South East Water Limited v Elster Water Metering Limited [2025] EWCA Civ 287

[2025] EWCA Civ 287Case No CA-2024-000943
IN THE COURT OF APPEAL (CIVIL DIVISION)
[2024] EWHC 620 (TCC)
ON APPEAL FROM THE HIGH COURT
BUSINESS AND PROPERTY COURT OF ENGLAND AND WALES
TECHNOLOGY AND CONSTRUCTION COURT (KBD)
HHJ Stephen Davies (sitting as a High Court Judge)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 20 March 2025
Before
LORD JUSTICE COULSONLORD JUSTICE MALESLORD JUSTICE ZACAROLI
Between
South East Water LimitedAppellantElster Water Metering LimitedRespondent
Clifford Darton KC and Eleanor Vickery (instructed by South East Water Limited) for AppellantRichard Power and Sam Hussam (instructed by Dentons UK & Middle East LLP) for RespondentHearing Hearing date: 5 March 2025
Approved JudgmentThis judgment was handed down remotely at 10.30am on 20 March 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives..............................
[1]This appeal raises an issue as to the proper construction of a Framework Agreement entered into between South East Water Limited, the appellant (“SEW”), and Elster Water Metering Limited, the respondent (“Elster”). Pursuant to the Framework Agreement, Elster supplied SEW with water meters and Automated Meter Reading electronic units (“AMR units”). SEW allege that the AMR units began to fail in operation primarily because they allowed water ingress and did not have the specified battery life of ten years.[2]SEW’s original claim was for damages in excess of £19 million; there is an alternative indemnity claim of over £28 million. However, SEW accept that the claim is subject to a contractual cap which limits the amount recoverable to £10 million. It is Elster’s case that, pursuant to Schedule 11 of the Framework Agreement, there was an even greater limit on SEW’s recovery, primarily calculated by reference to the free replacement (by Elster) of the faulty AMR units.[3]At the hearing of Elsters’ application dated 18 October 2023 for an order striking out the claim and/or for summary judgment, HHJ Stephen Davies, sitting as a judge of the High Court (“the judge”) had to deal with a raft of issues, all raised by SEW in order to get round this potential limitation of Elster’s liability pursuant to Schedule 11. The judge rejected them all. Subsequently, SEW raised eight separate grounds of appeal against the judge’s order. With the exception of grounds 2 and 3, which were concerned with the proper construction of the Framework Agreement (and Schedules 2 and 11 in particular), I refused permission to appeal on those grounds in an order dated 27 June 2024. I cannot help but conclude that the sheer number of points raised by SEW obscured (both from them and from the judge) the short, sharp issue at the heart of this case.[2]The Framework Agreement[4]Under the provisions of the Water Industry Act 1991, SEW is the statutory water undertaker for parts of Kent, Sussex, Surrey, Hampshire and Berkshire. Elster is a company, now part of the Honeywell International group of companies, whose business includes the supply of water meters and AMR units to the water undertakers.[5]The Framework Agreement was dated 26 April 2010. It is in somewhat unusual form. It starts with a letter dated 19 April 2010 from SEW to Elster confirming the award of the contract. The letter said that the contract was based on 21 identified emails exchanged between the parties. The letter was signed by Mr Lee Allen, a “Procurement Specialist” at SEW. It was countersigned the following day by Mr Tim Gabriel, the Managing Director of Elster. There was also a letter from Elster on 20 April, accepting the contract on the terms set out in the letter of 19 April.[6]There is a document dated 26 April 2010, headed “Agreement” which contains eleven clauses. This too is signed by both parties. There is an “Index of Schedules”. There are thirteen such schedules. Nowhere in the exchange of letters of 19/20 April, the 21 emails, the Agreement, or the Schedules, is there any express provision setting out an order of precedence amongst this torrent of different documents SEW originally sought to argue that clause 3 of the Agreement provided some order of precedence, but the judge rejected that at [104] of his judgment, and I concluded that the contrary argument (encapsulated as part of Ground 1 of the proposed appeal) had no real prospect of success. . It is therefore left for the reader to muddle his or her way through them. That this is the result of a detailed procurement exercise is surprising, to say the least. The diffuse documentation reflects poorly on SEW, who are the statutory undertakers and the contracting authority for this major project.[7]As to the 21 emails, those have not been provided to this court. Only one of them – an email of 17 March 2010 - is referred to by the judge in the context of Schedule 11, and I refer to it in paragraph 20 below, when I deal with the genesis of Schedule 11.[8]The Agreement document itself is in relatively standard form. The Supply Conditions were defined as those set out in Schedule 2. Clause 3 of the Agreement was in these terms:
“3 TERMS OF PURCHASE All Products purchased pursuant to this Agreement shall be subject to the Supply Conditions. All other terms and conditions are expressly excluded from this Agreement pursuant to clause 11.1 of this Agreement.”
