Choose your words carefully, again: Court of Appeal reverses High Court decision in £10M “fault attribution clause” case

Summary

It appears that Court of Appeal cases about the interpretation of liability clauses are like buses: you wait a while and then two come at once.  Close on the heels of the judgment in EE Ltd v Virgin Mobile [2025] EWCA Civ 70 (which you can read about here), Coulson & Zacaroli LJ (this time with Males LJ) have had to revisit the law here, but in very different circumstances. 

South East Water Ltd v Elster Water Metering Ltd [2025] EWCA Civ 287  provides slightly different lessons, not just about contractual interpretation, but about:

• considering suites of remedy & limitation / exclusion clauses holistically; 
• properly mapping their potential interactions; and
• if there is overlap, considering whether an ‘order of precedence’ clause (or wording to equivalent effect in the operative clause) is needed.  

In this case, those issues had not been adequately covered off. As a result, the lower court (the TCC) found in favour of Elster Water Metering (“Elster”) with the effect of drastically reducing the quantum of the damages claim brought by South East Water ("SEW").  The Court of Appeal has, however, now reversed the effect of that decision and found in favour of SEW's interpretation of the relevant clauses.

The clauses in question were not particularly unusual, especially in contracts for the longer-term supply of large volumes of  ‘simple’ goods. Millions of pounds in damages hung in the balance, and thousands of pounds of fees will have been spent in taking this case to the TCC, and then the Court of Appeal.  A good incentive, therefore, to ensure that the interactions between remedies and limitation / exclusive clauses are well understood. 

Further details

Context and key clauses

The case concerned the proper construction of a Framework Agreement between SEW and Elster for the provision of Automated Meter Reading units (AMRs). SEW claimed damages for faulty AMR units supplied by Elster, which allegedly failed due to water ingress and insufficient battery life.

The focus of the judgment was the interaction of two clauses: 

Schedule 11: “Meter AMR Warranty & Fault Attribution” began with: “Should a faulty device be identified in operation; the cost of an equivalent, replacement device & any incidental costs shall be limited to the warranty as set below.”  Beneath that wording was a table which identified that, if the fault was discovered:

1. In the first two years, then Elster would replace the faulty AMR unit free of charge, and there would be an additional payment by Elster to SEW of £40 – i.e. a cost to Elster
2. In the three subsequent years, the same but with no additional payment by Elster – i.e. a lower cost to Elster
3. Thereafter, SEW had to pay for any replacement AMR units, at a discount rate decreasing incrementally annually – i.e. a cost to SEW which increased over time (as the discount decreased).

Clause 13: “Remedies” was in two parts. Clause 13.1 set out a list of remedies for SEW to choose from: “Without prejudice to any other right or remedy which the [SEW] if may have, if any [AMRs] are not supplied in accordance with, or [Elster] fails to comply with, any of the terms of the Contract then [SEW] shall be entitled to avail itself of any one or more of the following remedies at its discretion, whether or not the [AMRs] have been accepted by the [SEW]”. The list of available remedies included: 

1. Option 3: giving Elster the opportunity, at Elster’s expense, “either to remedy any defect in [AMRs] or to supply replacement [AMRs]”; or 
2. Option 6: to “claim such damages as may have been sustained in consequence of the Supplier's breach or breaches of the Contract.”
3. An additional option was then provided by Clause 13.2, that “…without prejudice to any other right or remedy which [SEW] may have, if any [AMRs] are not supplied in accordance with, or [Elster] fails to comply with, any of the terms of the Contract then [SEW] shall be entitled recover any additional cost incurred by [it] in sourcing similar products from an alternative supplier.”

Decision of the lower court

Elster’s argument, which succeeded in the lower court, was that its liability exposure (where it had provided faulty AMR units) was clearly and solely prescribed by Schedule 11. This was re-enforced by the title wording “Fault Attribution”. Clause 13 then needed to be read compatibly with Schedule 11 such that: (a) If the SEW chose Option 3 (remedy the defect at Elster’s cost or replace the relevant AMRs) then Schedule 11 prescribed where cost should fall; and (b) if SEW chose Option 6 (damages sustained by the breach) then Schedule 11 prescribed how those damages should be calculated.  Elster argued that is how these clauses were to be read compatibly together. 

It is worth noting (especially given the Court of Appeal has overturned the decision), that the lower court resoundingly agreed with this interpretation:

I have no doubt that Elster is correct as to what it says is its plain and obvious meaning from the clear words used… As [Elster] submits, the heading does not simply say “AMR warranty” but also “& fault attribution”. Whilst these words in isolation do not necessarily indicate with complete clarity the intended effect of the schedule, the words appearing immediately after that make it quite clear that it is intended to have the effect of limiting SEW’s entitlement in respect of any claim in relation to a faulty AMR unit identified in operation to the cost of an equivalent replacement device and any incidental costs to the warranty set out below. It is, frankly, hard to see how its wording could have been improved in terms of conveying its intended effect to the intended reader. It has the undoubted merit of simplicity and clarity instead of being concealed in a thicket of legal boilerplate. [emphasis added]

The Court of Appeal’s decision

The crux of the Court of Appeal’s judgment is that the lower court’s decision was looking through the wrong end of the telescope.  

