How to draft a successful exclusion clause: lessons from the Glencore case

Lexis®PSL Commercial recently interviewed Paul Jonson, head of Pannone’s dispute resolution and regulatory division, on the Glencore Energy UK Ltd v Cirrus Oil Services Ltd case.

The case shows that drafting successful exclusion clauses has become something of an art form.

Standard form contracts are a useful start but every situation should be examined carefully.

What is the background to this case?

Glencore sought damages from Cirrus Oil for repudiation of a contract for the sale of around 630,000 barrels of crude oil. The contract included the following exclusion clause:

32.1. Except as specifically provided in the Special Provisions or in Section 12.4, in no event, including the negligent act or omission on its part, shall either party be liable to the other, whether under the Agreement or otherwise in connection with it, in contract, tort, breach of statutory duty or otherwise, in respect of any indirect or consequential losses or expenses including (without limitation) if and to the extent that they might otherwise not constitute indirect or consequential losses or expenses, loss of anticipated profits, plant shut-down or reduced production, loss of power generation, blackouts, or electrical shutdown or reduction, hedging or other derivative losses, goodwill, use, market reputation, business receipts or contracts or commercial opportunities, whether or not foreseeable.

What issues did this case raise?

Cirrus Oil submitted that the effects of this exclusion clause were twofold:

  • to exclude all liability ‘in respect of any indirect or consequential losses or expenses’—this effectively covered all losses falling within the second limb of Hadley v Baxendale (ie unusual losses for which the defaulter can only be liable if made aware of the danger of them being suffered), and
  • to exclude all liability for loss of anticipated profits, whether or not they can be seen as ‘indirect or consequential losses or expenses’ under Hadley v Baxendale.

Cirrus Oil argued that a claim made under section 50(2) and (3) of the Sales of Goods Act 1979 was a claim for lost profits. Since Glencore had been able to terminate its contract with its supplier without any liability and without taking delivery of any crude oil, the nature of its loss was a loss of the profit that would have been earned had the transaction proceeded.

What was the outcome of this case?

The court rejected the argument that Glencore’s losses were excluded under Clause 32.1 on the basis that damages for non-acceptance of goods under section 50(2) and (3) of the Sales of Goods Act 1979 concern the seller’s loss of a bargain with the buyer and not his loss of profits.

To what extent is the judgment helpful in clarifying the law in this area?

Ultimately, section 50 of the Sales of Goods Act 1979 is not a computation of lost profit. Instead, the measure of damages comes from calculating ‘how much worse off the seller would be if, at the time of the breach, he had sold the goods to a substitute buyer’—ie, the amount by which the agreed contract price exceeded the price obtained (or obtainable) in the market.

The key point in this decision is that parties need to be clear about excluding liability for loss of a bargain—otherwise they may find themselves ‘over a barrel’.

Are there any patterns or trends emerging in the law in this area?

The Glencore decision is just one of many examples of the courts adopting a strict approach to the interpretation of exclusion clauses and justifying these interpretations by reference to what makes ‘business sense’.

In Gb Gas Holdings Ltd v Accenture (UK) Ltd and others the court adopted a narrow interpretation of the meaning of ‘indirect loss’. Such a decision has led to various types of loss being recoverable as direct losses, effectively neutralising the effect of exclusions of liability for indirect loss.

In Internet Broadcasting Corpn Ltd (t/a NETTV) v MAR LLC (t/a MARHedge) [2009] the court decided that a clause excluding liability for loss of profits did not cover a repudiatory breach given that the main object of the contract was to achieve profits. The decision emphasised that exemption clauses will not be construed in a way which is at odds with the main object of the contract—here, profits. Although the court accepted that it was possible for a party to exclude liability for its own fundamental breach, clear wording to that effect would be needed.

Although the Court of Appeal in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd confirmed there is no presumption that an exclusion clause will not apply to deliberate breach, such clauses would likely be construed as narrowly as possible.

Here, the court decided that if the parties had intended to exclude liability for loss of profit in the event one party’s refusal to perform the contract, this should have been set out unambiguously and in a stand-alone clause. Pannone LLP acted for one of the parties in this case.

In reaching his decision, Mr Justice Cook looked at what made ‘business sense’. Accepting Cirrus Oil’s submissions would mean Glencore could recover nothing in respect of the former’s repudiation since no out of pocket losses were suffered. Mr Justice Cook declared that this would be an ‘unlikely and commercial’ result which would require ‘extremely clear words’.

What are the implications for lawyers and what will they need to be mindful of when advising clients?

Drafting successful exclusion clauses is becoming something of an art form. Parties intending to exclude certain types of liability—eg in relation to loss of profit—for deliberate breach as well as defective performance need to spell this out. And then spell it out again.

Lawyers now need to go beyond a belt-and-braces approach to drafting exclusion clauses. After all, Cirrus Oil had effectively ‘doubled-up’ on their protection against liability for loss of profits, only to find that they were open to a claim for loss of a bargain.

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor. Details of the case can be found by clicking here.

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