Exclusion clauses - loss of profits and wasted expenditure

Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies PLC [2023] EWHC 2506 (TCC)

The question

What factors does the court take into account when construing an exclusion clause that covered loss of profits and wasted expenditure, and how does the court approach arguments on whether UCTA applies where the parties are dealing on standard terms of business that have been subject to some negotiation?

The key takeaway

Even where there is an imbalance in the parties’ bargaining power, where the language of an exclusion clause is clear and explicitly includes a reference to loss of profits, a court will not strain the language of the clause to hold it ineffective.

The background

Pinewood Technologies PLC (Pinewood) is a UK developer and supplier of a management system for motor dealers (the DMS). The dispute stemmed from two reseller agreements made between Pinewood and Pinewood Technologies Asia Pacific (PTAP), in which Pinewood designated PTAP as its exclusive reseller of the DMS in various territories outside the UK.

PTAP claimed that Pinewood had breached its obligations to develop the DMS for use in the specified territories, seeking damages for loss of profits and wasted expenditure, totalling an estimated US $312.7m. Pinewood denied the alleged breaches of the reseller agreements and PTAP’s claims for damages for lost profits and wasted expenditure which it said came under the excluded types of loss in the reseller agreements (clause 16.2):

“… liability for: (1) special, indirect or consequential loss; (2) loss of profit, bargain, use, expectation, anticipated savings, data, production, business, revenue, contract or goodwill; (3) any costs or expenses, liability, commitment, contract or expenditure incurred in reliance on this Agreement or representations made in connection with this Agreement; or (4) losses suffered by third parties or the Reseller’s liability to any third party”.

Pinewood’s position was also that its liability was subject to general liability limits under clause 16.3 of the reseller agreements. It counterclaimed for unpaid invoices due under the reseller agreements. PTAP defended the counterclaim by claiming an equitable right to set off amounts it claimed were owed to it based on its initial claim, arguing that the no set off clause contained in the reseller agreements either didn’t apply to equitable set offs or was an unfair term under UCTA 1977 (not meeting the requirement of “reasonableness”).

The court was asked by Pinewood to:

• construe the provisions of the exclusion clause to find whether PTAP’s claim was excluded by clause 16.2 as a claim for “loss of profit” or alternatively for “any costs or expenses…incurred in reliance on” the reseller agreements
• declare that Pinewood’s liability was limited by clause 16.3 of the reseller agreements to £134,528 in respect of the first agreement and to £0 in respect of the second agreement
• enter summary judgment on Pinewood’s counterclaim for outstanding sums due under the reseller agreements on the basis of a “no set off” provision in clause 8.10 of the reseller agreements.

The decision

Construing the exclusion clause

The court rejected PTAP’s arguments that, as a matter of principle, the exclusion clause could not apply to the non-performance of contractual obligations or to repudiatory breaches of contract, but said that it will be a question of construction in every case whether the exclusion clause covers the breach or, in the case of clause 16.2, the loss in question. Losses pleaded by PTAP which did not fall under the specified losses in clause 16.2 could be caught by clause 16.3. The language of the exclusion clause was held to be “clear and unambiguous” and the intention of the clause was clearly to “exclude the specified heads of loss arising by reason of any liability on the part of Pinewood”. It did not serve to remove all of PTAP’s substantive rights and remedies because PTAP’s claim for incurred costs, while limited by clause 16.3, was not excluded. 

The court also rejected PTAP’s argument that the exclusion clause was only intended to cover indirect or consequential losses, in line with the second rule of Hadley v Baxendale. This was held to be supported neither by the surrounding provisions in the contract or the language of the clause itself.

UCTA

The UCTA arguments centred on whether PTAP was dealing on standard terms of business and, if so, whether the provisions satisfied the “reasonableness” test.

The court held that it was apparent from the evidence that the reseller agreements had been the subject of negotiation, culminating in substantive amendments to the draft (which had started off in a standard form held by Pinewood on its internal system) originally provided by Pinewood. It was also clear that both sides had had access to legal advice. It could not be said that the terms were “effectively untouched” or that none of the changes was material or that the changes left the first reseller agreement unchanged and the fact that there was no negotiation of some of the clauses did not alter the position. 

Set off

The court took a cautious approach to its interpretation of the clause restricting set off, again highlighting the importance of the requirement for clear and unambiguous wording, particular in circumstances such as here where the clause was asymmetrical.

Clause 8.10 provides that payment “shall be made in full without withholding deduction or set off, including in respect of taxes, charges and other duties” (emphasis added). The court agreed with Pinewood that it was clear from the use of the word “including,” that “taxes, charges and other duties” are not exhaustive of the items which may not be withheld, deducted or set off against user account fees. It was also well established that “set off” meant both legal and equitable set off.

The court therefore granted reverse summary judgment in favour of Pinewood and summary judgment on their counterclaim. 

Why is this important?

It confirms what we have seen with a whole host of judgments this year, the court will approach the exercise of construing an exclusion clause using the ordinary methods of contractual interpretation and on the basis that commercial parties are free to make their own bargains and to allocate risks as they think fit. In commercial contracts negotiated between business-people capable of looking after their own interests and of deciding how risks inherent in various kinds of contract can be economically borne, courts are reluctant to place a strained construction on words in an exclusion clause.

Any practical tips?

When structuring and negotiating an exclusion clause in a contract, consider:

• specifically referring to what kind of loss or expenditure is limited or excluded
• using clear and unambiguous wording
• setting out any exceptions to the exclusion clause to avoid uncertainty
• once negotiations are complete, read the words of the exclusion clause in the context of the whole exclusion clause, the contract as a whole, and the material background and circumstances applicable at the time the agreement was entered into.

Winter 2023