual principles. This case therefore demonstrates yet again the importance of context in determining whether or not courts will give effect to limitation of liability clauses.

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