Interpretation of ‘exclusive remedy’ and exclusion clause
SCOTTISH POWER UK v BP EXPLORATION [2015]
This case involved the remedies available to a customer following a failure to supply gas. The Court had to interpret a compensation mechanism which was stated to be an ‘exclusive remedy’ for breach of the supply provision as well as the types of liability excluded in the exclusion clause.
Facts:
- Scottish Power (SP) entered into four similar agreements with BP (and others) to buy gas from a gas field in the North Sea.
- The contracts contained the following provisions:
- Article 7.1 – the suppliers were under an obligation to provide, maintain and operate the facilities necessary to perform the contracts and in accordance with the ‘Standard of a Reasonable and Prudent Operator’.
- Article 6.12 – the suppliers were to deliver the quantity of gas as nominated by SP in accordance with the contracts.
- Article 4.6 – excluded liability for any “loss of use, profits, contracts, production or revenue or for business interruption howsoever caused …”.
- Article 16 – contained a compensation mechanism which applied if the suppliers under-delivered, involving the supply of gas at a reduced price after deliveries resumed (Default Gas Price). This stated the Default Gas Price (and various other payments due on termination) were “in full satisfaction and discharge of all rights, remedies and claims… in respect of underdeliveries by the Seller under this Agreement” – ie it was SP’s exclusive remedy.
- For over three and a half years, the production of gas from the gas field was shut down. During this time, the suppliers failed to supply gas to SP and so it went to another provider to meet its needs. The price of the replacement gas was higher than the contract price.
- The suppliers accepted that they were in breach of Article 6.12 and both parties agreed that the only remedy for breach of that clause was the provision of gas at the Default Gas Price in accordance with Article 16.
- However, SP also claimed the suppliers were in breach of Article 7.1 and that for breaches of that provision, it was not limited to the compensation as set out in Article 16 but was entitled to claim, in addition, for the difference in cost between the replacement gas and the contracted price for the gas which should have been delivered.
Decision:
- The Court decided that although SP’s claim was not excluded by Article 4.6, it was nevertheless covered by the compensation mechanism in Article 16. It therefore had no further remedy other than to receive gas at the Default Gas Price.
- Exclusive remedy under Article 16
- In interpreting the scope of Article 16, the Court referred to its approach to the interpretation of contracts. This included the principle that in ascertaining what reasonable people in the situation of the parties would have meant by the words used, the Court takes account of:
- the natural and ordinary meaning of the clause in question;
- any other relevant provisions of the contract;
- the overall purpose of the clause and the contract;
- the facts and circumstances known or assumed by the parties at the time that the contract was signed; and
- commercial common sense (see Arnold v Britton (SC) [2015]).
- There is also a general presumption that parties do not intend to abandon remedies that arise under the general law unless there is clear wording to support this.
- Applying the above approach, the Court found that:
- the suppliers were in breach of Article 7.1 and the loss caused to SP by their failure to deliver the amounts of gas nominated by SP was a claim "in respect of underdeliveries" within the meaning of Article 16. The compensation under the Default Gas Price mechanism was therefore SP’s only remedy for breach of Article 7.1 where that had resulted in an underdelivery. The Court expressly accepted that there could be breaches of Article 7.1 which would not result in an underdelivery and in such circumstances Article 16 would not provide the exclusive remedy;
- sufficiently clear language had been used in Article 16 to exclude or modify the availability of other remedies. The judge said that, “the [general] presumption must be less strong where the common law remedy is not simply excluded but is replaced by a different (and valuable) contractual one”.
- In interpreting the scope of Article 16, the Court referred to its approach to the interpretation of contracts. This included the principle that in ascertaining what reasonable people in the situation of the parties would have meant by the words used, the Court takes account of:
- Exclusions under Article 4.6
- The suppliers had also argued that even if they were in breach of Article 7.1, SP's claim for damages was in any event excluded by Article 4.6, saying it either came under the exclusion of 'loss of use' or 'loss of production'.
- In looking at this argument, the Court began by referring to the general measure of damages in an action for non-delivery of goods which is, "the estimated loss directly and naturally resulting, in the ordinary course of events, from the supplier's breach of contract". Where there is an available market, the measure of damages is the difference between the contract price and the market price of the goods at the time when they ought to have been delivered. The Court said that if Article 4.6 was intended to exclude liability for all losses caused by the other party's breach, it would have said so.
- Looking at the various exclusions in Article 4.6, the Court set out its understanding of what it considered the parties had intended each to cover:
- ‘loss of use’ - losses resulting from SP's inability to use the gas for the purposes of its own business;
- ‘loss of profits’ – loss of profits which it would otherwise have made from selling the gas or using it in its business;
- ‘loss of contracts’ - SP could be subject to contracts being cancelled or it could lose the opportunity to enter into contracts because of the suppliers' failure to deliver gas which SP needed in order to perform those contracts;
- ‘loss of production’ - loss due to the inability to produce other products (eg to generate electricity) because the suppliers did not deliver the gas;
- ‘loss of revenue’ - similar to ‘loss of profits’;
- ‘business interruption’ - this overlapped with other items of loss and further indicated the general type of loss which the clause was trying to exclude.
- The Court said that all of the exclusions in Article 4.6 have in common the fact that they are not seeking to exclude the basic or normal measure of loss caused by a breach of contract but are all kinds of further ‘secondary’ loss that a party may suffer which go beyond that basic measure. As a result, given that SP was only looking to recover the cost of buying gas from alternative sources to replace the gas which the suppliers should have provided, the losses did not fall within any of these categories.
Points to note:
- The wording of exclusive remedy clauses needs to be very carefully considered since they may very well operate to limit liability and it may not be possible to circumvent them by looking to other breaches of other more general contractual commitments.
- In many ways the interpretation given by the Court to the various exclusions of liability contained within the contract seem to be perfectly sensible and accord with common sense. What it does highlight is that exclusions of this type are only of limited effect. The Courts will not readily allow a party to exclude all contractual liability whatsoever.
- In 2016 SP appealed against the decision but the appeal was dismissed.