What remedy is left for contract breach after Court gives wide exclusion of liability for anticipated profits?

In the case of EE v Virgin Mobile Telecoms, The Court of Appeal has given a wide ruling allowing for the exclusion of 'anticipated profits' thus preventing EE's claim for damages for Virgin Mobile’s alleged breach of an exclusivity agreement.

Parties to commercial contracts often include exclusion clauses to manage their liability risks. This may contain a list of items such as lost profits, lost revenue, and lost savings, among other items.

What was the case about?

Virgin Mobile entered into a contract with EE to use EE’s network exclusively for 2G, 3G, and 4G mobile services. EE claimed that Virgin Mobile had breached that exclusivity obligation by migrating or adding some non-5G customers to other networks. EE claimed damages for the lost revenue it would have earned had those customers been with EE rather than going to other networks.

Virgin Mobile denied the breach, but raised a further argument based on the contract containing an exclusion of liability for 'anticipated profits'. Virgin Mobile argued that this exclusion barred EE's claim, applying to the High Court to strike out the case. The High Court agreed with EE, on the basis that EE's claim was effectively a claim for lost profits, and the term "anticipated profits" was broad and covered any claim for profits that would have been earned but for the alleged breach.

EE appealed to the Court of Appeal, saying that the interpretation was too wide and the claim was really for a diminution of price, as 'anticipated profits' would have meant something other than performance of the contract. EE argued that equating anticipated profits with lost profits could mean that virtually every claim for the expected performance by a wronged party for a breach of contract would be impossible.

Court of Appeal ruling

The Court of Appeal upheld the High Court's ruling and sided with EE, but the three judges disagreed so it was only by a majority decision.

The lead judgment ruled that 'anticipated profits' should be interpreted broadly to include any profits EE would have made had Virgin performed the contract. There was no overarching legal principle that would have meant exclusions of liability for loss of anticipated profits had to be limited to losses other than the loss of expected performance. The language in the clause here was clear and unequivocal. If the parties would have wanted anticipated profits only to cover losses that were not the loss of expected performance, the drafting should have expressly said so. The liability in respect of 'anticipated profits' really just referred to liability for profits that it was anticipated would have been made but for the breach of contract.

EE would have been aware of this entering into the contract, and the parties both had legal advice and were able to assess their risks.

The lead judgment also referred to other remedies being available for injunction and wasted expenditure. These had not been excluded by the contractual wording.

In a supporting judgment, another Court of Appeal judge said that to rule otherwise would 'do violence' to the actual language of the exclusion clause.

The Court of Appeal judge who disagreed found it hard to imagine that this result was what the parties would have intended, as the key contractual obligation on Virgin Mobile was the exclusivity provision. It would be contrary to commercial business sense if they had intended Virgin Mobile could breach that key provision, and divert customers to a competitor of EE, without having liability to recompense EE for the damages caused by that breach. In his view, the term "anticipated profits" should have meant profits that were hoped for but uncertain, arising as a consequence of, but outside, performance of the contract, rather than the sums directly payable under the contract. Nevertheless, this was the minority view, so did not take effect.

Key takeaways

I see the key takeaways in this case as follows:

• Liability clauses remain at the centre of contractual disputes. When negotiating contracts, don't just gloss over the wording in liability clauses as 'standard' wording.
• Be aware that liability clauses can be interpreted widely. Be careful about agreeing to wide terms such as lost 'profits' in a liability clause in a contract if you may want to claim for the other party's breach.
• In particular, courts have recently been showing a trend to uphold the wording used, even if it leads to a wide exclusion from the contractual obligations entered into.
• Context and exact wording used are key. This case once again highlights the importance of precise drafting in commercial contracts. Given that the Court of Appeal was split here, it shows there is no substitute for drafting these key clauses carefully.

This may not be the end of the matter. Given that the Court of Appeal was divided, this suggests the possibility of a further appeal to the Supreme Court, so there may yet be further disagreement with the outcome here.

If you would like advice on drafting commercial contracts, please contact Paul Gershlick in our Commercial Contracts team on 07795 570 072, or complete the form below.