Application of loss of profit exclusion
ASTRAZENECA UK v ALBEMARLE INTERNATIONAL (Part 2) [2011]
In addition to the issues set out in Part 1 of the Albemarle case, the High Court had to consider the effect of an exclusion of liability for loss of profit.
facts:
- Alongside the facts set out in Part 1, A claimed damages, the majority of which was for loss of profit, as a result of AZ failing to honour the first right of refusal. AZ sought to rely on the exclusion clause in the DIP supply contract which limited liability for supply or non-supply of the products to “the purchase price of the product in respect of which such damages are claimed”. It then went on to say “In no case shall [either party] be liable for loss of profits or incidental or consequential damages”.
- A maintained that the supply agreement was essentially a contract for the supply of DIP not propofol and so the exclusion clause did not apply to the first right of refusal in relation to the supply of propofol.
decision:
- The Judge construed the clause strictly finding that the exclusion of loss of profits only applied to the supply of or failure to supply DIP and not to a breach of the first right of refusal clause (which related to a replacement contract which might or might not have been entered into).
- The prime rationale for this was that to hold otherwise would have deprived A of any substantial remedy for its real loss (namely the loss of profits it would have made on the propofol contract). The Judge had concluded that the first right of refusal conferred significant rights on A. To deprive A of an effective remedy for breach of that provision would render the first right of refusal little more than a “statement of intent” and give AZ “little incentive” to comply with that obligation.
points to note:
- The judgment appears a little harsh but does demonstrate that the Courts are often prepared to construe exclusion (as opposed to limitation) clauses very narrowly indeed particularly where they feel that such a construction is warranted to achieve a fairer outcome.
- An exclusion of liability for loss of profits is unlikely to be given effect to by the Courts in cases of contracts such as this and, say, distributorship contracts where loss of profit is likely to be the primary head of loss in the event of a breach.