Polypearl Ltd v E.On Energy Solutions Ltd

Exclusion and limitation clauses in a commercial contract are construed as part of the contract as a whole. Commercial parties may allocate contractual risks as they choose, but clear language is required before a party is taken to have abandoned an otherwise available remedy. A clause excluding indirect or consequential loss does not necessarily exclude every claim described as loss of profit. The character of loss of profit depends on the circumstances. Loss arising naturally from the breach may be direct loss. Where the wording is ambiguous, the court may prefer the construction that accords with business common sense and preserves the contractual obligation. A clause limiting liability for “any damage or direct loss howsoever caused” is capable of applying to losses caused by breach of a central or fundamental contractual obligation.

Polypearl Ltd and E.On Energy Solutions Ltd entered into a Master Agreement and an Insulation Scheme Event Transaction Document. Polypearl alleged that E.On had failed to purchase the contractual volume of insulation products and claimed loss of profit and loss of the opportunity to receive carbon-saving payments.

E.On relied on clauses 10.1 and 10.7 of the Master Agreement. Clause 10.1 excluded indirect or consequential loss, including loss of profit, while clause 10.7 limited liability for damage or direct loss to £1 million. The court was required to determine whether the pleaded losses were excluded or capped, assuming the pleaded breach.

1. The preliminary issues were answered no and yes. Clause 10.1 did not exclude the pleaded losses. Clause 10.7 limited liability for those losses, so far as they were direct losses, to £1 million.

2. The clauses had to be construed according to the ordinary principles of contractual interpretation. The question was what a reasonable person with the relevant background knowledge would understand the parties to mean. Business common sense could assist where the language admitted more than one interpretation, but unambiguous language had to be applied.

3. The general scheme of clauses 10.1 and 10.7 was clear. Indirect losses were excluded, subject to the stated exceptions, and direct losses were capped. Together the provisions addressed the whole spectrum of losses resulting from breach.

4. The reference in clause 10.7 to “any damage or direct loss howsoever caused” was clear and unambiguous. It was not confined to property damage or personal injury. The words were wide enough to include loss caused by breach of a central or fundamental obligation.

5. Clause 10.1 was ambiguous because loss of profit may be direct or indirect, depending on the circumstances. The pleaded loss of profit arising from failure to purchase the products was direct loss because it was the natural and likely consequence of the assumed breach.

6. The parenthetical words referring to loss of profit explained the preceding reference to indirect or consequential loss. They did not clearly deem every loss-of-profit claim to be indirect. Clear express words would have been required to remove the remedy for direct loss of profit. The claimant’s construction was also more consistent with business common sense.