Exclusion clauses: High Court finds claim for "charges unlawfully avoided" fell within contractual exclusion for loss of anticipated profits

The High Court has granted summary judgment dismissing a claim for lost charges arising from an alleged breach of an exclusivity clause in a supply agreement. The court held that the claim was in reality a claim for lost profits and, as such, subject to an effective exclusion of liability for "anticipated profits": EE Ltd v Virgin Telecoms Ltd [2023] EWHC 1989 (TCC).

The court rejected as "fanciful" the claimant's argument that its claim for "charges unlawfully avoided" was something other than a claim for loss of profits. The decision emphasises that, while the court will assume that (in the absence of clear words) the parties did not intend to derogate from normal rights and obligations, clear wording will be respected. In particular, where words in an exclusion clause are fairly susceptible of one meaning only, that meaning must be attributed to the clause unless doing so would relieve a party from all liability and therefore turn the contract into nothing more than a mere declaration of intent. In the present case, that would not be the effect of interpreting the clause to apply to exclude the relevant claim, and so the clear words had to be given effect.

The decision also highlights the fact that a mere suggestion that further evidence may turn up at trial is insufficient to escape summary judgment. If a party wishes to rely on the availability of further evidence at trial, it must substantiate that assertion by describing (at least in general terms) the nature of the evidence and its relevance to the issues before the court.

Background

EE and Virgin are both network operators which provide their respective customers with mobile telephone and data services. They contracted for Virgin to be able to make use of EE's physical radio access network in order to provide its customers with such services.

Pursuant to the agreement, EE was required to provide Virgin with various services including 2G, 3G and 4G mobile network services. Virgin agreed that it would exclusively use EE's network in providing services to its customers and would pay EE charges which depended on the level of usage of the EE network by Virgin's customers.

An amendment to the original agreement permitted Virgin to use other networks to provide 5G services (and to provide 2G, 3G and 4G services to 5G customers). Virgin entered into a separate contract with Vodafone in January 2021 to use its network to supply Virgin's customers with 5G services.

EE contended that, in breach of the exclusivity clause, Virgin migrated non-5G customers from the EE Network on to the Vodafone network, and added new non-5G customers directly to the Vodafone network. EE sought loss of revenue (claimed as damages) of £24.6 million, on the grounds that Virgin had "unlawfully avoided" the charges that would have been payable in respect of those customers had they used EE's network.

In its defence, Virgin argued that this was not in breach of the exclusivity clause and, in any event, the correct measure of loss would be EE's loss of profit (and not its loss of revenue) which was excluded by an exclusion clause in the agreement which stated that neither party would have liability to the other in respect of "anticipated profits" or "anticipated savings". Virgin applied for strike out and/or reverse summary judgment of EE's claim. EE opposed the application, contending that it raised a question which could only be dealt with at trial.

Decision

The High Court (Joanna Smith J) granted the application for summary judgment and dismissed EE's claim.

Applicable principles

The judge helpfully summarised the approach to the construction of exclusion clauses as set out in the case law, noting that "the exercise of construing an exclusion clause must be undertaken in accordance with the ordinary methods of contractual interpretation". However, there are some specific rules to be taken into account when interpreting exclusion clauses, in particular:

1. The court will start from the assumption that in the absence of clear words the parties did not intend to derogate from normal rights and obligations.
2. The more valuable the right the clearer the language of the exclusion clause will need to be for it to be given effect.
3. Any ambiguity remaining following a linguistic, contextual and purposive analysis will be resolved against the party seeking to exclude liability.
4. An exclusion clause will not normally be interpreted in such a way that would defeat the main object of the contract or create a commercial absurdity, such as where the clause results in an "illusory bargain".
5. Where words in an exclusion clause are fairly susceptible of one meaning only, that meaning must be attributed to it unless "the meaning is repugnant to the contract". However, this is a principle of last resort and applies only in cases where the effect of the clause is to relieve one party of all liability for breach of any of the obligations which it has purported to undertake.

