While lawyers were all brought up on the principle of “freedom to contract”, there appears to be a growing trend that the courts are prepared to take a more restrictive approach when it comes to construing the scope of an exclusion clause. The latest example of this can be found in the Court of Appeal’s judgment in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd.
Kudos Catering v Manchester Central Convention Complex
As you can tell from the name of the case, the defendant owns a large convention centre in Manchester. It engaged Kudos to provide exclusive catering services at the venue for a five-year period. As part of the contract, Kudos was required to invest substantial sums in catering equipment for the venue.
Part way through the contract, the Convention Centre wrongly purported to terminate Kudos’ contract, thereby committing a repudiatory breach. Kudos accepted the breach, terminated the contract and claimed damages. Part of its claim consisted of a £1.3 million claim for loss of profit (being the profit that Kudos claimed it would have made had the contract been left to run its proper course).
“Forget it” responded the Convention Centre. “Read the contract.”
Sure enough, buried within the contract was a term which stated that the Convention Centre would have no liability whatsoever for any claim for loss of goodwill, business revenue or profits.
At first instance and in the Court of Appeal
Kudos spoke to its lawyers and asserted that the clause, on its true construction, did not exclude the Convention Centre’s liability. While Kudos lost the argument at first instance, it thought it was on to something and went to the Court of Appeal. If the court sided with the Convention Centre, Kudos would be left without any remedy whatsoever. However, practically speaking, Kudos could not refuse to accept the Convention Centre’s repudiatory breach and continue to provide catering at the venue against the Centre’s true wishes.
The Court of Appeal:
- Looked at the claim.
- Looked at the wording of the clause and the contract.
- Considered the purpose of the contract as a whole and how it was meant to work.
- Decided that whatever the parties had in mind when they agreed the clause, one thing that they could not have intended was that the clause would have such a wide ambit so as to rob one party of all contractual force. It just did not make business commonsense to deprive the contract of its commercial objective.
Previous cases have held that a court should start with the assumption that neither party, when entering into a contract, intends to abandon its remedies. Clear words are required to do so. But when deciding whether or not the words are clear, the court held that you should not be confined to the four lines of the clause itself, but should consider the clause’s wording in its wider context.
The Court of Appeal:
- Found that if the parties had really intended to exclude all financial loss in the event that one party refused to perform its obligations, the parties would have spelt this out clearly in a free standing clause. Here the clause was buried deep within a series of sub-clauses dealing with indemnities and insurance provisions.
- Concluded that this exclusion clause restricted a claim for financial loss in the respect of poor performance as opposed to non-performance.
What does this all mean?
Previously we have seen the courts struggling to see why an exclusion clause should have effect where there has been a deliberate and knowingly unlawful breach by one party. Here we have an example of the Court of Appeal refusing to believe that one party would agree to throw away all of its contractual remedies in the event of the other party wrongfully refusing to allow it to perform what would have been a long term valuable contract.
Again we see a fine example of the Court reading what some would say were very clear unambiguous words in such a way as to ensure the result was in line with good commercial commonsense. Whoever said that the judiciary was out of touch??
