Can a limitation of liability clause apply to a contractual primary payment obligation?

The recent High Court case of Costcutter Supermarkets Group Ltd v Vaish and Vaish [2024] EWHC 152 (KB) highlights the legal difference between a contractual claim for damages and a claim for debt. The Court’s decision confirms that a limitation of liability clause will not apply to a buyer’s obligation to pay the price for goods purchased.

The facts

Costcutter Supermarkets Group Ltd (“Costcutter”) entered into contracts with two retailers who each operated a Costcutter store (the “Defendants”). Under the terms of the contracts, the Defendants would order stock from Costcutter. Costcutter would source the stock from a third-party supplier, sell the stock to the Defendants and deduct a 1% service charge.

During the course of the arrangement, Costcutter changed it’s third-party supplier and stopped levying a service charge on the Defendants. However, the supply contracts themselves remained largely unamended and still referred to the service charge.

The Defendants were unsatisfied with the service provided by the third-party supplier issued several complaints. However, the issues were not rectified and eventually, the Defendants switched from the Costcutter brand to another nationally recognised brand. In doing so, they ceased payments to Costcutter for goods it had supplied to the Defendants.

Costcutter issued court proceedings against the Defendants to recover payment for the goods supplied.

The supply contracts each contained a limitation of liability clause, which read as follows:

“…the total liability of either party shall in respect of all acts, omissions, events and occurrences whether arising out of any tortious act, breach of contract or statutory duty or otherwise arising in any particular Contract Year in no circumstances exceed a sum equal to five (5) times the Service Charge paid by the Retailer to the Consultant in respect of the Contract Year immediately prior to the Contract Year in which such claim was made.”

The Defendants argued that this clause – and in particular the words “breach of contract…or otherwise” – limited their obligation to pay for any goods supplied to them. In fact, given that the service charge had not been levied by Costcutter for some years prior (and was therefore £0), the Defendants argued that their liability was excluded completely.

The decision

The High Court, overturning a previous judgment, disagreed with the Defendants.

The Court confirmed that the liability clause only applied to obligations to pay damages following a breach of contract. It did not limit the Defendants’ primary obligation to pay for goods supplied, which the Court confirmed was a debt.

The Defendants’ failure to pay for the goods may have been a breach of contract and the limitation clause could have been effective in limiting any contractual damages arising from that breach. However, it could not be applied to a primary payment obligation – such as the obligation to pay the purchase price for goods received.

The Court also confirmed that to limit a primary obligation to pay a debt would require very clear wording and the words “or otherwise” were not sufficiently clear.

Comments

The case demonstrates the necessity to set out contractual provisions such as limitation of liability clauses in the clearest possible way.

Although the judgment shows that the Courts will take a sensible approach when construing widely drafted clauses, it is important to remember that they are still bound by the wording of the contract and if the provisions are clear, they will be applied literally even if the outcome is unexpected or commercially onerous.

Where a commercial contract includes any liability limitations or exclusions, the parties should consider what remedies remain available under the contract. Liability limitations that are too broad, excuse the performance of a primary obligation or substantially deprive a party of any effective remedy should be avoided.

If you have any questions about anything in this article, contact Geldards Commercial Disputes team