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07 Nov 2023

Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc: Exclusion clause prevents claim for loss of profits

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In Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023] EWHC 2506 (TCC), the English High Court held that an exclusion clause in a contract effectively excluded liability for loss of profits and wasted expenditure. This is another example of the courts upholding wide ranging exclusion clauses where the parties' intentions are clear – see also our Insight on EE Limited v Virgin Mobile Telecoms Limited [2023] EWHC 1989 (TCC).

The decision also provides a useful illustration of the approach the English courts will take to applying the Unfair Contract Terms Act 1977 ("UCTA") to exclusion clauses.

Background

Pinewood Technologies Plc ("PT") is a UK developer and supplier of a bundled management information system for motor dealers (the "DMS"). This system contains software for use by motor dealers in the areas of finance, sales, workshop, parts, inventory and administration.

PT entered into two agreements (the "Reseller Agreements") with Pinewood Technologies Asia Pacific Ltd ("PTAP"), an unrelated Hong Kong company. Pursuant to these agreements, PT appointed PTAP the exclusive reseller of the DMS in a number of Asian countries and PTAP agreed to pay a fee to PT based on the number of customers in these countries.

In July 2022, PTAP brought a claim against PT, alleging that PT had breached various obligations in the Reseller Agreements. PTAP sought to claim its loss of profits or wasted expenditure and certain other incidental losses consequential on PT's breaches.

PT denied that it had breached the Reseller Agreements and argued that, in any event, PTAP's claims for loss of profits and wasted expenditure were excluded by a clause in the Reseller Agreements (the "Exclusion of Liability Clause"). This clause provided that:

'[PT] excludes … any liability it may have for breach of this Agreement … for … (2) loss of profit, bargain, use, expectation, anticipated savings, data, production, business, revenue, contract or goodwill; (3) any costs or expenses, liability, commitment, contract or expenditure incurred in reliance on this Agreement or representations made in connection with this Agreement ….'

PT also counterclaimed for unpaid fees due under the Reseller Agreements, which PTAP had withheld on the basis of equitable set off. PT argued that PTAP was prohibited from setting off the fees by another clause in the Reseller Agreements (the "Exclusion of Set Off Clause"). This clause provided that:

'[The fees] shall be the net amount payable by [PTAP], and shall be made in full without withholding, deduction or set-off, including in respect of any taxes, charges, and other duties that may be imposed by any law or country on the same or on either party …'

In January 2023, PT brought an application for reverse summary judgment of PTAP's claims for loss of profits and wasted expenditure and summary judgment for its counterclaim. PTAP opposed this application and also sought permission to amend its pleadings to plead that PT could not rely on the Exclusion of Liability Clause and Exclusion of Set Off Clause due to the operation of UCTA.

Decision

The High Court granted PT's applications and rejected PTAP's applications.

1. PTAP's application for permission to amend

The High Court began by considering whether PTAP's proposed amendments had a 'real prospect of success' (the test for granting permission to amend).

In its proposed amendments, PTAP argued that UCTA applied due to the operation of section 3 UCTA. Section 3 provides:

(1) This section applies as between contracting parties where one of them deals on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term—

a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

b) claim to be entitled (i) to render a contractual performance substantially different from that which was reasonably expected of him, or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

PT argued that UCTA did not in fact apply as the parties had not dealt on its standard terms of business: although the Reseller Agreements were based on PT's standard form reseller agreement, PT claimed that there had been negotiations and substantial variations to the agreement.

Applying the Court of Appeal judgment in African Export-Import Bank v Shebah Exploration & Production Co Ltd [2017] EWCA Civ 845, the Court held that the relevant question was whether the terms were 'effectively untouched'. It also noted that, if there had been material changes to the terms, it did not matter if the exclusion clauses themselves had not been negotiated.

On the facts, the Court found that the parties had negotiated substantive amendments to PT's standard terms when agreeing the Reseller Agreements. In particular, they had: (i) conferred a power on PTAP to accept or reject the appointment of other resellers in certain circumstances; (ii) imposed an obligation on PT to provide hosting for the DMS in accordance with certain service levels; and (iii) restricted PT's assignment rights. Both parties also had had access to legal advice and multiple drafts of the Agreements had gone back and forth, with changes being proposed by both parties, some of which were accepted.

The Court therefore concluded that there was no real prospect UCTA would apply to the Reseller Agreements and accordingly refused PTAP permission to amend.

2. PT's applications for summary judgment

The Court then considered PT's two applications for summary judgment, both of which turned on the construction of exclusion clauses. The Court held that it could 'grasp the nettle' and determine the applications as the law regarding the construction of exclusion clauses was sufficiently clear and there was no evidence of any factual complexity which would need to be dealt with at trial.

(a) PT's reverse summary judgment application: did the Exclusion of Liability Clause exclude PTAP's claims for loss of profits and wasted expenditure?

The Court held that the Exclusion of Liability Clause was effective to exclude PTAP's claims for loss of profits and wasted expenditure as:

  • The language of the clause clearly and unambiguously excluded such liability. The Court noted that even where there was an imbalance in the parties' bargaining power (as there was between PT and PTAP), this did not mean that the Court should strain the language if it was clear.
  • Nothing in the Reseller Agreements or material background suggested that the parties had not intended to exclude claims for loss of profits and wasted expenditure.
  • The clause did not have the effect of excluding all of PTAP's substantive rights and remedies as it was still able to bring a claim in relation to the incurred costs.

The Court rejected PTAP's suggestion, based on Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38, that exclusion clauses did not apply to the non-performance of contractual obligations or to repudiatory breaches unless expressly stated to do so. In Kudos, the Court of Appeal had held that a clause excluding loss of profits did not exclude loss of profits arising from a refusal or inability to perform the contract. However the Court found that the Court of Appeal in Kudos had simply applied the orthodox approach to construction of exclusion clauses to the particular facts of case. As such, it was not, as PTAP had sought to suggest, authority for any general proposition regarding the interpretation of exclusion clauses.

The Court therefore granted reverse summary judgment in relation to PTAP's claims for loss of profits and wasted expenditure.

(b) PT's summary judgment application: did the Exclusion of Set Off clause exclude PTAP's ability to set off any claims against the fees?

The Court also held that the Exclusion of Set Off clause excluded PTAP's ability to set off any claims against the fees. The Court noted that the language of the clause was clear: the fees had to be paid in full without set off, and it was well established that 'set off' meant both legal and equitable set off.

The Court rejected PTAP's suggestion that the intention of the clause was only to prohibit the deduction of taxes, charges and other duties. It was clear from the use of the word 'including' in the clause that these were examples and not exhaustive of the types of items which could not be set off. 

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