Interpreting Exclusion Clauses for Loss of Profits in Contracts

Hasit Seth, Independent Arbitrator, HLaw Chambers and Senior Fellow (Non-Resident) at Dhirubhai Ambani University’s School of Law

Introduction:

In February 2025, the English Court of Appeals handed down the judgment in the case EE Limited v. Virgin Mobile Telecoms Limited¹. The judgment illustrates the challenges of interpreting exclusion clauses in contracts, particularly the exclusion clauses for loss of profit claims when they are termed as “anticipated profits.” The lead judgment is by Zacaroli LJ with whom Coulson LJ agreed to dismiss the appeal, while Phillips LJ dissented.

The Contract:

EE limited (“EE”) and Virgin Mobile Telecoms Limited (“VM”) executed a Telecommunication Supply Agreement (“Contract”). EE is a Mobile Network Operator (“MNO”) with its physical radio network. VM is a Virtual Network Operator (“VNO”) that uses the network of other MNOs. Under the Contract VM was to use EE’s 2G, 3G, and 4G technology networks for its customers. VM had agreed to an exclusivity period and minimum revenues payable to EE under the Contract.

For 5G technology, VM and EE amended their Contract because in 2016 EE was not providing 5G services. The amendment was made subject to the exclusivity clause and allowed VM to use 5G services along with associated 4G, 3G, 4G, LTE, and other services from a different MNO if there was no EE-VM agreement on 5G. It was only in 2019 that EE started providing 5G services.

The Dispute:

EE alleged that VM moved customers who wanted 5G services to rival MNOs, and further, it even moved customers using only 2G to 4G services away from EE’s networks. According to EE, the shifting of customers to rival networks was a breach of the exclusivity clause. EE sought damages for a loss of £24,635,684 for the revenues it could have earned exclusively from EE customers who moved to rival MNOs. VM’s main defence was that the loss claimed by EE was covered by the Contract’s Clause 34.5(a), which excluded any claim for anticipated profits or anticipated savings.

The Exclusion Clause:

Exclusion clauses refer to a class of contract clauses that exclude liability for specified conditions.

A general exclusion for indirect, consequential, special, or incidental losses arising from directly unforeseeable loss reads as:

“ 34.4 Neither Party shall be liable to the other for any loss which is not directly foreseeable or which does not arise directly from the performance of this Agreement and thus neither Party shall be liable for any indirect or consequential or special or incidental loss whatsoever. ”

The key clause in question was Clause 34.5(a) that read as:

“34.5 Except for any damages claims by VM pursuant to Clause 34.2(c), to which Clause 34.3 applies (which EE acknowledges may include claims of damages for loss of profits), and for no other damage claims whatsoever, neither Party shall have liability to the other in respect of:

(a) anticipated profits; or
(b) anticipated savings.”

The High Court’s Interpretation of Exclusion Clauses:

The High Court judge Mrs. Justice Joanna Smith had ruled that VM’s claims were covered by the exclusion clause ². The judge’s interpretation of anticipated profits in clause 34.5(a) was broad enough to exclude all damages for loss of profits of any kind that were foreseeable by the parties. The judge had also held that “anticipated profits” and “lost profits” were not different only because the other clause had used the term “lost profits” for a similar claim carve-out.

The High Court started from the core principle of Baron Parke J to state that a party that suffers loss resulting from a breach of contract is entitled, so far as money can, “…to be placed in the same situation, with respect to damages, as if the contract had been performed….” ³ Hence, a successful Claimant in a breach of contract claim is entitled to compensation for her net loss, which can be claimed either as expectation loss (loss of bargain) or reliance loss, but not both. Here, the High Court determined EE’s claim to be a claim for loss of bargain, specifically loss of profits, despite it being claimed as “loss of revenue.”

The High Court rejected that the claim was for “diminution of price” based on two shipping cases ⁴. In those two cases, the exclusion clause excluded liability for “loss of profit, loss of use, loss of production or any other indirect or consequential damage for any reason whatsoever.” The two shipping cases, on different facts, held that the respective claim in question was not for loss of profits but for diminution in price.

The High Court, citing factual evidence, noted that, “What is clear from my detailed reading of the cases on which EE relies is that the true nature of the claim, and thus whether it will fall within the terms of a potentially relevant exclusion clause, is unsurprisingly a case sensitive issue. It depends on understanding how the claim is advanced, its true nature and whether it is genuinely concerned with a loss of profit (as opposed to, say, wasted expenditure or a diminution in price, both of which are of course simply different means of achieving an appropriate outcome by reference to the application of the overarching compensatory principle).”

