Bristows' SnippITs - Don’t call the Kopps when trying to recover lost profits

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

In the recent decision of A.F. Kopp Limited v HSBC UK Bank Plc, the High Court considered an application for summary judgment on whether an exclusion of indirect and consequential loss “including” loss of profit excluded liability for the claimant’s liability to its third party clients for their loss of profits. 

Key takeaways 

While further insights may be provided in the judgment following the full trial (the application for summary judgment having been dismissed), the judge did provide a view on what “direct” losses were in this context and also a helpful reminder when assessing the reasonableness of a clause for the purposes of UCTA.

• It is far more likely for loss of profit to be a direct loss if it is sustained by the claimant itself, e.g. in this case where the claimant was an agent, this would be the loss of a commission payment it would have received from the claimant's third party clients, or the cost of securing alternative financing or banking facilities to overcome the impact of the hold on the account. 
• It follows that it is hard to see what circumstances could arise where a claimant’s liability for any loss of profits sustained by third parties would be anything other than an indirect or consequential loss.
• When you have limited or no leverage to negotiate liability provisions, e.g. with a bank, hyperscaler or dominant software provider, there may still be merit in making them aware of the actual losses you may suffer in the event of a breach. This is because when considering if a standard term excluding or limiting liability satisfies the UCTA reasonableness test so as to not be struck out as unfair, it needs to be “fair and reasonable” which includes not only an objective element (i.e. what the parties ought reasonably to have known) but also a subjective element (i.e. what the parties actually did know at the time the contract was made).

Background

The claimant (A.F.Kopp Limited) sought damages against the defendant (HSBC UK Bank Plc) for breach of contract and/or breach of duty of care after its domestic and foreign currency business accounts were suspended following a safeguarding review by the defendant. This suspension resulted in the claimant, who acted as an import agent, to default on the payment of invoices for goods the claimant was purchasing on behalf of its clients. This in turn put the claimant in breach of its contractual obligations to its clients and was liable to indemnify them for their loss of profits due to their inability to resell the goods the claimant was due to purchase for them. The claimant paid its clients $1.68 million in lost profit and interest under a settlement agreement. The claimant claimed this loss from the defendant.

It was common ground that the relationship was governed by the defendant's 'Business Banking Terms and Conditions' including clause 32 which excluded liability for “indirect or consequential loss (including lost business, data, profits or losses resulting from third party claims) even if it was foreseeable”. It is unclear whether these terms also included express acceptance by HSBC for “direct loss of profit” and “other direct losses” (which would be surprising), or whether this was the argument put forward by the claimant as the natural flip side of the exclusion of indirect and consequential losses.

What was the issue?

The defendant applied for summary judgment, arguing that any loss suffered by the claimant even if the defendant was in breach, would (i) be excluded by clause 32; and (ii) clause 32 satisfies the reasonableness requirement under s.3 Unfair Contract Terms Act 1977 ("UCTA").

The Court’s guidance

The court ultimately declined to grant the summary judgment. This was because the reasonableness of clause 32 under UCTA required consideration of factual matters that would require a trial. Although it stated that its view on the interpretation of clause 32 was not definitive, it did still offer some guidance as to how the case would have been decided if the reasonableness of it was not in issue.

The judge applied the well-known test in Hadley v Baxendale on the remoteness of damages for breach of contract where losses:

1. that fairly and reasonably could be considered arising naturally from the breach of contract itself or are a probable consequence of the breach are usually seen as “direct” losses; and
2. that are in the reasonable contemplation of the parties due to special circumstances made known at or prior to the tie the contract was made are usually seen as “indirect” losses. 

In an unsurprising finding, the Judge thought the loss of profit of third parties, even if caused by the defendant suspending the claimant’s access to its business banking account, cannot be considered fairly and reasonably to be arising naturally according to the usual course of things nor a probable result of the breach, and therefore was not a recoverable direct loss. However, the defendant was thought to have special knowledge of the claimant being an import agent therefore, it’s the special circumstance of the agency relationship the claimant had that would mean third party losses may be in the reasonable contemplation of the parties, thus falling within the second limb of Hadley v Baxendale and an ‘indirect or consequential loss’, but this would be excluded by clause 32 exclusion.