I should note that, at the hearing before the judge, SEW took various points about this clause, in their various efforts to dilute the potential effect of Schedule 11. The judge rejected each of those arguments and I refused permission to appeal on the basis that none of them had a real prospect of success.[9]Clause 9 of the Agreement was entitled “Liability” and was in these terms:
“9 LIABILITY 9.1 In any event, and notwithstanding anything contained in this Agreement, in no circumstances shall the Company be liable, in contract, tort (including negligence or breach of statutory duty) or otherwise howsoever, and whatsoever the cause thereof for any liability of any Contractor or any Order placed by a Contractor pursuant to this Agreement. 9.2 Nothing in this Agreement shall limit the liability of either party for death or personal injury resulting from its own negligence or that of its employees sub contractors or agents or fraud. 9.3 Each party to the Contract shall indemnify the other in respect of damage to the other's tangible property resulting from its or its employees negligence up to an aggregate of £5,000,000 (five million pounds) per event or series of connected events The contractual cap at Clause 9.3was the subject of an agreed increase to £10 million when the Supplemental Deed was agreed in 2015: see clause 3.3. . 9.4 In any event, and notwithstanding anything contained in this Agreement, in no circumstances shall the Company or the Supplier be liable under this Agreement, in contract, tort (including negligence or breach of statutory duty) or otherwise howsoever, and whatsoever the cause thereof, (i) for any loss of profit, business, goodwill, contracts, revenues, or anticipated savings, or (ii) for any special or indirect or consequential damage of any nature whatsoever.”
[10]Clause 11.1 was an entire agreement provision.[11]As already noted, the Conditions of Supply were set out in Schedule 2. Clause 3 of Schedule 2 was entitled “Quality and Defects”. I set out Clauses 3.1, 3.4 and 3.8 only, although they were all concerned, in one way or another, with the standards required of the products Elster were supplying:
“3.1 The Supplier must ensure that all Products comply at all times for the duration of the Framework Agreement to the relevant British Standards (BS EN) for Products used in the preparation or conveying of water supplies intended for human consumption as set out in the Specifications in the Framework Agreement… 3.4 The Purchaser's rights under these conditions are in addition to the statutory conditions implied in favour of the Purchaser by the Sale of Goods Act 1979… 3.8 If any of the Products fail to comply with the provisions set out in this condition 3 the Purchaser shall, without prejudice to any other rights or remedies under these conditions, be entitled to avail itself of any one or more remedies listed in condition 13.”
[12]Clause 5 of Schedule 2 was entitled “Indemnity”. Clause 5.1 provided: “5.1 The Supplier shall indemnify and keep the Purchaser indemnified against:5.1.1 all liabilities, losses, damages, injuries, costs and expenses (including legal and other professional fees and expenses) suffered or incurred by the Purchaser: and/or5.1.2 any claim made against the Purchaser in respect of any liabilities, losses, damages, injuries, costs and expenses (including legal and other professional fees and expenses) sustained by the Purchaser's employees or agents or by any customer or third party; arising as a result of or in connection with:5.1.3 any breach of any warranty given by the Supplier in relation to the Products;5.1.4 any defective workmanship, quality or materials, non-conformity of the Products with the Order or the Specifications or other characteristics set out in the Schedules to the Framework Agreement; and5.1.5 any act or omission of the Supplier or its employees, agents or sub-contractors, or any direct or indirect breach or negligent performance of the terms of the Contract by the Supplier.”

