Contracts Matter

Virgin Mobile Telecoms Limited (VM) and EE Limited (EE) entered into a Telecommunications Supply Agreement (TSA) in 2013. Under the TSA, VM agreed to use EE’s mobile network infrastructure to provide its customers with 2G, 3G and 4G mobile services. The TSA included a provision whereby VM agreed to use the EE network exclusively for the provision of those services to its customers.

VM subsequently entered into an agreement with Vodafone for the supply of 5G services and began migrating customers from the EE network to the Vodafone network. EE insisted this was a breach of the exclusivity clause and consequently brought a claim against VM for the loss of revenue incurred as a result of the customers having migrated to a different network.

VM denied a breach had occurred and argued that, in any case, EE was contractually prevented from bringing a claim due to the exclusion of liability for loss of “anticipated profits” set out in clause 34.5(a) of the TSA: “…Neither party shall have liability to the other in respect of: (a) anticipated profits”.

The High Court granted summary judgment for VM, holding that VM’s liability for any alleged diversion of customers to alternative networks was captured by the exclusion in clause 34.5, which meant EE could not succeed in their claim. EE decided to appeal on the following grounds:

• The judge was wrong to categorise the claim as loss of profits. The correct analysis was that the claim was for diminution in price.
• The judge was wrong to construe the clause excluding liability for anticipated profits as excluding EEs claim.

Although Phillips LJ was swayed by EE’s arguments, the majority of the Court of Appeal ultimately ruled in favour of VM.

The key issue was whether it was correct to characterise the claim as a claim for loss of profits which was subject to the exclusion clause. In the leading judgment, Zacaroli LJ stated that “there is no overarching principle of law that limits an exclusion of liability for loss of anticipated profits to losses other than expectation loss or diminution in price”. In this case, the view was that in the relevant clause "anticipated profits" was used interchangeably with "loss of profits". As such the claim was caught by the exclusion clause.

The caselaw advanced by EE failed to provide any assistance. The facts in EE’s authorities were different to the present case and none of them were persuasive in determining that an exclusion covering “loss of profits” could not cover a claim for “diminution in price”. If the parties had intended clause 34.5(a) to cover only direct loss of profit claims that do not fall within the ambit of expectation loss, they could have done so specifically.

The judgment also dismissed EE’s argument about the commercial viability of the contract. Although damages and injunctive relief would have been difficult options for EE in the present case, this did not render the contract a “commercial absurdity” because there existed a range of circumstances where remedies could have been sought in the event of a breach. The judgment also noted that the clause was part of a lengthy contract drafted with the assistance of legal advice on both sides, involving a careful allocation of risk for both parties.

Dissenting, Phillips LJ considered that if EE had intended to give up the right to anticipated profits in these circumstances, then clearer language to that effect could have been used.

• The judgment emphasises that if the parties want to differentiate between anticipated profits and loss of profits, specific drafting should be included to this effect.
• In situations where the exact meaning of the clause is unclear, the court will attempt to identify what a reasonable person with knowledge of the context of the contract would understand the disputed words to mean.
• The lack of unanimity among the judges creates uncertainty over whether similar disputes in the future will follow the same reasoning, particularly as the authorities cited in this case were distinguished on their facts.

Ultimate Oil and Gas DMCC (UOG) contracted with CE Energy DMCC (CEE) under a series of spot contracts for the sale of gasoil and jet fuel. The terms of these contracts provided that CEE retained title in the goods until payment was made by UOG. UOG later failed to make payment in respect of outstanding sums due under these contracts, and the parties subsequently entered into a ‘Payment Agreement’, in which it was agreed that UOG would pay its debts in instalments, and that CEE would supply two further spot cargoes (the New Spot Cargo) if UOG complied with its obligations. The owner and chairman of UOG, Mr Bashar, also provided a personal guarantee in respect of UOG’s obligations under the Payment Agreement.

UOG paid its first instalment under the Payment Agreement, and accordingly CEE agreed to supply the New Spot Cargo. However, when UOG failed to make payment for the New Spot Cargo, and to comply with its remaining obligations under the Payment Agreement, CEE did not supply the additional cargo and issued a claim against UOG for the unpaid price of the goods, and a further claim against Mr Bashar under the personal guarantee. It also reactivated existing arbitral proceedings between the parties in respect of UOG’s outstanding debts to CEE.

Section 49(2) SGA 1979

Due to the presence of the retention of title clause, the court was required to consider whether the claim was within the scope of section 49(2) of the SGA, which provides that a seller may claim for the price of goods where it is payable on a "day certain irrespective of delivery", even where title has not passed to the buyer.

The relevant contract provided for delivery of the New Spot Cargo by offshore ship-to-ship transfer between vessels, with payment due latest 45 calendar days from the Notice of Readiness provided by the daughter ship in respect of its arrival at Lagos to offload its cargo. UOG argued that a “day certain irrespective of delivery” required the day to be defined in the contract, in a way which was neither logically nor practically connected to delivery.

