Choose your words carefully: Court of Appeal split on £25M “loss of profits” exclusion clause case
6 Feb 2025
14 min read
EE Limited v Virgin Mobile Telecoms [2025] EWCA Civ 70
THE SPEED READ
A decision that came down to the wire
This is a Court of Appeal judgment – and an important one about contractual interpretation – which was really finely balanced.
It’s something akin to two heavyweight boxers who ‘go the distance’ and await the final scores of the three judges. The first judge, Lord Justice Zacaroli, finds in favour of Virgin Mobile. The second, Lord Justice Phillips, declares for EE. Both appear to have reached justified, yet opposing, conclusions. So who has won? Then Lord Justice Coulson, knowing he has the deciding vote, spells out just how ‘close to call’ this fight was. “I have not found the central issue in this case easy to decide”, he says. “My original instinct” was that Phillips LJ’s analysis was correct. However, “with…reluctance…I have concluded that … [Zacaroli LJ’s] analysis – and more importantly… careful judgment – are correct”. Virgin Mobile therefore win what – without stretching this boxing analogy – is a “knock-out blow” to EE’s £24.6M claim for breach of contract.
So what was this narrowly balanced issue? Why was Coulson LJ so “reluctant” to call it in favour of Virgin Mobile? The issue was the correct interpretation of an exclusion clause. In particular, it was the statement that “neither Party shall have liability to the other in respect of anticipated profits”. Could it be, that this term (when considered in its wider admissible context) had the effect of excluding the entirety of EE’s £24.6M claim for loss-of-profit damages? Even if those damages flowed from a serious breach by Virgin Mobile: a breach of the exclusivity terms at heart of the contract? “Yes”…in this particular contract (but those last four words are key!)
The case, especially the varying interpretations by the appellate judges, highlights the importance of exercising caution when using terms like "anticipated profits" or "loss of profit." While these terms may seem universally understood, their meanings are ultimately dependent on the specific context.
Top 10 Practical Takeaways
[1] Know the rules you’re playing by: This case is a stark and illustrative example of why knowledge of the rules for interpretation of contracts can be vital. This is particularly so in the context of clauses allocating risk (e.g. exclusion and limitation clauses). That is not to say all drafting must be done by solicitors, but it would certainly be riskier to draft such terms without such rules in mind.
[2] There is no general principle or uniform interpretation for the meaning of phases such as “loss of profits” or “anticipated profits”. The line of cases leading are clear: what such phases mean will depend on the context in which they are used in the contract and the wider admissible context which the court uses to determine meaning (if there is such a dispute).
[3] What you intended a phrase to mean has little / no relevance: When determining meaning, the subjective intentions of the parties (i.e. what the parties thought they meant) is irrelevant (save for some very narrow exceptions). The Court must identify the objectively ascertainable meaning: what the reasonable person armed with certain admissible context about this contract would have understood the disputed words to mean at the point of contracting.
[4] Clarify a phrase (e.g. head of loss) that has multiple meanings….: In this case, one of the grounds for dispute is that in some cases “loss of profits” can be interpreted several ways. Most narrowly, it could mean resulting losses outside of this contract only; less narrowly it could mean those losses and/or the ones which directly flow from the breach. Depending on the wording, its meaning might depend on the nature / seriousness of the breach. Most widely, it could mean all loss of profits (direct or consequential; losses within this contract or outside). If the meaning is unclear then the court must only use admissible aids to determining the meaning – see points 2 and 3 above.
[5] …Or prepare to live with the risk: The irony is that exclusion clauses are often the most heavily negotiated. It may be the ‘compromise wording’ that has led to uncertainty. The thinking might be: “if we spell out the true meaning too clearly the other side will resist it; so better we leave the wording as it is”. If that is the case, recognise the risk of your approach (it may still be an acceptable risk) and the strength of your arguments for the interpretation you intend. Alternatively, is there scope to make the words clearer?