arising as a result of or in connection with:

[13]Clause 13 was entitled “Remedies”. I should set it out in full:
“13 REMEDIES 13.1 Without prejudice to any other right or remedy which the Purchaser if may have, if any Products are not supplied in accordance with, or the Supplier fails to comply with, any of the terms of the Contract the Purchaser shall be entitled to avail itself of any one or more of the following remedies at its discretion, whether or not the Products have been accepted by the Purchaser: 13.1.1 to rescind the Contract; 13.1.2 to reject the Products (in whole or in part) and return them to the Supplier at the risk and cost of the Supplier on the basis that a full refund for the Products so returned shall be paid forthwith by the Supplier; 13.1.3 at the Purchaser's option to give the Supplier the opportunity at the Supplier's expense either to remedy any defect in the Products or to supply replacement Products and carry out any other necessary work to ensure that the terms of the Contract are fulfilled; 13.1.4 to refuse to accept any further deliveries of the Products but without any liability to the Supplier; 13.1.5 to carry out at the Supplier's expense any work necessary to make the Products comply with the Contract; and 13.1.6 to claim such damages as may have been sustained in consequence of the Supplier's breach or breaches of the Contract. 13.2 For the avoidance of doubt and without prejudice to any other right or remedy which the Purchaser may have, if any Products are not supplied in accordance with, or the Supplier fails to comply with, any of the terms of the Contract the Purchaser shall be entitled recover any additional cost incurred by the Purchaser in sourcing similar products from an alternative supplier.”
[14]Schedule 11 was entitled “Meter AMR Warranty & Fault Attribution”. It was in these terms (and again I set it out in full):
“Should a faulty device be identified in operation; the cost of an equivalent, replacement device & any incidental costs shall be limited to the warranty as set below. Year of Failure AMR Transponder (Inc Battery) Meter 1 FOC plus £40 FOC plus £40 2 FOC plus £40 FOC 3 to 5 FOC Nothing 6 to 15 Discounted replacements Nothing Discounted replacement formulae = purchase price prevailing at time of failure multiplied by (15 minus number of years since shipment date) divided by 15 years. Clarification of warranty table Clarification of warranty table • FOC denotes ~ replacement of complete meter & AMR device free of charge (Elster meter) • Amount stated; £40 is payment contribution for installing the replacement AMR meter. • Example 1; • Meter register fogged due to water ingress through poor manufacturing seal in year 2 the Supplier will supply complete meter & AMR device free of charge. • Example 2 • AMR device fails to transmit in year 8 due to a premature battery failure ~ the Supplier will supply a complete 'Elster' meter & AMR device at the following price; • (15 - 8) / 15 = 47% discount of purchase price (at the time) • Example 3 • AMR meter no longer records flow within specified accuracy in year 4 ~ The Supplier will supply a replacement meter and AMR device at the following price; • (15 - 4) / 15 = 73% discount of purchase price (at the time) Warranty subject to; 1. The Products and systems must be installed and operated according to the Suppliers instructions. The Supplier will provide the necessary training to assist with the correct installation procedures. 2. The Transponder read interval must not exceed a maximum of once a month 3. The equipment is designed to operate within a temperature range of -20°C to +65°C. 4. The equipment must not experience temperatures averaging below 0°C or above 30°C for more than 20% of the time. 5. The Product must not be physically damaged in any way. 6. Where a third party's own reading software is used, that software must be designed to work with the ratios in the manner approved by the Supplier. 7. Radios awaiting installation should be stored separated from any active Wavenis radio system to avoid unwanted reads. 8. Warranty period begins from date of shipment + 2 months to allow for installation. 9. Replacement Products/parts will have the same or better functionality as the original Products/parts to the reasonable satisfaction of the Purchaser.”