Setting to one side the title wording of clauses (which was to be given very limited weight):

• Elster’s principal obligation was to supply AMR units which complied with the contract specification 
• If they did not do so, then there were a range of options open to SEW: Clause 13 clearly stated that all of the remedies listed there were available to SEW at their discretion. 
• Schedule 11 states that where “a faulty device [is]…identified in operation”, then “the cost of an equivalent, replacement device and any incidental costs shall be limited to the warranty ….” [emphasis added].  This wording presupposes that - out of the Clause 13 options - SEW has elected the Option 3 route of replacing the device. But as shown above, Clause 13.1 also gave SEW other options, including for example Option 6 (damages) or Clause 13.2 (sourcing from an alternative supplier).  

Therefore:

• Elster (and the lower court) was wrong in the interpretation that Schedule 11 applied across the board; limiting all SEW’s claims for damages under clause 13 to the cost of replacement AMR units as calculated in Schedule 11.
• SEW was correct in its submission that Schedule 11 only applied if SEW exercised the option of inviting Elster to supply replacement AMR units pursuant to Option 3.

Further reasoning

Coulson LJ, giving the leading judgment, gave five reasons for this interpretation:

[1] The language of Schedule 11 was not concerned with damages at all; it was simply concerned with fixing the parties rights and obligations *if* replacement AMRs were being provided by Elster. “…there were no words to indicate that Schedule 11 applied, or even had any relevance, in circumstances where (for whatever reason) Elster were not supplying AMR units to SEW by way of replacement, much less where SEW had brought a claim for damages against Elster.” Thus this was not a limitation of liability clause.  Importantly, it could not therefore limited Elster’s liability if SEW instead chose to pursue Option 6 (damages)

[2] Schedule 11 was not clear enough to be a limitation of liability clause in any event. This second reason highlights an important rule of contractual interpretation: when interpreting contracts there is a (rebuttable) assumption that “parties do not give up their ordinary rights without clear words” (per Lord Leggatt, in his Supreme Court judgment in Triple Point [2021] UKSC 29).  In this case, given the impact which Elster’s interpretation would have had in limiting its liability to SEW, much clearer wording would have been need: “the assumption identified by Lord Leggatt in Triple Point… is simply not displaced here.”

[3] The extreme nature of Elster’s interpretation intended to suggest this was not the interpretation the parties would (objectively) have intended. In particular, as noted near the top of this article, Schedule 11 worked so that from six years onwards SEW would have to pay Elster for replacement of the units.  So if Schedule 11 was interpreted as also applying to SEW’s right to claim damages then this part of Schedule 11 would have the effect of entirely excluding Elster’s liability from year 6 onwards.  Such an extreme exclusion clause would require much clearer wording. By contrast, SEW's interpretation had no such extreme effect.

[4] Elster’s argument only worked by reading a ‘notional cost’ element into Schedule 11. In order to make Elster’s argument work, it would have to work in all scenarios, including where SEW had not asked Elster to provide replacement AMR units, and had instead made clear that they did not want them and instead wanted damages.  Elster contended that in that scenario Schedule 11 could be read as saying that SEW’s damages would be limited to the notional cost to Elster of providing such units. That requires too much additional information to be read into the contract.  In particular, it presupposes that Elster would otherwise have a right to provide such units; but they didn’t. “[T]here was no … right on the part of Elster to replace the defective AMR units, so the notional cost argument cannot run”.

[5] Commercial common sense: Although separating it from the above four reasons (presumably to make clear that this was additional confirmation, rather than a decisive point) Coulson LJ, further reflected that: “In my view, this reading of clause 13 of Schedule 2 and Schedule 11 also makes wider commercial sense. If defective units were sporadic, or if the problems appear to be ironed out in the first few years of the contract, then it is easy to see why clause 13.1.3 might have been utilised. There were also other advantages to SEW of using this option: Schedule 11 does not require proof of fault and it may well go beyond the normal six year contractual limitation period. However, if problems with the AMR units persisted, and were considered by SEW to be generic, then SEW might reach a point where they would no longer want any replacement units from Elster because they no longer trusted Elster to be able to deliver a product that was fit for purpose. In those circumstances, SEW were not bound to ask for or receive replacement AMR units which they did not want, from a supplier that they did not trust, or to have their damages limited by reference to the notional cost to Elster of providing such replacement products.”

Final thoughts

Notwithstanding the reversal of the first instance decision, it can be seen from the judgment that the Court of Appeal was temporarily tempted by Elster’s interpretation.  Coulson LJ reflected that: “The judge said at [103] that it was frankly difficult to conceive how anybody could have believed that Schedule 11 was designed solely to flesh out one of the options in clause 13. I too was originally sceptical about that argument, because it seemed a little unrealistic to treat Schedule 11 as optional at SEW’s behest…” 

Yet, on the final analysis, that is exactly how the contract was to be interpreted.  Coulson LJ's comment here points to the fact that it was only a careful reading of the interaction of these two clauses which led to the end result.  It is very easy to think of slightly different wording for Schedule 11 which would have had the impact contended for by Elster. A good incentive, therefore, to ensure that the interactions between remedies and limitation / exclusive clauses are well understood. 

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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).