Exclusion clauses: clear wording ‘vital’ for construction industry compliance

Differences in interpretation of these clauses can lead to disputes, as recent examples from the courts in England and Wales and South Africa show. Courts of both of these common law jurisdictions apply similar tools when interpreting contracts and giving effect to the intention of the parties.

As the cases show, careful drafting of these clauses can be the difference between a party having a remedy under the contract and being left without one.

What is an exclusion clause?

An exclusion clause is a contractual term commonly found in a construction contract. It is designed to exclude or reduce a contracting party’s liability which, under normal circumstances, would be attached by law.

Disagreements often arise as to the effect of an exclusion clause, and in particular whether certain types or amounts of loss are covered. Courts in common law jurisdictions have traditionally shown a preference for interpreting these clauses “strictly” because it is assumed that a party does not easily give up its ordinary legal remedies.

Several examples from the English and South African courts highlight some practical scenarios which parties to construction contracts should be aware of when testing whether exclusion clauses are likely to have their intended effect.

Loss of profit exclusion

Clauses dealing with loss of profit or revenue are commonplace in construction contracts, with the courts demonstrating the importance of being clear from the outset as to the specific losses which are subject to exclusion.

For example, in a 2023 case, the Court of Appeal of England and Wales confirmed that a claim for “anticipated savings” may amount to the same thing as a “loss of revenue” claim. Here, Virgin Mobile entered into an agreement with EE for the exclusive use of EE’s mobile network infrastructure. Several years later, Virgin Mobile entered into a separate agreement with Vodafone in respect of the provision of 5G mobile data services and began migrating these services onto Vodafone’s mobile network. EE argued that this breached an exclusivity clause in their agreement with Virgin Mobile and claimed damages expressed as a “loss of revenue”. The court found that EE was prevented from claiming this type of loss since the contract contained an exclusion that “neither Party shall have liability to the other in respect of: (a) anticipated profit; (b) anticipated savings”. The court considered that EE’s claim for loss of revenue was a claim for “anticipated profit” by another name, and so its claim failed.

In another case, the England and Wales Court of Appeal held that a claim for “wasted expenditure” was not covered by an exclusion for loss of profit, revenue or savings. The difference between the two cases lies in the fact that the claim for wasted expenditure was for sums that the company had paid in expectation that the contract would be performed, whereas in the EE case, the claim was in respect of lost revenue which would have been generated from the contract, which equated in substance to a loss of profit. 

The South African Supreme Court of Appeal also recently considered a loss of profit claim. Here, the agreement between parties excluded consequential damages alongside loss of business, profit, savings or goodwill. It was argued that the meaning of “consequential damages” in the clause was unclear. The court held that the language of the clause, when read in the context of the agreement, was ambiguous and therefore gave rise to difficulties of interpretation. The court allowed the claim to proceed, as this type of claim was not clearly excluded under the contract.

Liability caps

Another common cause of dispute is whether a liability cap applies per claim, or on an aggregated basis. The courts have shown that this will largely depend on the wording of the contract.

For instance, in one English case, the contract between the parties contained the following exclusion clause:

• “52.2 Subject to clause 52.1, the CONTRACTOR’s total aggregate liability: …52.2.6 in respect of all other claims, losses or damages, shall in no event exceed £10,000,000…” 

It was argued that this cap applied separately to each claim. Given the words “total aggregate liability”, however, the court held that the clause applied as a single aggregate cap clause.

In an earlier Englihs case, an exclusion clause provided that: “the supplier's total liability to the customer… arising out of or in connection with this agreement (including all statements of work) shall be limited to an amount equivalent to 150% of the charges paid or payable in the preceding twelve months from the date the claim first arose”.  Here, the court focussed on the term “claim” and whether this meant “cause of action” or “liability”. Whilst conceding that the wording was not “well drafted”, the court held that “claim” was, in the context of the clause, most likely to mean “liability” and therefore applied in the aggregate.

As with English law, in South African law, whether there is a per-claim or an aggregate cap on liability will depend on the specific wording of the contract and the presumed intention of the parties.  

While there are limited judicial comments on exclusion clauses in South Africa, in a 2017 High Court case, a dispute arose as to whether an insurance policy stipulated an enforceable cap on liability. In ultimately deciding that there was a liability cap and that the cap on liability applied per claim, the court set out a number of foundational principles. First, absent any express provision in the contract, liability caps are enforceable unless they are ambiguous or unconscionable. Second, exclusion clauses must be restrictively interpreted, and third, the ‘contra proferentem’ rule – which means? – should be followed.

These broad principles show that both English and South African courts will approach the issue in much of the same way – by using basic principles of contractual interpretation. 

Should set-off be applied before or after applying a cap on liability?

Where counterclaims are involved, one issue which may arise is whether a cap on liability should be applied prior to or after the application of set-off.

This was the core issue in the English case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd in 2024. In this case, an agreement between Rolls-Royce and Topalsson was terminated, and a dispute emerged as to what was due to whom on termination. Amongst other matters, the court had to consider how a contractual cap on liability of €5 million was to be interpreted. 

The Court of Appeal focussed on the words “the total liability of either party to the other”, which suggested that each party’s liability to the other would first be calculated by reference to the cap and then set-off applied. For the reverse to have been true, the contract could have said that the cap applied to the parties’ net liability, but it did not. 

In South Africa, the case of Six-A-Property Investments v Ferreira in 2015 addressed the common law remedy of set-off regarding reciprocal debts between the parties. In this case the court held that the wording of the contract excluded the application of set-off and, once again, the classic interpretation principles applied, with the court emphasising that the intention of the parties as derived from the contract wording and context was paramount in determining whether set-off was excluded.  

Is interest included within the cap on liability?

The Topalsson case also considered whether the cap on liability included any interest claimable. The court found that the wording of the contract showed that interest was subject to its own distinct “sole remedy”, which would be deprived if the total liability cap was to include the interest.  

The South African Supreme Court of Appeal’s decision in Pfeiffer v First National Bank of Southern Africa Ltd in 1998 likewise tackled the issue of whether interest was to be included in the cap on liability incorporated into a suretyship agreement between the parties. The court assessed two caps on liability under the contract: ‘Cap A’ set a monetary limit on the surety’s liability for the capital debt, while ‘Cap B’ contained a separate provision for interest on the amount listed under Cap A. The court found that the former applied only to the capital amount and the latter only to the interest, with the effect that interest could be claimed on the capped amount under Cap A but not on any capital amount exceeding the cap. Interest, however, was not included in the capital cap and could accrue separately. 

The issue was addressed in the same way in both the Topalsson and Pfeiffer cases: namely that, where the contract provides for a separate and distinct remedy for interest, that remedy is unlikely to be overridden by a general cap on liability save where there is clear wording to indicate that intention.  

Co-written by Luyanda Khanyile of Pinsent Masons.