[3]The Facts in Summary[15]Since this was an application to strike out, the judge was obliged to take SEW’s pleaded claim at its highest. The principal allegation made in the Particulars of Claim is that the AMR units were not fit for purpose because they did not have a product life of at least ten years.[16]Paragraphs 10-18 of the Particulars of Claim indicate that problems with the AMR units were experienced in 2012/2013, the first two or three years following installation, and in consequence SEW asked Elster to replace the defective units. Elster did so. Although further problems continued, on 1 June 2015, the parties entered into a Supplemental Deed which extended the term of the Framework Agreement for a further five years.[17]Paragraphs 22-26 of the Particulars of Claim assert that there were further defects in the AMR units that Elster were continuing to supply. There was a joint sampling exercise in 2018 which did not apparently resolve the issues. There is no further narrative pleaded in the Particulars of Claim, which goes on to allege breaches of contract on the part of Elster and sets out the two claims to which I have referred at paragraph 2 above.[4]The Judgment Below[18]The judge’s judgment can be found at [2024] EWHC 620 (TCC). The first matter for him was whether or not he could deal with the issues that arose out of Elster’s application to strike out large parts of the claim, which was in turn based on the provisions of Schedule 11 (which was not mentioned in SEW’s claim). The judge concluded that he could at [10]. He did not hear oral evidence but he considered the detailed witness statements that had been adduced by both parties.[19]The judge correctly noted that at least some of the statement of Mr Moores, SEW’s current procurement manager, and who was employed in a supporting role to Mr Lee Allen in 2010, was inadmissible because it sought to give evidence as to SEW’s subjective belief as to the intention behind and meaning of Schedule 11. The evidence about the genesis of Schedule 11 was only important because SEW had sought to rely on the Unfair Contract Terms Act 1977, so the judge therefore had to address (amongst other things) whether Schedule 11 constituted, as SEW maintained, Elster’s written standard terms of business. The judge concluded, after a detailed analysis at [43]-[60], that it was not even reasonably arguable that SEW could establish that Schedule 11 constituted Elster’s written terms of business.[20]As part of this exercise,

the judge identified the background to Schedule 11:

“36. One of the items of correspondence identified was a letter from Elster dated 17/3/10, responding to various tender clarification requests submitted by SEW. Having provided its responses to those requests the letter also included two further “clarifications”
. The first was a confirmed price reduction for a specific product and the second, headed “warranty and fault attribution”, contained the details of what Elster was proposing by way of warranty proposal. This proposal subsequently became Sched. 11 to the framework agreement, so I shall refer to it in more detail below. However, it is worth observing that there are four material differences between this proposal and what became Sched. 11… 38. It follows that there is currently no documentary evidence evidencing any specific SEW response to this clarification, nor is there any oral evidence of any response. This is despite Mr Simko [Elster’s principal witness of fact] saying in his first witness statement that he had been “involved in enquiries undertaken in recent months within the business to identify further details about the negotiation of the Framework Agreement” and Mr Moores also giving extensive evidence about this topic…”[21]Having found that the contents of Schedule 11 could not be said to be Elster’s standard terms of business at [55]-[57], the judge went on: 58. Instead, the documentary evidence which is available shows that:(a) Elster did not even put the first draft of what became Sched. 11 to SEW until a relatively late stage in the tender process and, then, only on the relatively tentative basis of a proposal;(b) Sched. 11, whether in its first draft or eventual form, does not have anything like the appearance of standard terms of business, in that it is: (i) limited to one specific subject, i.e. warranty and fault attribution for one specific event, namely a faulty device being identified in the field; and (ii) clearly very much bespoke to that specific event, where the fault device is that of the AMR unit (including) battery and meter, rather than the whole suite of products offered by Elster – some of which can be seen from the other contracts.”[22]For the purposes of the appeal, the relevant section of the judgment is headed “The Proper Interpretation and Effect of Sched. 11” and runs from [93]-[105]. Having summarised the parties’ submissions, and having explained why some of the evidence of Mr Moores was inadmissible at [98]-[100], the judge turned to the objective interpretation of Schedule 11. He said:
“101. Returning then to the objective interpretation of Sched. 11, I have no doubt that Elster is correct as to what it says is its plain and obvious meaning from the clear words used, although – as I shall explain below - I do not accept that this means that it is not a limitation clause. As Mr Power submits, the heading does not simply say “AMR warranty” but also “& fault attribution”
