Exclusion clauses don’t apply to debt

A recent case in the English High Court reminds us that contract clauses that limit or exclude liability typically don’t apply to contractual debts. The case is Costcutter Supermarkets Group Ltd v Vaish & Anor [2024] EWHC 152 (KB) and the judgment can be found here: https://www.bailii.org/ew/cases/EWHC/KB/2024/152.html

This case was an appeal to the High Court from a decision in the County Court. The key clause of the contract read as follows:

19.2 Subject to clause 19.1 and 18.1 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.

Where the contract specifies that a party (Owing Party) will pay a price for goods or services, and Owing Party fails to do so, can it claim that its liability is limited by the wording above?

In the County Court, the judge said yes. On appeal to the High Court, Mr Justice Constable said the country court judge “fell into error” by failing to distinguish between an action in debt and an action for breach of contract. The above wording limited liability for breach of contract, but not for debt.

Another way of looking at this is that a contractual debt is a primary obligation, while any additional losses that might be suffered as a result of failure to pay the debt (eg bank interest charges) are secondary.

This primary/secondary distinction comes up in other legal contexts. Some readers may recall the Parking Eye case in the UK Supreme Court, on the subject of penalties and liquidated damages. The joint judgment of Lords Neuberger and Sumption in that case focused on the distinction, and indicated that breach of a primary obligation was not subject to the rule against penalties. See discussion of that case on this blog at https://ipdraughts.wordpress.com/2015/11/08/unconscionably-long-judgments-uphold-penalty-clause/

Indemnities are sometimes argued to give greater protection to the beneficiary of the indemnity because the indemnity is a primary obligation rather than a secondary one. In IP Draughts’ view, this is more likely to be relevant to the traditional type of indemnity which is not based on fault, and less likely to be relevant to the indemnity against breach of contract, though he is not aware of any case law that confirms this point.

In corporate transactions, a “covenant to pay” certain losses (eg tax liabilities incurred by the target company) is sometimes seen, as an alternative to an indemnity. This is argued to create a primary obligation. IP Draughts has his doubts about the merits or legal consequences of what he views as blatant legal engineering.

Coming back to the Costcutter case, the fact that two judges came to different conclusions highlights the fact that the legal distinction, under English law, between debt claims and contract claims is not as well know as it might be. It will be interesting to see if there is any further appeal in this case.

Contracts often limit liability to the contract price. Where IP Draughts’ client is the party receiving money under a contract, he sometimes modifies the limitation of liability clause to make clear that the cap is in addition to the obligation to pay the contract price. Perhaps this is unnecessary for the reasons articulated by Mr Justice Constable in the Costcutter case. But good contract drafting is not just about winning in court. There is also the issue of setting commercial expectations. If an experienced County Court judge (Oxford law degree and KC)* can get this point wrong, what hope is there for us mere mortals to understand the limitations of a limitation of liability clause?

• Background of HHJ Sephton KC here: https://www.judicialcareers.judiciary.uk/his-honour-judge-sephton-qc/