[6] The tricky world of amendment: Given the final words above, it should be unsurprising that difficulties can arise when the contract is amended. In particular, if the amendment changes the risk balance of the contract (e.g. gives one party powerful new rights) but none of the risk allocation mechanisms are amended (e.g. limitation and exclusion causes are untouched), it will be hard for a party to convince the court that those risk allocation clauses changed their meaning when the amendments were made. Therefore, if the meaning is intended to be changed, further thought should be given as to how to make this apparent.
[7] Just because an interpretation is tough doesn’t mean it’s wrong: As this case shows, in the right context, it is possible for an exclusion clause to exclude all claims for “loss of profits”. It can do so even if it denies the counter-party their most substantial head of loss.
[8] But beware the ‘scot-free’ exclusion clause: Drafters must be careful that exclusion clauses are not so wide that they “would defeat the main object of the contract or create a commercial absurdity, notwithstanding the literal meaning of the words used”. At that point, the court will seek to find an alternative narrower interpretation of the clause, so as to avoid this outcome.
[9] Previous case law can be a siren song: In light of all of the above, if you do end up in dispute, there may be limited value in basing your claim (or indeed your contract drafting) on what past cases have decided a particular contractual phrase meant. The judgments in those previous cases were made in the specific context of that contract and its admissible surrounding context. That is not to say that those past cases have no value. The more analogous they are to the present case, the more likely it is that the court will find them at least a little persuasive. Conversely, however, there is a particular pitfall of extrapolating meaning from previous cases. As Coulson LJ summarised in this case: “[T]hese decisions almost always come down to the words used and the commercial background against which the words must be construed, so other cases are always of limited utility."
[10] Plead your claim carefully: the door may be closed but a window may be open: It is not clear to what extent the Court’s comment on this point reflected the underlying facts. They might have been making the point in the abstract. Either way, the Court noted whilst the Claimant’s right to ‘loss of profits’ (valued at £24.6M) appeared to be caught (and therefore barred) by the exclusion clause, there appeared to be nothing in the contract preventing an alternative (albeit probably much lower value) claim for ‘wasted expenditure’. So plead your heads of loss carefully.
If you have time for some deeper analysis, read our ‘deeper dive’ below.
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THE DEEPER DIVE
Why was the Court of Appeal was split 2:1 on this case?
The reason that some of the learned judges were so reluctant to reach the conclusion that EE’s right to damages was excluded was neatly summarised by Lord Justice Phillips:
“It would be surprising if the parties intended that [Virgin Mobile] could breach the key exclusivity provision, unlawfully diverting its customers to a third party supplier, without incurring liability to pay EE damages reflecting the loss of revenue resulting from that breach. A right to claim for the amount of lost Charges by reason of such diversion [i.e. which would have been paid to EE in respect of those customers if they had not been unlawfully diverted] (less costs savings, in the unlikely event that there were any) would be conventional, straightforward and would simply reflect the commercial bargain made. To exclude that right would undermine the bargain and it is unclear why the parties would have so provided consistently with business common sense”.
To put it more plainly: if the heart of the commercial bargain here was for Virgin Mobile to provide a flow of customers to EE exclusively, then if Virgin Mobile started unlawfully diverting those customers to other network providers then the principal head of resulting loss of EE would be loss of profits. So if the exclusion clause barred Virgin Mobile from recovering loss of profits then this “undermine[d] the bargain” because it insulated Virgin Mobile from having to pay damages if it breached the core term of the bargain. It seemed to Phillips LJ that such a clause would therefore be inconsistent “with business common sense”.
However, as summarised above, the other two appellate judges disagreed (albeit one very narrowly). The majority judged that Virgin Mobile had successfully excluded its liability for ‘loss of profits’ in the widest sense being claimed by EE, and was therefore not liable for the profits EE would have made on the customers sent its way by Virgin Mobile even if, in breach of the exclusivity agreement, Virgin Mobile caused those losses by sending the customers to other providers.