. Whilst these words in isolation do not necessarily indicate with complete clarity the intended effect of the schedule, the words appearing immediately after that make it quite clear that it is intended to have the effect of limiting SEW’s entitlement in respect of any claim in relation to a faulty AMR unit identified in operation to the cost of an equivalent replacement device and any incidental costs to the warranty set out below. It is, frankly, hard to see how its wording could have been improved in terms of conveying its intended effect to the intended reader. It has the undoubted merit of simplicity and clarity instead of being concealed in a thicket of legal boilerplate. 102. It is of course true that it must be read as part of the whole agreement, in accordance with the general principle recorded by Coulson LJ in Hopkins at paragraph 46. SEW relies upon Sched. 2 and cond. 13 in particular to seek to argue its contrary interpretation. However, in my judgment it is simply not possible to read Sched. 11 as being a mere adjunct or alternative to the right conferred on SEW at its election under cond. 13.1.3 of Sched. 2 to give Elster the opportunity to supply replacement products at its own expense. Apart from anything else, Sched. 11 cannot be read as only applying in the limited case where SEW elected to invoke its cond. 13.1.3 remedy because: (a) it is not stated to depend on SEW choosing this option; and (b) the extent of Elster’s obligations under Sched. 11 are plainly less than the rights which SEW would have under clause 13.1.3, namely to require Elster to supply replacement products and to carry out any other necessary work entirely at its own expense. 103. SEW suggests that clearer words would have been needed to exclude the full panoply of rights conferred by cond. 13. However, as Elster contends, there is no need to make it explicit in cond. 13 that it is subject to Sched. 11. As Mr Power observes, the rights conferred by cond. 13 are already circumscribed by clause 9.4 of the framework agreement, even though neither cond. 13 nor clause 9.4 expressly refer to each other. Although, as I have said, SEW’s alleged belief at the time is irrelevant anyway, it is frankly difficult to conceive how anyone reading Sched. 2 and Sched. 11, even as a non-lawyer and even only briefly, could ever have believed that Sched. 11 was intended only to give SEW an additional and optional right or remedy. 104. SEW also contends that clause 3 of the framework agreement operates as some form of order of precedence clause by which the Sched. 2 conditions are to have more weight than anything contained in Sched. 11. But there is no basis for reading clause 3 in this way. To the contrary, I prefer Elster’s submission, based on the further principle of contract construction also summarised in paragraph 46 of Hopkins, that “where a contract contains general provisions and specific provisions which potentially contradict each other, the specific provisions will be given greater weight”. I was also referred in this context to the decision of the Court of Appeal in Yarm Road Ltd v Hewden Tower Cranes Ltd [2003] EWCA Civ 1127 and, in particular, the judgment of Laws LJ at paragraph 41. It is undoubtedly the case that Sched. 11 deals with the specific case of a faulty device being identified in operation, whereas cond. 13 deals with the more general case of any failure of products supplied to accord with the terms of the contract. It follows that Sched. 11 should apply in precedence to cond. 13 in the specific circumstances where it does apply, which include the current case. 105. In conclusion, I am satisfied that this is a straightforward point of contract construction and that there is no credible possibility of my decision being affected by any of the factual issues identified by SEW which, insofar as relevant and arguably credible, I have proceeded to assume in SEW’s favour anyway. For the reasons given, I am satisfied that Sched. 11 has the meaning contended for by Elster…”[23]Subsequently,

the judge added this point about the claims potentially permissible under Schedule 11:

“129. …However, the question which arises is whether or not SEW can maintain a damages or other monetary claim based either on any alleged failure by Elster to comply with its Sched. 11 obligations or on the claim being limited to the cost to Elster of complying with its Sched. 11 obligations. Such issues can only be determined if, as and when an alternative pleaded case is advanced.”
[5]The Issues on Appeal[24]As I have said, SEW sought permission to appeal on eight different grounds. I refused permission on Ground 1 and Grounds 4-8 inclusive. That left Grounds 2 and 3, which are in these terms:
“Ground 2: the construction of Schedule 2 of the Framework Agreement 2. The Judge erred in his construction of Schedule 11 of the Framework Agreement because: (i) He treated the heading to Schedule 11 as if it were part of the operative provisions to this schedule rather than simply a guide to its terms; (ii) Schedule 11 should properly have been construed as simply a (collateral) warranty and it was only practically workable and only made commercial sense if it was construed in this way; (iii) On his construction of Schedule 11, it was irreconcilable with other parts of the Framework Agreement because it imposed different obligations on the Respondent to those set out in clause 3 and Schedule 2 in the event that the Meters were not of merchantable quality/fit for purpose and/or failed to comply with their specifications; (iv) The Judge failed properly to construe Schedule 11 against the utilities procurement background, which included (a) the express requirement (in the invitation to tender) that any variation to the contractual terms must be clearly to the Appellant’s advantage and (b) the manner in which Schedule 11 was introduced into the contract. 3. Schedule 11 could not properly be construed as constituting a “specific provision” and Schedule 2 as containing “general conditions” as found by the Judge. The provisions were irreconcilable and Schedule 2 clearly had priority on the plain and ordinary reading of the Framework Agreement. Ground 3: the construction of limitation of liability clauses 4. Having found (for the purposes of the Unfair Contracts Terms Act 1977 (“UCTA”)) that Schedule 11 was a clause which limited the Respondent’s liability to the Appellant (contrary to the Respondent’s submissions), the Judge failed to then apply the strict test for the construction of limitation clauses and gave no or no sufficient weight to the fact that, on his construction, Schedule 11 would restrict the Appellant’s rights under the Sale of Goods Act 1979, which had been expressly preserved by Schedule 2 of the Framework Agreement.”