Whether summary determination appropriate

The judge then went on to consider whether the issue of construction could be determined without a full trial. EE argued that its claim was for "charges unlawfully avoided", which it said was neither a claim for loss of profits nor wasted expenditure, but a different beast entirely. Virgin argued that the court should look to the substance of the claim, rather than how EE sought to label the loss.

The judge emphasised that an obligation to pay charges created a contractual debt, but the same cannot be said for a claim for charges unlawfully avoided (which can only be claimed in damages). To elide the two confuses a claim in debt to recover for a failure to pay for services provided and a claim for damages for the diversion away of customers. In circumstances where the contract states that charges are payable "for the provision of the services", if a party has been prevented from providing such services its only claim in respect of those charges lies in damages.

On that basis, Joanna Smith J found that EE's claim in these proceedings was in fact a claim for loss of profit; the profit it would have made if the Virgin customers (alleged to have been wrongfully diverted to other networks) instead used EE's network under the terms of this agreement. Under the compensatory principle only the profit that would have been made once any additional costs in providing services to the diverted customers were netted off would be recoverable. Even if (as EE suggested in its supporting evidence) it incurred no costs in connection with the provision of its services, such that its loss would have in fact amounted to the value of the charges that it would have received had the customers not been diverted, this was still a claim for loss of profits. Any attempt by EE to escape the strictures of the fundamental compensatory principle was, the judge stated, "bound to fail".

Having determined that EE's claim was properly a claim for loss of profits, the judge then went on to consider whether she could "seize the nettle" as to the construction of the exclusion clause at this stage. In doing so she reviewed the evidence provided by EE and noted that this amounted to nothing further than a suggestion that "something might turn up" at trial. This was insufficient to escape an application for summary judgment; if a party wishes to rely on the availability of further evidence at trial, it must substantiate that assertion by describing (at least in general terms) the nature of the evidence and its relevance to the issues before the court. While the court should proceed with caution when invited to make a final decision without a trial, in this case there was no impediment to making such a decision. The true nature of EE's claim was a matter of law which could be decided or, if it was a mixed question of fact and law, then all relevant facts were before the court. The question of the true interpretation of the exclusion clause was a question of construction largely dependent on the terms of the contract itself, and the judge had before her all the necessary evidence to determine that question.

Decision on the facts

Finally the judge turned to the question of whether EE's claim for loss of profits was excluded under the terms of the exclusion clause in the agreement, noting that both the true nature of the claim (ie whether it was a claim for loss of profits) and thus whether it fell within the relevant exclusion clause, was "unsurprisingly a case sensitive issue". Authorities dealing with similar expressions in other contracts must be treated with caution owing to the fact that different contracts use different words, and involve different backgrounds and different applicable commercial common sense.

Applying the principles set out above, the judge found that EE's claim was excluded by the terms of the contract. The language of the exclusion clause was clear and unambiguous; the wording "anticipated profits" was capable of one meaning only and was, in the circumstances, equivalent to "loss of profits". With one express exception (not relevant to the issues at hand), liability for anticipated profits in claims for damages was excluded. The fact that there is no other qualification on this clause means that the parties were intending to have it apply as widely as possible.

The judge emphasised that this was a sophisticated, lengthy and bespoke agreement reached by sophisticated parties and detailed consideration went into the risk and rewards for each party. The exclusion clause in particular was a tailor-made stand-alone clause intended to have a wide reach. It applied equally to a loss of profits by both parties, not existing for the benefit of one party alone. In the circumstances, the parties could be taken to have meant what they said and the words used were sufficiently clear to rebut the presumption that neither party intends to abandon remedies arising by operation of law. To give the clause a narrower construction would require the court to read into the existing wording a limitation on their scope which was not provided for by the contracting parties in the clear wording they agreed.

This was also not an appropriate case for the court to invoke the “illusory bargain” principle to depart from the natural meaning of the contract, not least because if EE was correct that there had been a breach of the exclusivity obligation, there were remedies available to EE including a claim for injunctive relief.

Note: The appeal was heard on 18 November 2024 with judgment reserved