Why did the exclusion clause work as it did, in this case?
You can read the eight point summary at the bottom of this article, but the crux is that it was the correct interpretation of the exclusion clause in the specific circumstances of the contract. In particular, and to answer Phillips LJ’s concern: there were rational reasons why the parties might seek to exclude ‘loss of profits’ in its widest sense; it was not inconsistent with business common sense (or no more so than the alternative); and, in fact, it did not result in EE being denied all legal recourse as some legal avenues were still available (albeit more limited in their assistance to EE).
Specifically, as noted in Practical Takeaways 9 & 10 above, the majority of the Court reflected on the fact that: (i) there was a minimum payment clause within the contract, this effected the overall risk profile of the contract within which this exclusion clause operated; (ii) the exclusion clause did contain certain carve-outs for wilful breach of the contract, so clearly there was some thought to risk apportionment in what would otherwise be a more blanket exclusion; (iii) an injunction for specific performance was an alternative potential remedy (albeit not one without its problems); and (iv) whilst the clause did exclude “loss of profit” it did not exclude “wasted expenditure”, so there was at least one other available head providing a potentially (partial and possibly much smaller) remedy for losses.
At the risk of reading too much into a brief judgment, it is possible to speculate on scenarios where these last two factors might carry particular weight:
- First, where loss of profit is excluded then, in circumstances of this type of breach, it might be easier to argue that damages would not be an adequate remedy (a limb of the injunction test), thereby bolstering the strength of an injunction / specific performance claim.
- Second, perhaps the reason ‘wasted expenditure’ was not pleaded was because such losses were too small or non-existent. To explain: ‘wasted expenditure’ in this case would have been the amount EE spent on assets – e.g. network improvements – on the basis that Virgin would continue to send customers their way, per the terms of the exclusivity contract. That expenditure would then be wasted when Virgin instead diverted those customers to other network providers. However, such losses might be non-existent if, for example, network improvements would have been the same whatever volumes of customers Virgin had sent their way.
- If that was the dynamic in this contract then perhaps it makes sense for the parties to have agreed to exclude all future loss of profits claims and leave open claims for wasted expenditure. Perhaps that was an appropriate risk allocation if EE held that little future risk?
No general principle or uniform interpretation
Lest anyone was tempted to think that the Court of Appeal was setting out some general principle about how to exclude or limit liability for “loss of profits” or “anticipated profits”, there was one point on which all of the justices were clear: there is no general principle about what either of these phrases mean; nor should there be:
- EE had been able to point to previously decided cases in which “loss of profits” had been given much narrower meanings. In particular, in some cases it had been interpreted to mean loss of profits outside of the contract, or so called ‘consequential loss of profits’. Such an interpretation – if applied to this contract – would not have excluded the damages EE sought.
- Neither Zacaroli LJ nor Coulson LJ sought to suggest that those cases were incorrectly decided. In those cases, the words “loss of profits” had not excluded the type of damages EE was now seeking.
- However, such previous cases were “of little assistance” (Zacaroli LJ’s language), or else “a ragbag of particular results in particular types of cases” (Coulson LJ’s summary). Either way: “they showed no more than that those words may be differently construed depending on their contractual context”. "[T]hese decisions almost always come down to the words used and the commercial background against which the words must be construed, so other cases are always of limited utility.”
- Context is a vital part of interpretation, therefore.
A balancing analysis: deciding if valuable rights are excluded
It might be a surprise to some that there should be any debate as to how to interpret a clause purporting to exclude all claims for “loss of profits”. Surely those words are clear? Sadly, it is not quite that simple, and to assume such simplicity could be a grave (and costly) mistake:
- There are at least eight ‘rules’ which the courts now consider to be “the proper approach to the construction of contracts generally” (they are all neatly listed in the judgment of Sir Geoffrey Vos C in Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821, at §18 if reference is needed). The words “at least” here recognise that some rules contain sub-rules, but in any event they are all part of what has become a well-known list.
