Limitation of liability clauses are often hotly contested in contract negotiations. Suppliers typically seek to limit their exposure to risk, while customers aim to protect themselves from potential losses in the event of supplier non-performance. The effectiveness and enforceability of these clauses is often the starting point for any future contract disputes.
The Court of Appeal recently considered the scope of a clause excluding liability for “anticipated profits” in its decision in EE Limited v Virgin Mobile Telecoms Limited [2025] EWCA Civ 70, which all contract lawyers should take note of.
What were the facts of the case?
EE claimed over £24.6 million in losses, alleging Virgin Mobile breached their contract. The alleged breach related to a Telecommunications Supply Agreement (TSA), under which EE would supply radio access network for Virgin Mobile’s customers (which Virgin Mobile accordingly paid a fee for). There was an exclusivity clause requiring EE to be Virgin Mobile’s sole supplier, but this was subject to certain agreed exceptions including the ability for Virgin Mobile to source 5G services for its customers from another mobile network operator.
EE claimed Virgin Media had breached the exclusivity clause by migrating customers to Vodafone beyond the agreed exceptions. EE’s claim was therefore for its loss of revenue from the fees Virgin Media would have otherwise paid under the TSA, had its customers not been wrongly diverted to another mobile network operator.
Virgin Media denied any breach of the exclusivity clause, but the key question for the court was whether EE’s claim for loss of revenue constituted “anticipated profits” as the TSA contained an exclusion of liability clause stating that “neither Party shall have liability to the other in respect of: (a) anticipated profits”.
What did the Court of Appeal decide?
In a 2:1 majority ruling, the Court of Appeal found that EE’s claim was one for anticipated profits and was therefore excluded from the contract. As a result, EE’s claim failed and it was unable to recover damages.
EE argued that the parties had not intended for “anticipated profit” to capture direct loss of profit under the TSA as a result of the other party’s breach of its primary obligations. EE instead argued that “anticipated profit” referred to other profits anticipated to be earned outside of the TSA (essentially a form of indirect or inconsequential profit).
It is easy to have sympathy with this assessment, and indeed Lord Justice Coulsen himself remarked that it seemed “potentially artificial to label that as a claim for lost profit”. Lord Justice Phillips, dissenting, described this as a “commercially surprising result”.
Nonetheless, the language of the clause was “clear and unequivocal” and so the natural and ordinary meaning of the words had to be applied. There was also already a clause dealing explicitly with exclusion of indirect or consequential loss. In those circumstances, proper contractual construction did not allow for a different interpretation of “anticipated profit”.
“For EE’s claim to fall outside the exclusion clause, EE have to say, as a matter of construction, that “anticipated profits” refers to profits anticipated to be earned outside the TSA. That was Mr Patton’s argument before us, summarised by Zacaroli LJ at [46] above.
But why should those words be given that very specific and qualified meaning? There is nothing whatsoever in the words themselves to indicate that they are referring only to anticipated profits to be earned outside the TSA, not profits under the TSA. On the face of it, such a construction requires the insertion of words that are just not there.”
(Lord Justice Coulson, [114 to 115].
What should contract lawyers take away from this decision?
Limitation and exclusion of liability clauses will always be assessed by a court on a case-by-case basis, and there are a number of factors which will be considered before enforcing such a clause. However, what is clear is that the court will not undertake linguistic gymnastics to undo a bad bargain where clear and unequivocal language has been used, and particularly where the contract has been negotiated at length between sophisticated parties with appointed legal teams (whether inhouse or external counsel).
A few key points, particularly for in-house counsel drafting or advising on exclusion clauses are:
- Be explicit about what is included – do not assume that phrases such as “anticipated profit” will be given anything other than their natural and ordinary meaning. If you intend to only exclude profit arising outside of the contract, state this expressly.
- Avoid overly broad or vague expressions – using multiple terms to describe similar losses may result in the exclusion clause being interpreted much wider than intended. Instead, be clear with the meaning you are assigning to certain phrases used.
- Consider carving out direct losses – consider expressly reserving your business’ ability to recover direct losses caused by a breach of contract, including loss of profit.
Practical considerations in contract negotiations
Limitation of liability clauses can be very contentious and are often the last points to be agreed during contract negotiations. This has always been the case but limitations of liability clauses in technology contracts have brought these issues into particular focus as technology providers often work from standard contract documentation and however hard customers might try to increase standard liability caps (which are for the provider’s benefit only of course) above 100% of the contract price and to exclude only indirect and consequential loss, it is incredibly rare for this to be agreed. Providers instead prefer a long list of excluded losses, always including loss of profit even if they are suffered as a direct result of the breach.
A strong limitation of liability clause in favour of one contract party can leave the other party unable to recover losses, as seen in EE’s case. If you are on the receiving end of such a clause, and cannot make any headway negotiating improved terms, then your business will need to understand its potential risks and the irrecoverable losses which it may foreseeably incur if an issue were to arose and to assess whether proceeding is commercially acceptable (perhaps in the knowledge the business’ insurance cover could be relied upon were an issue to arise).
Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
