Court of Appeal finds clause excluding liability for "anticipated profits" captured claim for charges that would have been due under the contract

The Court of Appeal has, by a majority, upheld a decision that a clause in a telecommunications supply agreement excluding "anticipated profits" meant that the claimant could not recover its losses for the defendant's breach of exclusivity provisions which had led to the claimant earning reduced sums under the contract: EE Ltd v Virgin Mobile Telecoms Ltd [2025] EWCA Civ 70.

The decision emphasises that exclusion clauses will be interpreted using ordinary methods of contractual construction. While the court will assume that, in the absence of clear words, the parties did not intend to give up valuable rights, the court will not strain to find an alternative interpretation where a clearly drafted clause allocates risks between commercial parties. It also shows that the value of previous decisions dealing with similarly worded clauses may be limited, particularly where the circumstances are different.

Also noteworthy is the dissenting opinion of Lord Justice Phillips who would have found that the clause did not exclude the losses claimed, in particular because he considered that excluding those losses would have undermined the commercial bargain between the parties and therefore was unlikely to have been intended.

The fact that senior judges can disagree on such matters illustrates the challenges involved in interpreting exclusion clauses. As a practical matter, while it can be difficult (if not impossible) to remove the possibility of any challenge to the meaning of a clause, the clearer and less ambiguous a clause is, the less likely it is to lead to a costly dispute.

Background

As set out in our previous blog post, here, the case involved a dispute between EE Ltd (EE) and Virgin Mobile Telecoms Ltd (VM) over a Telecommunications Supply Agreement (TSA). Under the TSA, EE provided VM with access to its mobile network for 2G, 3G, and 4G services, which VM used to provide services to its users. VM agreed to use EE's network exclusively for this purpose during the "Exclusive Period".

The TSA was subsequently amended to permit VM to use other networks to provide 5G services, in which case it could also provide 2G, 3G and 4G services to the 5G customers.

The dispute arose when VM entered into an agreement with another service provider for 5G services and began migrating customers (or adding new customers) to that new provider's service. EE claimed that VM had breached the exclusivity provisions in the TSA and sought to recover damages for the amounts it would have been entitled to charge VM if the relevant customers had used EE's network.

VM applied to strike out EE's claim, or for reverse summary judgment, on the basis that the losses were excluded as "anticipated profits" under clause 34.5(a) of the TSA. The relevant part of that clause provided that: "…neither Party shall have liability to the other in respect of (a) anticipated profits or (b) anticipated savings."

At first instance, Mrs Justice Joanna Smith found that such losses were excluded by the clause and therefore granted summary judgment. EE appealed.

Decision

The Court of Appeal dismissed EE's appeal. Zacaroli LJ gave the leading judgment, with which Coulson LJ agreed in a short concurring judgment. Phillips LJ gave a dissenting judgment.

Principles of interpretation of exclusion clauses

Zacaroli LJ summarised (with reference to the judgment at first instance) the approach to be taken to interpreting contracts and the application of those rules to exclusion clauses.

Importantly, previous authorities make clear that exclusion clauses must be interpreted using ordinary methods of contractual interpretation. This involves considering the natural and ordinary meaning of the words, the context, and the commercial purpose of the contract. The courts acknowledge that commercial parties are entitled to make their own bargains and allocate risks as they see fit. A court will respect that risk allocation and give effect to the parties' agreement, including exclusion and limitation clauses.

However, the court's starting position is that, in the absence of clear words, the parties did not intend to derogate from their normal rights and obligations under the common law. In this respect, the more valuable the right being excluded, the clearer the language of the exclusion clause needs to be. Unclear words will not suffice, and any ambiguity must be resolved against the party seeking to exclude liability.

Notwithstanding the above, an exclusion clause will not normally be interpreted as extending to a situation which would defeat the main object of the contract or create a commercial absurdity. Even then though, where the language is fairly susceptible of one meaning only, that meaning must be attributed to it unless "the meaning is repugnant to the contract".

Application to the case

Zacaroli LJ noted that (as was agreed between the parties) EE's claim for damages related to expectation loss. However, there was disagreement between the parties as to whether the loss in question was a "loss of profits" and so caught by the exclusion clause.

EE argued that the damages claim was one for diminution in price, and that it was well established that such a claim is not to be regarded as a claim for loss of profits. In doing so, EE relied on two earlier cases, each of which related to salvage and involved the consideration of an exclusion clause. Zacaroli LJ found that "neither judge purported to identify any established meaning of 'loss of profits', or determine that an exclusion of “loss of profits” cannot cover a damages claim for "diminution in price".