Ground 3: the construction of limitation of liability clauses

[25]This appeal is about Schedule 11 and how, if at all, it fitted into the Framework Agreement. I propose to address that issue by dealing briefly with the applicable law (Section 6); my interpretation of the Framework Agreement (Sections 7-10); and my short response to the individual Grounds of Appeal (Section 11). There is a short summary of my conclusions at Section 12 below.[6]The Applicable Law[26]It is not necessary, in every judgment concerned with the proper construction of a commercial contract, to set out at length the relevant principles to be followed; there is enough authority from the Supreme Court over the last 15 years to make that task unnecessary. In short, what matters are the words used, when seen in their contractual context and against their factual background: see Arnold v Britton [2015] UKSC 36 at [17]; Woods v Capita [2017] AC 1173 at [12]. Perhaps the most user-friendly summary of the principles from those Supreme Court authorities is that of Popplewell J (as he then was) in Lukoil Asia Pacific (PTE) Limited v Ocean Tankers (PTE) Limited (“Ocean Neptune”) [2018] EWHC 163 (Comm) where he said at [8]:
“The court’s task is to ascertain the objective meaning of the language which the parties have chosen in which to express their agreement. The court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. The court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to the objective meaning of the language used. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”
[27]As Popplewell J notes, it is usual to consider the rival constructions to see if they make commercial sense. Although that is a feature of contractual interpretation which should not be overstated (see Arnold v Britton at [17]), it can be a useful way of testing the practical consequences of the different interpretations: it is a sort of sense check.[28]There have been a number of appeals recently where the lower courts appear to have adopted a generous view of what evidence may be admissible as to the parties’ state of knowledge, pursuant to Chartbrook v Persimmon Homes [2009] 1 AC 1101. In my view, the judge in the present case was right to say that evidence of subjective understanding or belief as to what the contract meant is wholly inadmissible and should never have been part of SEW’s witness statements.[29]It used to be the case that the courts adopted a strict (not to say strained) approach to contractual interpretation if the clause in question was an exclusion clause or one limiting liability: see for example Ailsa Craig Fishing Co. v Malvern Fishing Co [1983] 1WLR 964 at [969H]-[970A]; and BHP Petroleum v British Steel [2000] Lloyd Rep 277 at [43]. However, the court has moved away from that approach, particularly in relation to clauses which limit rather than exclude liability: see Interactive E Solutions JLT v O3B Africa Limited [2018] EWCA Civ 62 at [14].[30]The modern approach is now summarised by Lord Leggatt in Triple Point Technology Inc v PTT Public Co Limited [2021] UKSC 29 (Triple Point):
“107.The approach of the courts to the interpretation of exclusion clauses (including clauses limiting liability) in commercial contracts has changed markedly in the last 50 years. Two forces have been at work. One has been the impact of the Unfair Contract Terms Act 1977, which provided a direct means of controlling unreasonable exclusion clauses and removed the need for courts to resort to artificial rules of interpretation to get around them: see Lord Denning’s swansong in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284, 296-301; and Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251, paras 57-60 (Lord Hoffmann). This change of attitude was heralded by the decision of the House of Lords in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. The second force has been the development of the modern approach in English law to contractual interpretation, with its emphasis on context and objective meaning and deprecation of special “rules” of interpretation - encapsulated by Lord Hoffmann’s announcement in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 that “almost all the old intellectual baggage of ‘legal’ interpretation has been discarded”. 108.The modern view is accordingly to recognise that commercial parties are free to make their own bargains and allocate risks as they think fit, and that the task of the court is to interpret the words used fairly applying the ordinary methods of contractual interpretation. It also remains necessary, however, to recognise that a vital part of the setting in which parties contract is a framework of rights and obligations established by the common law (and often now codified in statute). These comprise duties imposed by the law of tort and also norms of commerce which have come to be recognised as ordinary incidents of particular types of contract or relationship and which often take the form of terms implied in the contract by law. Although its strength will vary according to the circumstances of the case, the court in construing the contract starts from the assumption that in the absence of clear words the parties did not intend the contract to derogate from these normal rights and obligations.”