The court disagreed. It held that a day was certain if it was ascertainable, including by reference to an uncertain event or something that one of the parties or a third party did, and considered that the phrase “irrespective of delivery” was to be interpreted as meaning "whether or not the date certain is fixed by reference to delivery". As such, the judge was satisfied that the provision of the Notice of Readiness was a “date certain” on the basis that, although not specified as a fixed date, it was ascertainable following the occurrence of an event specified in the contract. It considered this was “irrespective of delivery” because, although notice would likely occur following delivery, it would not be bound to coincide with delivery and the contract did not make payment conditional upon delivery having occurred.

The Guarantee

CEE argued that: (i) the guarantee provided by Mr Bashar was a demand guarantee, and as such Mr Bashar was under an obligation to pay any sum demanded by CEE in good faith, notwithstanding UOG’s actual liability, and (ii) in the alternative, that UOG and Mr Bashar were contractually estopped by the Payment Agreement from denying any liability to make payment of the outstanding sums. Mr Bashar contended that the guarantee was a surety guarantee, under which he would only be liable to perform following the liability of UOG being established through award or judgment.

The court concluded that this was a surety guarantee, and therefore CEE would be required to demonstrate UOG’s liability in respect of the outstanding sums guaranteed by Mr Bashar. It considered that it was able to do so, on the basis that the Payment Agreement contained “promises to pay specified proportions of outstanding sums at particular dates”, and “a succession of very precise and express admissions about what was due under the previous contracts”, which were described as “irrevocable”. As such, UOG, and by extension Mr Bashar, were contractually estopped from relying on those admissions. The Court held that Mr Bashar had guaranteed the underlying liability and confirmed that there was no requirement for CEE to first obtain a judgment or award against UOG in order to call upon the performance of the personal guarantee.

• This decision provides clarity as to the interpretation of a key provision of the SGA and is to be welcomed by sellers. A price to be payable on "a day certain irrespective of delivery" could be defined by reference to a contingent or future even, i.e. it means an ascertainable date, not a pre-defined calendar date
• However, the judge considered that current case law with respect to section 49 of the SGA is contradictory and "not in a satisfactory state" and concluded that the topic is ripe for appeal.
• As such, until these differences of opinion have been resolved by a higher court, in order to avoid any ambiguity sellers should remain wary of linking a trigger for payment to the occurrence of an event, rather than delivery, where a retention of title clause is present.

Ms Lawrence carried on business as a property investor with a portfolio of residential properties in London and Surrey. She entered into a Loan Agreement in 2018 with an unnamed lender acting by its security agent, HNW. The lender was identified in Schedule 4 by the number "1" and was described as " a person … who lends money through HNW Lending Limited who has granted permission for 'HNW Lending Limited to act as their Security Agent in entering into and administering this loan to the Borrower."

Clause 26.7 of the Loan Agreement stated:

“The Borrower and Lender agree that, while HNW Lending Limited is not a party to this Loan Agreement, HNW Lending Limited may take the benefit of and specifically enforce each express term of this Loan Agreement and any term implied under it pursuant to the Contracts (Rights of Third Parties) Act 1999.”

In 2021, HNW sent a demand to Ms Lawrence notifying her that the loan amount and interest were due and payable, and the security was enforceable. Ms Lawrence sought to strike out HNW’s claim on the basis that HNW had no standing to bring a claim because it had no enforceable rights under the charge and Loan Agreement. This argument was based on a county court judgment in August 2024, also involving HNW, which held that because the HNW was not expressed to benefit from the agreement, there was nothing it could enforce under the Contracts (Rights of Third Parties) Act 1999.

Reaching a different conclusion to the county court, the judge decided that HNW did have title to sue on the Loan Agreement and the charge, and the claim should not be struck out.

The judge considered that clause 26.7 must have been drafted with the 1999 Act in mind and with the intention of conferring on HNW equivalent rights to those of the lender, enabling HNW to enforce obligations owed to and benefitting the lender. He noted that there was a dearth of case law on the scope of section 1(1). The example given in Chitty on Contracts of a situation where a third party may enforce a term of the contract pursuant to section 1(1))(a) (" if the contract expressly provides that he may ") is materially different from what the parties appear to have had in mind in this case.

Contrary to what Chitty's example might suggest, the judge considered that section 1(1)(a) is not limited to the enforcement by a third party of a term purporting to benefit the third party, since this type of term is specifically addressed in section 1(1)(b). It is sufficient that the contract expressly provides that the third party may enforce the term (as clause 26.7 did in this case). Alternatively, clause 26.7 was effective pursuant to section 1(1)(b) to confer on HNW the benefit of the covenants and rights of enforcement owed to the lender.

The judge concluded that construing clause 26.7 as legally effective also accorded with the principle that the courts should endeavour, if possible, to give effect to the parties' contractual provisions rather than treating any part of them as “otiose”.

• This decision potentially expands the scope of third-party claims pursuant to the Contracts (Rights of Third Parties) Act 1999. However, it is worth noting that the judge gave Ms Lawrence permission to appeal to the Court of Appeal on the issue of enforceability of the Loan Agreement, noting the lack of case law on section 1(1).
• Until the differences of opinion in this case and the previous county court judgment have been examined by a higher court, it is advisable to ensure that the third party rights provisions in any contract accurately reflect the intention of the parties to create, modify or limit any statutory third party rights.