Moreover, the relevant clauses were materially different to those in the present case and they appeared in different contexts. Indeed, more generally, Zacaroli LJ made clear on a number of occasions in his judgment that previous authorities were of little assistance given they were "merely examples of judges adopting a different interpretation on different wording".

In any event, Zacaroli LJ described the debate as to whether EE's claim was for "loss of profits" or "diminution in price" as an arid one. The only question was whether EE's damages claim was one "in respect of anticipated profits" within the meaning of clause 34.5(a).

Zacaroli LJ described the core issue as whether "anticipated profits" meant something other than the value to EE of the contractual performance VM would have provided but for the breach of contract. EE put forward a number of arguments, including that: (i) the exclusion clause only applied to losses of profit outside the agreement, ie not sums directly payable under it; and (ii) the court should have in mind (following the Court of Appeal's findings in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38, considered here) that if the first instance judgment was upheld EE would be left with no effective remedy and that an exclusion clause should not be interpreted as extending to such a situation.

Zacaroli LJ expressed the view that the phrase “liability … in respect of anticipated profits” merely referred to liability in respect of profits that it was anticipated would be made, but which were not made because of the breach of contract. In other words, it had the same meaning as the phrase “claims for lost profits”. He rejected EE's argument that the language of anticipated profits was not apt to describe "charges foregone". That argument relied on a misdescription of the legal basis for the claim: EE had no claim for charges (which would sound in debt) but only a claim for damages calculated by reference to the charges it would have earned (less any additional expenses).

Zacaroli LJ accepted that an exclusion for anticipated profits could have been intended to apply only to loss of profit claims which fell outside the concept of expectation loss. However, he considered that, "if the parties had in mind such detailed distinctions between the types of loss of profit claims, the exclusion clause would have been drafted with greater specificity."

As for EE's argument that the judge's interpretation left EE without any effective remedy for the breach, which was inherently unlikely to have been the parties' intention, Zacaroli LJ emphasised the need to judge commercial reasonableness at the time of contracting and not by reference to the particular breach which had occurred. Taking this wider view, there could be many circumstances in which the innocent party had a claim (eg for wasted expenditure or an injunction) which would not be caught by the clause.

Ultimately, Zacaroli LJ found that the phrase "anticipated profits" in clause 34.5(a) was intended to and did exclude EE's claims in the current case. In summarising his reasoning, he included the following points:

• there is no overarching principle of law that limits an exclusion of liability for loss of anticipated profits to losses other than expectation loss or diminution in price;
• the wording of the exclusion in this case was clear and unequivocal;
• the better view was that liability for anticipated profits was intended to indicate something additional to loss which did not arise directly from the performance of the TSA;
• if the parties had intended the exclusion clause to cover only direct loss of profit claims that did not fall within the ambit of expectation loss, they would have done so specifically;
• the clause was part of a lengthy contract drafted with the assistance of legal advice on both sides, involving a careful allocation of risk for both parties; and
• the consequences of VM's interpretation of the exclusion clause were commercially reasonable, and no less so than the alternative reading (particularly in light of the substantive remedies that the judge found remain available to EE, whether by way of damages or equitable relief).

Phillips LJ's dissenting judgment

It is of note, and illustrative of the difficulties and uncertainties in interpreting exclusion clauses, that Phillips LJ dissented from the majority judgment, providing an alternative interpretation of the exclusion clause.

In Phillips LJ's view, the exclusion clause should not be interpreted to bar claims for lost revenue directly payable under the contract, contending that "anticipated profits" should be interpreted more narrowly, excluding only profits outside the TSA framework. The term should not encompass the straightforward claim for lost charges due to VM's breach of the exclusivity obligation.

Phillips LJ's view was that the parties would not have intended to exclude a remedy for VM's key obligation under the TSA and that the exclusion clause should not be interpreted in a way that significantly undermined the enforceability of the exclusivity provision.

Whilst Coulson LJ concluded that he preferred the analysis of Zacaroli LJ, he acknowledged that he had not found the case easy to decide and that his original instinct had been that the losses claimed fell outside the exclusion clause. However, his conclusion was that there was "nothing whatsoever in the words themselves to indicate that they are referring only to anticipated profits to be earned outside the TSA" and that the provisions as a whole pointed to the parties agreeing to have excluded the losses claimed.