- There are an additional seven factors which the courts now accept as “the approach to be taken specifically in relation to the interpretation of exclusion clauses” (you can likewise find these in §18 of this EE v VM judgment).
- What can be seen in these fifteen topics is a recognition that: “commercial parties are free to make their own bargains and to allocate risks as they think fit”; the contract is the vehicle for this risk allocation; and when interpreting contracts the court will proceed on the basis that “the departure point in most cases will be the language used by the parties because…the parties have control over the language they use in a contract.”
- Where this gets more complicated is where either:
- There is any potential scope for ambiguity, particularly given the maxims that “The more valuable the right, the clearer the language of the exclusion clause will need to be” and that “any ambiguity or lack of clarity must be resolved against the party seeking to exclude liability”; or
- Far more rarely, one party contends that an exclusion clause leads to a situation which “would defeat the main object of the contract or create a commercial absurdity, notwithstanding the literal meaning of the words used”.
- In fact, one might argue both sub-bullet points above are part of the same spectrum: The more valuable the right being given up, the more carefully the court will look at the contract (note: the whole contract, not just the clause in question) to work out whether the objectively ascertainable intentions of the parties really were to give up that right. In fact, if the right being given up is so valuable that giving it up would seem to defeat the main purpose of the contract / lead to a commercial absurdity, then the court will find the parties cannot have intended it.
One can see that it was those last factors which weighed most heavily for Phillips LJ, and why Coulson LJ was ‘reluctant’ to reach the majority decision that the exclusion for “loss of profits” had the effect of excluding the entirety of EE’s £24.6M claim for damages even if those damages flowed from breach by Virgin Mobile of the very core of their agreement: a breach of exclusivity by diverting customers to other network providers.
The final analysis in this case
Those who want a blow-by-blow account of why in this particular contractual context the exclusion clause was effective have – as Coulson LJ himself reflected – the benefit of Zacaroli LJ’s “analysis and…careful judgment”. The summary version appears at §102 of his judgment (slightly paraphrased with emphasis added):
“To summarise:
(1) 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;
(2) in some cases similar wording has been found to be so limited, but in other cases it has not;
(3) the wording of the exclusion in this case is clear and unequivocal;
(4) the better view is that [the two adjacent exclusion clauses in this particular contract] are intended to be read cumulatively, so that [read together it becomes clear that in this particular contract] liability for anticipated profits is intended to indicate something additional to loss which does not arise directly from the performance of the [contract], and if the parties had intended the clause [the exclusion clause] to cover only direct loss of profit claims that do not fall within the ambit of expectation loss, they would have done so specifically;
(5) the better view is that “anticipated profits” is used [in this particular suite of clauses] interchangeably with “loss of profits”;
(6) the fact that at least the paradigm case that falls within [the limited carve-out from the exclusion clause], and is thus carved out from [the exclusion clause relating to “anticipated profits” / “loss of profits”], is a claim for expectation loss [i.e. a claim which could include loss of profits] points towards such a claim otherwise being covered by [the exclusion clause].
(7) the clause is part of a lengthy contract drafted with the assistance of legal advice on both sides, involving a careful allocation of risk for both parties; and
(8) the consequences of this reading of [the exclusion clause relating to “anticipated profits” / “loss of profits”] in the context of the range of its possible applications at the time of entry into the [contract], are commercially reasonable, and no less so than the alternative reading, particularly in view of the substantive remedies that remain across those applications (whether by way of damages or equitable relief).
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This article was written by Lloyd Nail, a senior associate in our Dispute Resolution Team.
Lloyd is a dispute resolution lawyer specialising in complex systems, decision-making, and risk, often in high-pressure environments, with a particular focus on procurement law (including procurement litigation), health & safety (in particular complex system failures), and transport (including complex systems risks and contract issues).
“These decisions almost always come down to the words used and the commercial background against which the words must be construed, so other cases are always of limited utility." ~ Lord Justice Coulson