Exclusion clauses: High Court grants summary judgment as losses fell within clear and unambiguous exclusion clause and UCTA reasonableness test did not apply

In a recent decision, the High Court granted summary judgment in favour of a defendant on the basis that the claimant had no real prospect of establishing that its losses were not excluded under the terms of the relevant agreements: Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies PLC [2023] EWHC 2506 (TCC).

The decision acts as a reminder that an exclusion clause will only need to satisfy the "reasonableness test" under the Unfair Contract Terms Act 1977 (UCTA) in certain circumstances, such as where one party deals on the other's written standard terms of business. A court is unlikely to find that this requirement is satisfied where negotiations have resulted in substantial amendments to the terms, whether or not the exclusion clause has itself been amended.

It is also a reminder that the courts will apply even a broad exclusion of liability, where the language of the clause is clear and unambiguous – though it will not lightly find that a clause excludes all of a party's liability so as to turn its obligations into mere declarations of intent. The same approach to construction applies when considering whether a clause excludes liability for deliberate repudiatory breach as for other breaches of contract.

The decision also suggests that the courts will be slow to order a party to disclose documents relating to issues which are not pleaded, to enable the applicant to determine whether it has a pleadable case (in this case as to fraud).

Background

The claimant (PTAP) and defendant (Pinewood) entered into two contracts for PTAP to market and sell Pinewood's dealer management system for the automotive industry in certain territories (the Agreements).

PTAP brought a claim against Pinewood alleging breaches of various obligations under the Agreements, which it said caused significant disruption of customer contracts and therefore lost profits for PTAP under the Agreements, as well as certain incidental losses in the form of additional costs.

Pinewood denied the alleged breaches and argued that PTAP's claim  was excluded in any event by an identical exclusion clause appearing in each of the Agreements. Specifically, the exclusion clause excluded (at clause 16.2) any 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 [PTAP's] liability to any third party".

Alternatively, Pinewood argued that any liability it might have was limited to £134,528 under the limitation clause set out at clause 16.3.

Pinewood brought an application for reverse summary judgment on the basis that the exclusion of liability at clause 16.2 applied and therefore PTAP had no real prospect of success at trial. Alternatively, Pinewood sought a declaration that its liability was limited to £134,528 under clause 16.3.

PTAP argued that the summary judgment application raised questions of construction that could only be dealt with at trial. It also applied to amend its case to argue that clause 16 of the Agreements formed part of Pinewood's "written standard terms of business" within the meaning of UCTA, and did not meet the statutory requirement of "reasonableness", so that the clause was ineffective (the UCTA argument).

PTAP also applied for specific disclosure of certain categories of documents in support of possible claims for fraud or fraudulent misrepresentation which had not been pleaded (and would not be excluded due to a carve out at clause 16.1 of the Agreements).

Decision

The High Court (Joanna Smith J) granted summary judgment in favour of Pinewood and dismissed PTAP's applications.

Application to amend

It was agreed that the proposed amendment to plead the UCTA argument should only be allowed if it had a "real prospect of success".

The judge referred to a number of authorities which considered when a party may be said to be dealing on the other's written standard terms of business terms, so that an exclusion of liability  would be subject to the reasonableness test under UCTA. As set out by the Court of Appeal in African Export-Import Bank v Shebah Exploration & Production Co Ltd [2017] EWCA Civ 845, the key question was whether the standard terms remained "effectively untouched", or whether there were more than insubstantial variations to the terms (whether or not those variations were to the provisions excluding liability).

Applying these principles to facts of the case, the judge noted that negotiations involving email exchanges and calls had clearly taken place between the parties in advance of finalising the Agreements and that both parties had taken legal advice in relation to the Agreements. While some changes were rejected by Pinewood, others were accepted. In these circumstances, it was impossible to say that the terms were effectively untouched, or that none of the changes was material. Accordingly, PTAP had no real prospect of establishing that the Agreements were on Pinewood's written standard business terms, and the amendment application should be dismissed. As such, there was no need for the judge to go on and consider whether or not the exclusion clause was reasonable.

Construction of the exclusion clause

The judge summarised the key principles which apply to the construction of exclusion clauses, including the following:

• An exclusion clause must be construed in accordance with the ordinary methods of contractual interpretation, and the principle of freedom of contract requires the court to respect and give effect to the parties’ agreement.
• However, the court will start from the presumption that, in the absence of clear words, the parties did not intend to derogate from their normal rights and obligations under the common law: Triple Point Technology Inc v PTT Public Co Ltd [2021] AC 1148; Modern Engineering (Bristol) Ltd v Gilbert Ash (Northern) Ltd [1974] AC 689.
• The court will, if necessary, strain to avoid a construction which gives the clause such a wide ambit that it derives one parties obligations of all contractual force and the contract becomes "a mere declaration of intent": Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38 (see this blog post).