As noted by the Court of Appeal, the judge had applied these principles of interpreting exclusion clauses to the EE’s claim: (1) Freedom of contract means the parties are free to use exclusion and limitation clauses to manage price and risk allocation, (2) Clear words are necessary to depart from common law principles defining rights and liabilities, (3) The more valuable the right, more is the clarity required in the exclusionary words, (4) Ambiguous words are to be interpreted against the party seeking to exclude liability, (5) When words are clear, the assumption is that the business parties are presumed to well manage their economic interests, (6) Despite the literal meaning of the words, if the interpretation is repugnant to the contract’s meaning or results in an absurdity, then it has to be rejected, and (7) if the language of the exclusion term has only one interpretation that is not repugnant to the contract’s meaning, then that has to be accepted ⁵.

The Appeal:

EE again argued in the Court of Appeal that its claim was for diminution of price, which was well distinguished in law from the loss of profits. EE argued that it had provided services, yet VM chose to migrate its customers to other MNOs; hence, its claim is not for lost profits but in price diminution. In contrast, VM argued that EE’s claim was an expectation loss claim for loss of profits.

The Majority View

Zacaroli LJ with whom Lord Justice Coulson agreed (with his own reasons), dismissed the appeal by a majority ruling. Zacaroli LJ’s lead judgment noted these key points:

The “diminution in price” interpretation of the exclusion clause stood rejected. The key question was whether EE’s claim is for anticipated profits under the Contract’s clause 34.5(a).
Alternately, was there any loss apart from the loss of services that EE would have provided to VM but for VM’s breach of the Contract. It could not be said that any reduction in profit due to breach of a contract by the opponent necessarily leads to loss of profit, because in a given context of a contract it may not be a loss of profit. But a claim for expectation loss is capable of being a loss of profit, relying on an Australian case ⁶ that states, “… It is for this reason that expectation damages are often described as damages for loss of profits…”, with the recoverable amount being net profits.
Exclusion of liability for loss of profits was not to cover only the specific breach here of exclusivity provisions, but rather it covered any kind of breach.
There were a range of remedies available to EE that parties may have contemplated when entering into the Contract in addition to possible injunctive relief. Hence, exclusion of the loss of profit claim does not defeat the purpose of the agreement or leave EE totally without remedies. Hence, the High Court’s analysis does not render the Contract to be uncommercial.

Coulson LJ agreed to dismiss the appeal. His reasons mainly were:

While remarking that the central issue was not easy to decide with the central issue being whether the claim by EE was for excluded anticipated profits. He agreed with Zacaroli LJ that the words “anticipated profits” and “loss of profits” were used interchangeably, and hence “anticipated profits” did not have any special meaning.
Coulson LJ also disagreed that anticipated profits covered only those profits to be made outside the TSA. “In my view, clause 34.4 already excludes any claims for profits lost outside the TSA, because that clause is expressly designed to exclude indirect or consequential losses. That would plainly cover profits anticipated to be earned outside the TSA.” He noted that claim was artificially labelled as for loss of profits when it was really for charges under the TSA.

The Dissent

Phillips LJ held in dissent that the appeal should be allowed. He reasoned that “In my judgment, however, it is far from clear that the exclusion of damages claims for “anticipated profits” encompasses a claim for loss of revenue by reason of a breach of the exclusivity provision.” Thus, he differentiated between loss of profits and anticipated profits terminology.

Conclusion

The terminology used to label loss of profits is less relevant than the context of exclusion of loss of profits in the contract. Here, the term anticipated profit in the contracts was interpreted to cover a loss of profit claim. While the loss of profit claim can be validly excluded, the contract language and circumstances must justify the exclusion for it to be interpreted to achieve the exclusion.

¹ EE Limited v. Virgin Mobile Telecoms Limited [2025] EWCA Civ 70
² EE Limited v. Virgin Mobile, [2023] EWHC 1989 (TCC)
³ Robinson v Harman (1848) 1 Exch 850, at 855
⁴ Alexander Tsavliris & Sons Maritime Company v OSA Marine Limited (The Herdentor) (1996) Folio 2557 unreported and Ease Faith Ltd v Leonis Marine Management Ltd (The Ease Faith) [2006] EWHC 232 (Comm)
⁵ EE Limited v. Virgin Mobile Telecoms Limited [2025] EWCA Civ 70 at para 16(a) to (f).
⁶ Omak Maritime v Mamola Challenger Shipping [2010] EWHC 2026 (Comm); [2011] 2 All ER (Comm) 155, at§34, citing the judgment of the High Court of Australia in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64