Exclusion clauses, by which parties to a contract seek to exclude or limit their liability in the event of a breach, can be a useful way of allocating and mitigating contractual risk. But what happens if it is unclear what they mean? A dispute over the interpretation of such a clause lay at the heart of the Court of Appeal's recent judgment in EE Ltd v Virgin Mobile Telecoms Ltd [2025] EWCA Civ 70, which serves as a timely reminder of the importance of careful drafting.
Background
EE Limited and Virgin Mobile Telecoms Limited entered into an agreement under which EE gave Virgin Mobile access to its mobile network, allowing Virgin Mobile to provide its own customers with 2G, 3G, and 4G mobile services. Virgin Mobile agreed to use EE's network exclusively for the provision of such services. In 2016, the agreement was amended to make provision for a potential agreement between the parties regarding 5G services. If no agreement was reached, the amendment allowed Virgin Mobile to source 5G services from another mobile network operator, and varied the exclusivity provision so that Virgin Mobile customers receiving 5G services from another operator could also receive 2G, 3G, and 4G services from that alternative operator.
In January 2021, having reached an agreement with another operator in relation to 5G services, Virgin Mobile began migrating its customers away from the EE network. However, EE contended that in doing so, Virgin Mobile had breached the exclusivity provision, and brought a claim for the revenue it would have received if the customers had remained on its network. Virgin Mobile denied it was in breach, but contended that in any event, the claim fell within an exclusion clause in the agreement.
The clause in question provided that "neither party shall have liability to the other in respect of anticipated profits". The key question was whether EE's claim was one for "anticipated profits". The High Court considered that it was. EE appealed.
The approach to interpreting exclusion clauses
Exclusion clauses are construed according to the ordinary methods of contractual interpretation, with the principle of freedom of contract requiring the court to respect and give effect to the parties' agreement. The court's starting assumption is that, in the absence of clear words to the contrary, the parties did not intend to depart from their normal rights and obligations. The more valuable the right they are giving up, the clearer the language of the exclusion clause will need to be, with any ambiguity being resolved against the party seeking to exclude liability. However, in commercial contracts negotiated between sophisticated parties, the court will not usually depart from a clear meaning of the clause.
Finally, while the court will not usually interpret an exclusion clause as extending to a situation which would defeat the main purpose of the contract or create a commercial absurdity, if the language is fairly susceptible of one meaning only, that meaning must be attributed to it unless "the meaning is repugnant to the contract".
The Court of Appeal's decision
On the assumption that a breach had occurred (the issue not having been determined by the Court), the parties agreed that this was a case based on the expectation measure of loss: Had the exclusivity provision not been breached and customers not diverted, EE would have received charges under the contract, measured by reference to those customers' use of its services. Virgin Mobile contended that this was a claim for loss of profits (and therefore fell within the exclusion clause), while EE contended that it was a claim for diminution in price (and that it is well established that such a claim is not to be regarded as a claim for lost profits).
The Court of Appeal rejected the argument that an exclusion for loss of profits cannot cover claims for diminution in price, concluding that the case law relied upon by EE did not support the broad principle for which it contended. However, in its view the real question was whether the claim was one "in respect of anticipated profits"; in other words, whether a claim for "anticipated profits" meant a claim for loss of profit other than expectation loss, namely profits earned outside the contract.
Zacaroli LJ held that it was not. He thought the language of the exclusion clause was clear and unequivocal and that the phrase "anticipated profits" was interchangeable with loss of profits. The exclusion clause did not just refer to profits earned outside the contract - if that was what the parties had intended, they would have said so. He considered that his interpretation was supported by other clauses in the agreement, and that it was at least as commercially reasonable as the alternative reading. Coulson LJ agreed, although he found the issue less easy to decide. He commented that while it was potentially artificial to label the claim as one for lost profits, on analysis that was precisely what it was.
However, Phillips LJ dissented. He considered that exclusivity was, in this case, a key contractual obligation and that it would be surprising if the parties intended Virgin Mobile to breach it without incurring liability to pay damages reflecting loss of revenue. He did not think it was sufficiently clear that the exclusion for "anticipated profits" encompassed a claim for loss of revenue due to a breach of the exclusivity obligation.
Nevertheless, in light of the view of the majority, the appeal was dismissed.
What does this mean for exclusion clauses?
Negotiating exclusion clauses is often the most contentious part of any contractual process – particularly with respect to high-value technology, outsourcing and other complex commercial agreements.
This case demonstrates that a well-drafted exclusion clause can be a powerful tool in heading off a potentially complex trial on liability. However, the diverging views of the Court of Appeal judges here and in a string of other recent cases also show that interpreting their effect is not always straightforward.
Ultimately the interpretation of each provision will depend on the precise words used. Historically, a clause that appears to strike at the heart of the parties' commercial bargain may have faced particular challenges. However, today we are increasingly seeing courts apply a literal approach to contract interpretation in this area. In Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023] EWHC 2506 (TCC), for example, the court found a way to give effect to a particularly wide exclusion clause.