[31]It is trite law that the court will do all it can to construe all parts of the contract, and that no part of it should be treated as inoperative or surplus: see Merthyr (South Wales) Limited v Merthyr Tydfill County Borough Council [2019] EWCA Civ 526 and Triple Point. In RWE Npower Renewables Limited v JM Bentley Limited [2014] EWCA Civ 150, Moore-Bick LJ said at [15] that the starting point was that “the contract documents should as far as possible be read as complementing each other and therefore as expressing the parties’ intentions in a consistent and coherent manner”. At [17] he approved the first instance judge’s approach in that case, to the effect that the proper construction of a contract “was intended to resolve discrepancies relating to individual obligations rather than forcing on the reader a choice between one entire clause and another”.[32]One of the secondary issues that arose on appeal was whether Schedule 11 was inconsistent or incompatible with the remainder of the Framework Agreement. In Pagnan Spa v Tradax Ocean Transportation SA [1987] 3 All ER 565, Bingham LJ (as he then was) explained that the fact that one term of a contract qualified another did not amount to an inconsistency, because it did not lead to a scenario where effect could not fairly be given to both provisions: one clause may simply narrow or restrict the ambit of another.[33]If, despite this, there is unavoidable inconsistency, then one relevant canon of construction, to which the judge had regard in the present case, is to the effect that specific provisions will be given greater weight than general provisions: see Yarm Road Limited v Hewden Tower Crains Limited [2003] EWCA Civ 1127 at [41].[7]What Were the Parties’ Rights and Obligations if the AMR Units were Defective?[34]Elster’s principal obligation was to supply AMR units which complied with the specification set out in Schedule 1. If they did not do so, then there were a range of options open to SEW, pursuant to clause 13 of Schedule 2. Clause 13.1 made plain that the remedies listed there were all available to SEW at their discretion. The relevant options for the purposes of this appeal included clause 13.1.3 (giving Elster an opportunity to supply replacement products) and clause 13.1.6 (seeking to recover such damages as may have been sustained as a result of Elster’s breaches).[35]It appears that, over the course of time, SEW availed themselves of both of these remedies. To start with, it seems from the Particulars of Claim that they invited Elster to provide replacement AMR units, and that Elster did so. This was enough to lead to the Supplemental Deed five years later. However, following the continued supply of defective AMR units, SEW then brought a claim for damages based on the estimated costs of replacement and reinstallation works. Elster now say that this second option is not open to SEW, or to be more accurate, that it is open, but only to the limited extent permitted by Schedule 11.[36]Schedule 11 refers to “a faulty device…identified in operation”. If a faulty device is identified in operation then the Schedule says that “the cost of an equivalent, replacement device and any incidental costs shall be limited to the warranty as set out below.” Set out below is the table which identified that, in years 1-5, the faulty AMR unit would be replaced free of charge. If the fault was discovered in years 1 and 2, there would be an additional payment by Elster to SEW of £40. After year 5, SEW had to pay for any replacement AMR units, albeit at a discount, the amount of which discount reduced between years 6 to 15.[37]Who is incurring “the cost” which Schedule 11 says that the warranty limits? In years 1-5 it must be the cost to Elster of supplying a new AMR unit free of charge and, in years 1-2, also paying an additional £40 to SEW. From the start of year 6 onwards, the cost is to SEW for a replacement unit at the sliding scale discount. Thus example 2 envisaged an AMR unit failing in operation because of premature battery failure in year 8 and calculated the discounted amount that SEW would have to pay Elster for the replacement AMR unit. By then, therefore, the cost being limited by the warranty is the cost to SEW in buying that replacement unit.[38]Can Schedule 2 and Schedule 11 be read together? Both parties say that they can, but for very different reasons. SEW’s principal submission is that Schedule 11 only applied if SEW exercised the option of inviting Elster to supply replacement AMR units pursuant to Clause 13.1.3. Elster submit that Schedule 11 applied across the board and limited all SEW’s claims for damages under clause 13 (or for that matter their claims for an indemnity under clause 5) to the cost of replacement AMR units, as calculated in the table. At the appeal hearing, when he was asked what would happen if SEW did not want replacement AMR units from Elster, Mr Power submitted that Schedule 11 would operate to limit the damages claim to the notional cost to Elster of such replacement AMR units. That was the argument noted briefly by the judge at [129]. I have called this the ‘notional cost’ argument.[8]What was Schedule 11 Doing and Not Doing?