The judge rejected PTAP's submission that exclusion clauses “do not apply to the non-performance of contractual obligations or to repudiatory breaches of contract”, or that such a proposition was supported by the decision in Kudos. Similarly, there was no presumption against an exclusion clause being construed to cover deliberate repudiatory breach, or a need for clear words before it would do so (as the High Court held in AstraZeneca UK Ltd v Albermarle International Corporation [2011] EWHC 1574 (Comm), criticising the decision in Internet Broadcasting Corporation Ltd (t/a NETTV) v MAR LLC [2009] EWHC 844 (Ch): see this blog post).

Applying these principles to the facts of the case, the judge was satisfied that any liability on the part of Pinewood for breach of the Agreements giving rise to damage in the form of loss of profit and wasted expenditure fell within the scope of the exclusion clause. The key points in favour of the judge's conclusion were:

• The language of the exclusion clause was clear on its face and unambiguous – there was no suggestion that the word "breach" should be qualified or limited in scope, or that the words "in connection with this agreement" should be taken to mean in performance of the agreement, ie to exclude repudiatory breaches.
• The language did not support an argument that the types of loss at sub-clauses (2), (3) and (4) of clause 16.2 were intended to be governed by the reference in (1) to "special, indirect or consequential loss". The sub-clauses made up a series of separate and distinct categories of loss that were to be excluded.
• Viewing clause 16 as a whole, the title of the clause, "Liability of Pinewood", and the title of clause 16.2, "Excluded Types of Loss", described the nature of the clauses to which they relate in clear terms. It was difficult to see how PTAP's narrow construction of clause 16.2 (ie as excluding certain types of breach) could be consistent with the heading to clause 16.3, "General Liability Limit".
• If the wording of clause 16.2 appeared to exclude all liability for loss of any type, then that would render otiose the general liability limit in 16.3, but in fact PTAP had pleaded incidental losses (in the form of additional costs) which it was accepted fell outside the excluded categories of loss in clause 16.2.
• Taking the Agreements as a whole, the differentiation elsewhere between different types of breaches (ie repudiatory, remedial and repeated breach) indicated that the parties were well aware that they could specify different types of breaches, yet the wording of the exclusion clause was broad and only referred to the umbrella term "breach".
• Even when there is an imbalance of power between the parties in the overall factual background, there is no need for the court to strain the language if it is clear.
• Pinewood’s construction did not deprive its obligations under the Agreements of all contractual force (as per Kudos). PTAP's key rights deriving from its appointment as Pinewood's exclusive reseller in the specified territories (including for example the right to restrain Pinewood from soliciting customers in the territories) were specifically enforceable by PTAP and were not excluded or limited by clause 16. And there were categories of loss which it was accepted fell outside the clause (see above).

Specific disclosure application

PTAP accepted that it did not have the evidence needed to support a plea of fraud or fraudulent misrepresentation, and accordingly it had not applied to amend its case in that regard. However, it sought disclosure from Pinewood to enable it to establish whether it had a pleadable case, arguing that the existing available facts invited further inquiry and explanation and that it would be unjust to enter summary judgment when there was a "real possibility" that disclosure could enable it to amend its case.

The judge dismissed the application. She noted that there is no express provision under Practice Direction 57AD (Disclosure in the Business and Property Courts) for specific disclosure at such an early stage of the proceedings. While she accepted, on the basis of other first instance authority, that there was a residual jurisdiction to order disclosure under the court's general case management power at CPR 3.1(2)(m) to "take any other step or make any other order for the purpose of managing the case and furthering the overriding objective", such an order would only be granted where it was reasonable and necessary and did not undermine the integrity of PD 57AD.

In the present case, PTAP could not provide any compelling reason why the application did not cut across or sidestep the regime in PD 57AD. The provisions for Extended Disclosure under the PD required the identification of "Issues for Disclosure", which were those key issues in dispute that the parties considered would need to be determined with some reference to contemporaneous documents, and which should be identified by the parties’ statements of case. The scheme of the PD was to encourage and permit disclosure in relation to the issues to be determined at trial, and it would be contrary to the purpose and objectives of the PD to order disclosure in relation to unpleaded issues purely on the grounds that something might turn up which would change the shape of the proceedings.

The present application was no more than a fishing expedition, and the documents sought were not disclosable in the absence of an amended case to plead fraud.

Note: On 7 December 2023, the Court of Appeal refused permission to appeal against this decision.