South East Water Limited v Elster Water Metering Limited

Commercial contracts, including provisions limiting liability, are construed by ordinary objective principles. The court gives primary weight to the language used, read in its contractual context and against the relevant factual background. Business common sense is a sense check, not a substitute for the words. Ordinary contractual rights are not displaced without clear language. A provision fixing the cost and consequences of supplying replacement goods does not, without more, cap or exclude damages where the claimant chooses another contractual remedy. Contract documents should be read coherently. A specific term may qualify a general term without creating inconsistency. A notional-cost limitation should not be implied where it is unsupported by the contract and contradicts its stated allocation of costs. Damages for replacement of old goods may nevertheless require credit for betterment.

South East Water Limited purchased water meters and automated meter-reading units from Elster Water Metering Limited under a Framework Agreement. South East Water alleged that the units were defective and claimed damages and an indemnity, subject to a contractual cap.

On Elster’s application to strike out the claim or obtain summary judgment, HHJ Stephen Davies held that Schedule 11 was a limitation of liability provision which took precedence over the more general remedies in Schedule 2: [2024] EWHC 620 (TCC). Permission to appeal was granted on issues concerning the construction of Schedules 2 and 11 and limitation clauses. The central question was whether Schedule 11 limited South East Water’s ordinary damages claim when it did not seek replacement units from Elster.

1. Appeal allowed. Coulson LJ gave the leading judgment, with which Males and Zacaroli LJJ agreed. The judge below had misinterpreted the Framework Agreement.
2. Commercial contract construction requires the objective meaning of the words chosen by the parties to be identified from the contract as a whole, its context and the relevant factual background. Business common sense may provide a practical sense check. Subjective understanding or belief is inadmissible. There is no special strict or strained rule for limitation clauses. The ordinary approach applies, subject to the assumption that ordinary rights are not surrendered without clear words: [2015] UKSC 36; [2017] AC 1173; [2021] UKSC 29.
3. Schedule 11 was concerned with the parties’ rights and costs where Elster supplied replacement units after a faulty device had been identified in operation. It operated only where South East Water requested that replacement route under clause 13.1.3 of Schedule 2. It did not limit the ordinary damages remedy under clause 13.1.6 or the right under clause 13.2 to obtain replacement products from an alternative supplier.
4. Schedule 11 contained no sufficiently clear words limiting damages or Elster’s liability. The contrary construction produced the extreme result that, after year 5, South East Water might have no remedy and might have to pay for replacement units even where the products did not comply with the specification. The proposed notional-cost limitation was unsupported by the wording, contradicted the pricing table and could not be implied. The authorities concerning a contractor’s right to return and remedy defects were distinguishable because Elster had no equivalent right: [1999] 66 ConLR 110.
5. Schedules 2 and 11 could be read coherently. The utilities-procurement background had no direct bearing on the wording. The alleged strict test for limitation clauses was erroneous, and the Sale of Goods Act 1979 point was irrelevant. South East Water’s damages claim was not capped by Schedule 11, although any claim involving replacement after substantial use would have to allow for betterment.

1. Court of Appeal (Civil Division): Appeal allowed. The Framework Agreement was construed so that Schedule 11 did not limit South East Water’s ordinary damages claim.
2. High Court, Technology and Construction Court: On Elster’s application to strike out the claim or obtain summary judgment, HHJ Stephen Davies held that Schedule 11 limited South East Water’s entitlement and prevailed over the general remedies in Schedule 2: [2024] EWHC 620 (TCC).