EE Limited and Virgin Mobile have recently emerged from a Court of Appeal case concerned with limiting liability in their supply agreement by excluding liability for “anticipatory profits”. But what were “anticipatory profits”, and could they be something less than the loss of profits?
This case followed the High Court judgment in 2023. The Court of Appeals’ judgment brings a renewed focus on the need for careful drafting of limitation (and, in turn, exclusion) of liability clauses.
Background: EE Limited v Virgin Mobile Telecoms Limited
In 2013, EE and Virgin Mobile entered into a supply agreement.
Under the supply agreement, EE would provide mobile network services to Virgin Mobile, which in turn would use EE’s network exclusively for a specified period (“Exclusivity Clause”). The agreement included a limitation of liability clause preventing either party from bringing claims related to “anticipated profits”.
In 2021, Virgin Mobile allegedly breached the Exclusivity Clause by moving non-5G customers to a competitor’s network. EE’s claim for £24.6 million in lost revenue was dismissed by the High Court as it was considered a claim for loss of profits, which was excluded by a limitation of liability clause.
The appeal
EE appealed the High Court’s decision. The primary questions were:
- Whether EE’s claim was correctly characterised as a loss of profits claim.
- Whether a limitation of liability clause prevented such a claim.
Appeal decision
The Court of Appeal, in a split 2:1 decision, upheld the High Court’s dismissal of EE’s claim, revealing nuanced judicial reasoning and the close call in interpreting the limitation of liability clause.
- The majority decided that the limitation of liability clause was clear and unambiguous, extending to the anticipated profits implicitly forming the lost revenues claimed by EE. The judges acknowledged that this interpretation was consistent with the language agreed upon by sophisticated parties capable of negotiating their own risks and remedies. There had been an appropriate allocation of risk despite the potential harshness of the outcome for EE.
- The minority argued that excluding such claims undermined the core commercial bargain and was inconsistent with business common sense. Excluding damages from a breach of the key exclusivity provision was seen as commercially unreasonable.
Key takeaways
Clarity and Context: The Court of Appeal upheld the clear and unequivocal language of the limitation of liability clause, emphasising that any terms excluding valuable rights must be unambiguous and understood within the contractual context.
Sophisticated Negotiation: The judgment highlighted that detailed negotiation and risk assessment between equal parties are key in enforcing such clauses.
When read in the context of other wording in the supply agreement, it became clear that “anticipated profits” was intended to cover additional losses not arising directly from the agreement. Had the parties intended the limitation of liability clause to cover direct loss of profit claims, they would have done so.
Unlimited Application: The law does not restrict limitation of liability clauses covering loss of profit to only applying in respect of expectation loss of diminution in price. Furthermore, the use of “anticipated” did not change the meaning of the clause, as “anticipated profits” was synonymous with “loss of profits”.
Interpretation of Terms: Words such as “anticipated profits” should be viewed in their contractual environment. EE had sought to rely on previous cases where limitation of liability clauses had been interpreted narrowly. The Court of Appeal judges found that previous case law offered guidance but was not determinative, as each clause’s interpretation depends on its unique commercial context and drafting.
Valuable Rights and Alternative Remedies: Although excluding liability for loss of profits was objectively a bad deal for EE, the limitation of liability clause applied both ways. Ultimately, the clause wording was not uncommercial, as EE was still left with valuable contractual rights enforceable by specific performance, injunctive relief or damages based on wasted expenditure.
When entering into supply and distributorship agreements, the parties must ensure that all potential liabilities, limitations, and exclusions are explicitly addressed and clearly understood to avoid costly disputes. The Court of Appeal’s judgment serves as a reminder that limitation of liability clauses need careful consideration to ensure they reflect the parties’ true intentions and appropriately allocate risks, avoiding unintended and commercially unreasonable outcomes.
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