Bristows' SnippITs – [Exclusion] Clause and Effect: Courts uphold broad exclusion for loss of profits

This post is the latest in the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

The recent case of Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies plc [2023] EWHC 2506 (TCC) is another example of the courts upholding wide-ranging exclusion clauses in commercial contracts.

Key takeaways

• Even a seemingly small number of changes to limited parts of a template agreement (if they “directly affect the obligations of the parties”) could mean the agreement is not on the other party’s “standard terms” so not subject to the reasonableness test in UCTA. This may be the case even if the clause being challenged was not negotiated or amended.
• Customers should think carefully before signing up to widely drafted exclusion clauses, particularly where these clauses would prevent a claim for the types of losses they are most likely to incur as a result of the other party’s breach (such as wasted expenditure and loss of profit). In this case, the only losses incurred by PTAP that were recoverable were less than $1m of remedial costs in the context of a +$300m claim. 

Background

The claimant, Pinewood Technologies plc (Pinewood) was the developer and supplier of a dealer management system (DMS) for the car industry. Pinewood entered into two reseller agreements with Hong Kong company Pinewood Technologies Asia Pacific (PTAP), giving it exclusive rights to market and sell the DMS to dealerships in a number of jurisdictions outside the UK. 

PTAP brought a claim against Pinewood for breaches of several terms of the reseller agreements which it said had caused disruption to its contracts with dealerships and meant that in some jurisdictions not a single customer had been able to go live with the DMS. As a result, PTAP said it had incurred damages for wasted expenditure and lost profits of approximately $312m and costs in dealing with the consequences of Pinewood’s breaches (remedial costs) of approximately $897k. 

Court’s decision

1. One of PTAP’s applications related to whether section 3 of the Unfair Contract Terms Act (UCTA) applied so that the test of “reasonableness” had to be applied to the exclusion clauses.

The court held that s3 of UCTA did not apply:

• The parties were not dealing on Pinewood’s written standard terms of business meaning s3 of UCTA could not apply.
• Even though many of the provisions of the reseller agreements had not changed from Pinewood’s standard terms (including the exclusion clauses themselves) the test was whether there had been “substantive” changes to the reseller agreements as a whole.
• Both parties were legally represented through the negotiations and the changes that had been made to the reseller agreements (although limited in number) included a new requirement for Pinewood to host the DMS – this was plainly of substance as it directly affected the obligations of the parties and therefore went beyond a clarificatory edit. It could not be said that the terms were “effectively untouched”.

 2. One of Pinewood’s applications related to whether PTAP’s $312m claim for wasted expenditure and loss of profits was caught by the clause in the reseller agreement excluding   claims for “loss of profit” or for “any costs or expenses…incurred in reliance on” the reseller   agreements.

The court held that the exclusion clause in the reseller agreement did apply to preclude PTAP’s $312m claim:

• The starting point in construing an exclusion clause is the ordinary methods of contractual interpretation, including that commercial parties are free to allocate risks as they think fit.
• The language of the exclusion clause was held to be “clear and unambiguous” in excluding liability for damage in the form of both loss of profit and wasted expenditure.
• Although an exclusion clause will not normally be interpreted as extending to a situation that would deprive a party of any remedy for non-performance, the clause in this case still allowed PTAP’s claim for remedial costs (although this was itself limited by a cap).
• The court did accept that the parties were not equal in terms of bargaining power and that the exclusion clause was one-sided (only in respect of Pinewood’s liability). In these circumstances the court “must look very closely indeed at the terms of the exclusion clause” and apply all the relevant principles including the presumption that PTAP did not intend to abandon any claim it might have for loss of profits or wasted expenditure by reason of Pinewood’s breach of contract. However, this was not enough for the court to find a strained construction when the meaning of the clause was clear.

This case is consistent with other recent judgments where the courts have adopted a strict interpretation of limitation and exclusion clauses, including EE Ltd v Virgin Mobile Telecoms Ltd [2023] EWHC 1989 (TCC)) where an exclusion for “loss of profits” was held to exclude a supplier’s claim for the “revenue” it expected under its customer contract. See our article about this case here.

This post is part of the Bristows’ SnippITs series, which offers practical considerations and key takeaways from recent caselaw affecting the IT sector. You can find other articles in the series here.