Legal briefing | 26 Oct 2023 |

EE v Virgin Mobile: reciprocal liability clause prevents damages claim for breach of exclusivity

Many commercial contracts contain blanket exclusions of loss of profits – and sometimes the parties also agree that such clauses will be mutual (so both supplier and customer benefit from the same exclusion). But a recent dispute between EE and Virgin Mobile highlights the significant impact such provisions can have on a party's remedies for breach – especially where the clause is reciprocal. The judgment also contains some important lessons about exclusivity obligations.

What was the dispute about?

Virgin Mobile ("VM") is a provider of mobile telephone and data services. VM does not have its own mobile network and therefore contracted with EE, for the provision of 2G, 3G, and 4G services for VM's customers. It was agreed that VM would exclusively use EE for the provision of the relevant mobile services. The contract provided that neither party would be liable to the other for damages in respect of "anticipated profits".

In December 2016, the agreement was amended to allow VM to provide its customers with 5G services from an alternative supplier (in the absence of any agreement with EE to provide such services). Furthermore, where VM provided 5G to a customer from another supplier (such as Vodafone), 2G, 3G, and 4G could also be supplied from that other supplier, to avoid a customer having multiple service providers. Despite EE launching their 5G service in May 2019, VM chose to contract with Vodafone instead and began to migrate customers from EE to Vodafone in January 2021.

Following this, EE claimed that, by migrating 2G, 3G and 4G (as well as 5G) customers onto Vodafone's network, VM breached the exclusivity arrangement and claimed damages for loss of revenue. VM argued that, even if it were in breach (which it denied), its liability for such loss was excluded by the blanket "anticipated profits" exclusion.

What did the court decide?

EE argued that the exclusion of "anticipated profits" did not apply to its claim, which it characterised as being for "charges unlawfully avoided" rather than "lost profits". The court disagreed, concluding that "anticipated profits" meant the same as "lost profits" - and that EE's damages claim was essentially for the profit margin that it would have expected to earn on the provision of services to customers which had (allegedly) been unlawfully migrated to Vodafone.

EE also tried to rely on a number of earlier cases where similar blanket exclusions of loss of profits were deemed problematic on the basis that they effectively stripped the innocent party of all suitable remedies for breach of contract (see textbox below); in those cases, the courts construed the exclusions very narrowly. In this case, EE maintained that, if the clause prevented it from bringing a damages claim, then it would be deprived of any meaningful remedy for breach of the exclusivity obligation – and therefore, in line with those previous cases, the exclusion should be construed narrowly.

The court noted however that, in this case, EE still had remedies available to it, including a strong claim for injunctive relief (had it been minded to pursue this at the time). Where the clause was reciprocal (i.e. capable of mutual benefit) and clearly worded, there was no reason to interpret it narrowly, especially in a contract between two sophisticated, well-resourced parties.

The court therefore granted summary judgment in VM's favour, confirming that EE's claim for damages should not proceed because liability for loss of profits had been excluded in the contract.

When have attempted exclusions of loss of profits failed in the past?

In both Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd (2013) and University of Wales v London College of Business (2015), exclusions of lost profits were construed narrowly because otherwise they would have deprived the innocent party of any meaningful remedies in respect of key aspects of the parties' bargain. In both cases, the courts drew attention to the need for very clear wording to indicate that such a drastic outcome was what the parties actually intended.

So why did the court reach a different conclusion in EE v Virgin Mobile? After all, surely exclusivity was an important part of the parties' bargain – and the effect of the clause was to prevent EE pursuing an important remedy for breach of that obligation? However, as noted above, EE was not prevented from pursuing other remedies such as injunctive relief and the court found that the clause in this case was clearly worded. It was also significant that the clause was reciprocal and therefore capable of benefitting both parties; had VM been suing EE for failure to provide mobile services in accordance with the contract, EE would almost certainly have argued that the clause excluded any claim on the part of VM for loss of profits.

Exclusions of lost profits were also considered in the recent case of CIS General Insurance Limited v IBM United Kingdom Limited (2022), where the court rejected an attempt by a supplier to argue that such wording also excluded any claim for wasted expenditure. An important part of the Court of Appeal's rationale in reaching this conclusion was that such an outcome would have led to the supplier having almost no liability for serious underperformance, which was unlikely to have been the intention of the parties. For more detail, see our briefing.

Lesson 1: Exclusivity: check provisions on liability or remedies

Whilst the alleged breach of the exclusivity provision was not addressed, this case highlights the need to consider other potentially relevant provisions of the agreement when entering into exclusivity commitments. In particular, it is important to check that any clauses dealing with liability and remedies for breach do not prevent a claim for damages being brought (as was the case here). In this case, had the blanket exclusion of lost profits contained a carve-out, preventing it applying to any breach of the exclusivity obligation in favour of EE, the outcome of the dispute might well have been very different. For further guidance on how to avoid the most common pitfalls in respect of exclusivity provisions, see our briefing Exclusivity: some do's and don'ts.

Lesson 2: Don't treat blanket exclusions of lost profits like boilerplate

Because blanket exclusions of lost profits are relatively common, they can sometimes be treated as if they are merely boilerplate provisions which do not require much consideration. However, this case highlights that, where they are upheld, such provisions often impose significant constraints on a party's remedies for breach – and it is critical to think through those implications before accepting the exclusion. On the flip side, parties wishing to rely on blanket exclusions of lost profits need to consider whether the effect of the clause is so sweeping that it is at risk of being construed very narrowly (on the grounds that it cannot have been the intention to deprive the innocent party of any meaningful remedies for breach, particularly in relation to matters which are central to the parties' bargain). It is always preferable to ensure that you have a freestanding global cap on liability set at a level which you can live with in case blanket exclusions are held to be unreasonable.

Lesson 3: Beware reciprocal/mutual provisions

Making a provision such as a blanket exclusion of lost profits reciprocal can make it more palatable to the other party – and that may be what happened here. However, had the exclusion only applied to EE's liability, then VM would not have been able to use it to effectively defeat EE's claim for breach of the exclusivity provision. Reciprocity or mutuality is a two-edged sword – sometimes it may work to your benefit, but in other situations you may come to regret having agreed to it. It is always worth considering whether you are prepared to live with that risk – or whether carve-outs or provisions tailored to the particular needs and interests of each party are appropriate.

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