Costcutter Supermarkets Group Ltd v Vaish – limitation clause in contract did not limit liability to pay for goods delivered

Background

Costcutter Supermarkets Group Limited (Costcutter) entered into two trading agreements for the supply of goods with Mr Vaish and another (collectively Vaish), in respect of the operation of two Costcutter franchise convenience stores. Costcutter was entitled to charge Vaish for the goods sourced and delivered plus a service charge of 1% (Service Charge). During those contracts, Costcutter changed its supplier with the new supplier proving to be unreliable and inconsistent. Vaish, unhappy with delayed deliveries of the goods, decided to cease the regular direct debt payments to Costcutter effectively terminating the contracts. Costcutter issued a claim against Vaish for payment of the debt for the goods delivered and, in the alternative, for damages for breach of contract.

Liability cap

The question for the court was whether the limitation of liability clause applied to Vaish’s failure to pay for the goods delivered. Vaish sought to rely on clause 19.2 which stated that each party’s liability to the other:

“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 … [is limited] to five times the Service Charge paid… [in the previous year].”‍

Importantly, no Service Charge was paid by Vaish to Costcutter in the preceding year. Accordingly, Vaish argued that under the limitation of liability clause its liability to Costcutter was effectively zero meaning that Costcutter could not claim for payment of the goods delivered.

First-Instance decision

At the court of first instance, the judge agreed with Vaish and Costcutter’s claim was dismissed. The judge found that Costcutter’s claim fell within the limitation of liability clause and as no Service Charge had been paid, Costcutter’s claim for the goods delivered was limited to zero. Costcutter appealed.

High Court’s decision

Justice Constable disagreed with the court of first instance and set out that the judge failed to differentiate, as noted in the case of AB v CD [2015] 1 WLR 771, between a claim for payment of a debt (i.e., a primary obligation) and a claim for damages for breach of contract (i.e., a secondary obligation). Justice Constable’s interpretation of the limitation of liability clause was that it was intended to limit liability for secondary obligations only. The inclusion of the words “or otherwise arising” were not sufficiently clear to have the effect of excluding any claim in relation to primary obligations, so the debt claim was carved out of the liability cap.

Justice Constable said only the “clearest of wording” would enable liability to be capped at zero for a primary obligation and reiterated Moore-Bick LJ’s words in the Stocznia case that the “more valuable the right, the clearer the language will need to be.”

Comment

This case highlights a crucial distinction between a primary obligation to make payment for goods and/or services under contract and a secondary obligation to pay damages for breach of contract or otherwise.

When drafting for the supplier of goods and/or services, it is important to include express wording setting out that "nothing in the agreement shall exclude or limit any party’s obligation to make payments for goods/services delivered" (i.e., liability is uncapped for debt claims). If drafting for the beneficiary of the goods and/or services supplied, you will need to use very clear wording (e.g., the use of the words "or otherwise arising" will not be sufficient) to limit or exclude liability of a primary obligation. Note that even if a contract purports to exclude or limit liability for breach of a primary obligation, it is worth bearing in mind that a court may still deem it to be unenforceable irrespective of the wording contained in the contract.