Why exclusion clauses shouldn’t exclude too much

© John Allan and licensed for reuse under this Creative Commons Licence

© John Allan and licensed for reuse under this Creative Commons Licence

A recent Court of Appeal case shows the dangers in using standard, widely-drafted exclusion clauses without thinking carefully about what types of loss might arise in practice – particularly where the effect of the clause would be to leave one party without any remedy for the other’s breach.

Background

Kudos Catering (UK) Ltd entered into a five year contract to provide catering services to the Manchester Central Convention Complex Ltd (MCCC). MCCC lost confidence in Kudos and two years before the end of the term the contractual relationship broke down with both parties alleging repudiatory breach. Kudos claimed £1.3 million for loss of profits that would have been earned during the remaining term of the contract.

The case centred on the wording of clause 18 of the contract which was headed Indemnity and Insurance” which provided that MCCC would have:

no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits…suffered by the Contractor or any third party in relation to this Agreement.

In the High Court it was held that clause 18.6 only had one effect: to exclude all liability of MCCC for Kudos’ loss of profit.

Court of Appeal decision

In overturning the High Court decision, the Court of Appeal found that if the contract had continued for the intended five year term, Kudos would have made a profit. The court further found that if MCCC was able to exclude all liability for loss of profit, it would effectively deprive Kudos of any sanction for MCCC’s non-performance. For this reason, the Court of Appeal held that clause 18.6 did not exclude liability for Kudos’ loss of profit where such liability arose out of MCCC’s repudiatory refusal to perform the contract.

In coming to its decision, the Court of Appeal noted the following key points:

  • the exclusion of loss of profit was ‘buried’ in a clause headed clause 18 “Indemnity and Insurance”
  • if the clause did exclude all liability for loss of profit, it would effectively deprive Kudos of any sanction for a breach of contract by MCCC which would render the contract an unenforceable statement of intent
  • if the parties had intended to exclude liability for loss of profit in the event of refusal to perform the contract (rather than for defective performance), it should have been set out unambiguously in a stand-alone clause

Some practical lessons

Casting the exclusion clause net too far may not provide the protection envisaged. In order to avoid the clause being rejected as ‘too wide’ it will be prudent to bear in mind the following points:

  • Avoid the temptation to ‘bury’ certain key limitation and exclusion clauses
  • If an exclusion is of particular importance, put it in a standalone clause (under a suitable heading) to bring it to the attention of the other party and to avoid a court interpreting it by reference to surrounding sub-clauses
  • Although the court in the current case refused to provide a distinction between refusal to perform and an inability to perform, consider inserting a clause to expressly deal with repudiation
  • Consider whether the innocent party will have an adequate remedy for breach as the courts will not look favourably on a clause that seeks to remove any remedy for failure to perform or for defective performance

Graphing privacy

Graph SearchLast month, Facebook announced its latest innovation: Graph Search, widely regarded as an attack on Google’s dominance in the online search market.

Graph Search is being rolled out gradually across Facebook’s billion-strong user base, and will enable people to conduct “real language” searches of Facebook users. So you can search for “people in Tunbridge Wells who like Pizza Express”, and you’ll get a list of Facebook users who live in Tunbridge Wells and who have clicked the “Like” button on Pizza Express’s website at some point.

Like almost everything that Facebook does, this has given rise to some serious privacy concerns. Web developer Tom Scott started an Actual Facebook Graph Searches on Tumblr, giving some of the more embarrassing, amusing or even alarming examples of Graph Search results.

Facebook’s response to these concerns is that Graph Search will only show information that users have agreed to be made publicly available in their privacy settings. However, Graph Search undoubtedly makes that information far more accessible and usable to the world at large. It’ll be interesting to see if any European data protection commissioners challenge Facebook’s actions here – perhaps arguing that people cannot have given properly informed consent, since Graph Search is so innovative that people could not have had it in mind when they agreed to Facebook’s privacy terms.

As I’ve written before, people tend to focus too much on what information companies hold about them. However, the real impact on privacy comes from what companies are able to do with the data they hold about you: making connections, drawing inference, building up a surprisingly accurate picture about you from what may appear only a small amount of information. You could say that Graph Search puts something of this same power of “Big Data” in the hands of ordinary Facebook users – for good or ill.