High Court Clarifies Limits of Liability Clauses in Commercial Contracts

Introduction

In the case of Costcutter Supermarkets Group Limited v Ameet Kumar Vaish & Anor (2024 EWHC 152 (KB)), Mr Justice Constable presided over an appeal concerning the interpretation of liability and payment obligations under commercial agreements. The High Court was tasked with distinguishing between claims for a debt and claims for damages and determining the applicability of a limitation of liability clause in the context of these claims.

Key Facts

Costcutter Supermarkets Group Limited entered some varying contracts with respondents Ameet Kumar Vaish (AV) and Pradeept Kumar Vaish (PV) for the operation of different convenience stores. Disputes arose due to service issues after Costcutter changed its business model and supplier, following which AV and PV decided to switch to the SPAR symbol group and cancelled their direct debit mandates with Costcutter. A primary issue in the case was the interpretation of a limitation of liability clause, which the trial judge found barred Costcutter’s ability to recover for goods delivered on two contacts due to the service charge being zero in the preceding year. Costcutter appealed this decision, and the respondents cross-appealed concerning the sums judged to be owed in debt, as determined partly by a spreadsheet drawn up by the respondents.

Legal Principals

The case centered around the principles of contractual interpretation in the context of limitation clauses and the distinction between claims in debt and claims in damages.

Contract Interpretation (Arnold v. Britton, Rainy Sky SA v. Kookmin Bank, Wood v. Capita Insurance Services)

The court reiterated the principles of contract interpretation, focusing on the natural and ordinary meaning of the provision, relevant provisions of the contract, the overall purpose of the contract, the factual and commercial context known to the parties at the time the contract was executed, and commercial common sense. It was emphasized that unless language is ambiguous, clear wording in a contract must be applied. However, where ambiguity exists, the preferred construction is the one aligned with business common sense.

Distinction Between Debt and Damages (Chitty on Contracts, AB v CD)

A pivotal point of the appeal was the distinction between a claim in debt (entitlement to payment of a definite sum owing under the contract) and a claim in damages for breach of contract (entitlement to compensation for loss resulting from the breach). Chitty on Contracts was invoked to underline the difference and the Supreme Court case AB v CD was referenced to assert the primary obligation to perform a contract, which a limitation clause generally does not extinguish.

Limitation of Liability in Contract (Triple Point Technology, Inc v PTT Public Company Limited)

Lord Leggatt’s commentary in Triple Point Technology was used to understand the approach towards construing limitation clauses, which should not override ‘normal rights and obligations’ without clear intent expressed in the contract. An interpretation that deviates from established legal norms requires unambiguous wording in the contract.

Outcomes

The High Court found in favor of Costcutter on the appeal and determined that the trial judge had erred in his application of the limitation of liability clause. It was held that claims in debt to enforce primary obligations are not excluded by a clause drafted to limit secondary obligations arising in damages. Consequently, the respondents were found liable for the actual cost of goods delivered, irrespective of the “five times Service Charge” limitation clause; this is because the liability to pay a debt is a primary obligation and cannot be circumscribed by a limitation of liability clause, which by nature is directed at secondary obligations.

The cross-appeal by the respondents, which contested the trial Judge’s reliance on their spreadsheet as indicative of acknowledgment of the debt owed, was dismissed. The High Court found no error in the trial judge’s consideration of the evidence or in his findings of fact based on the spreadsheet prepared by the respondents, and no permission was granted for the cross-appeal.

Conclusion

The High Court decision in Costcutter Supermarkets Group Limited v Ameet Kumar Vaish & Anor underscores the crucial distinction between primary and secondary contractual obligations, and the limitations of liability clauses in commercial contracts. The judgment clarifies that a party to a contract retains its primary obligation to pay for goods or services received, which is not normally restricted by a limit on liability for breaches of other contractual terms. This case serves as a critical reminder to legal professionals of the care needed in drafting and interpreting commercial contracts and the inherent resistance of primary contractual obligations to exclusion through general limitation clauses.