[39]It is sensible to start with a consideration of Schedule 11. On Elster’s case (which the judge upheld), Schedule 11 was a clause limiting Elster’s liability to SEW. The principles identified by Lord Leggatt in Triple Point concerned with limitation of liability clauses are therefore directly applicable. On the assumption that Elster and the judge were right, the remedy identified in Schedule 11 for years 1-5 was worth, in money terms, far less to SEW than conventional damages claim. From the start of year 6 onwards it was apparently worth very little to SEW (because they became the paying party, albeit at a discounted price) unless Schedule 11 gave them the right to claim as damages the notional cost to Elster of replacing the defective AMR units.[40]In my view, the judge was wrong to characterise Schedule 11 as a limitation of liability clause. On its proper construction, Schedule 11 did not limit SEW’s right to claim damages in the ordinary way pursuant to clause 13.1.6 of Schedule 2. There are at least three separate reasons for that, as well as a complete answer to Mr Power’s alternative submission based on the notional cost argument. 8.1. Schedule 11 Was Not Concerned with Damages: It Fixed the Parties’ Rights and Obligations If Replacement AMR Units Were Provided By Elster[41]First, it seems to me that Schedule 11 was not concerned with SEW’s entitlement to damages, or the assessment or quantification of such damages; it certainly did not limit the scope of any damages claim that SEW might make. Schedule 11 assumed that Elster were providing replacement AMR units. That is its starting point. In that situation, Schedule 11 applied, and the cost to Elster (and, in later years, to SEW) of such replacement units is spelt out. But there were no words to indicate that Schedule 11 applied, or even had any relevance, in circumstances where (for whatever reason) Elster were not supplying AMR units to SEW by way of replacement, much less where SEW had brought a claim for damages against Elster. Nor is there anything in Schedule 11 which purports to take away SEW’s right, recognised in clause 13.2 of Schedule 2, to opt to obtain replacement products in the market where Products failed to comply with the terms of the Contract, and factor in the costs of doing so in a claim for damages.[42]For what it is worth, this distinction between the replacement of defective AMR units (Schedule 11) and a claim for damages (Schedule 2), appears to have been demonstrated on the limited facts that the court has had to assume from the Particulars of Claim. In the first few years after the Framework Agreement was agreed, the parties agreed that Elster would supply replacement AMR units. That arrangement was therefore governed by Schedule 11. But when the AMR units continued to be defective and SEW decided on a change of approach, they no longer wanted Elster to supply replacements, so Schedule 11 was of no application, and a claim for damages was made pursuant to Clause 13.1.6 of Schedule 2. 8.2. Schedule 11 Was Not Clear Enough to Be A Limitation Of Liability Provision In Any Event[43]Secondly and in any event, there were no words in Schedule 11 or the Framework Agreement of sufficient clarity to suggest that, regardless of whether SEW wanted replacement AMR units from Elster, Schedule 11 would somehow comprise the limit of Elster’s liability to SEW. In my view, there was nothing which purported to limit SEW’s right to claim damages pursuant to clause 13.1.6, by reference only to that which was set out in Schedule 11; nothing in Schedule 11 which sought to qualify any part of Schedule 2; and nothing in Schedule 2 to suggest the wide-ranging rights which it identified were in any way limited by Schedule 11. But even if that was wrong and it was possible to find some hint of such a limit, there were on any view no clear words setting out any such limitation of liability.[44]In this way, the assumption identified by Lord Leggatt in Triple Point, that parties do not give up their ordinary rights without clear words, is simply not displaced here. There were no clear words which limited SEW’s ordinary right to claim damages. There was only a calculation of cost that applied if Elster were providing SEW with replacement AMR units.[45]I take Mr Power’s point that Clause 13 of Schedule 2 was not expressly said to be the subject of the contractual cap in Clause 9.3 of the Agreement (as amended), nor subject to the exclusion of loss of profit claims (Clause 9.4 of the Agreement), yet it is agreed that it was subject to both. So, to that extent, he is right that there is not necessarily any magic in the absence of an express link or cross-reference. But the way those clauses work together is, to my mind, straightforward, and a demonstration of the point in Pagnan: that one clause can qualify another without there being any incompatibility. In this way, the damages claimed in clause 13.1.6 of Schedule 2 are the same as the damages limited by clauses 9.3 and 9.4, so they can be read together, and the latter limits the former. But Schedule 11 does not mention damages at all, and does not purport to limit Elster’s liability if - for whatever reason - Elster are not supplying any replacement AMR units, and SEW are instead claiming damages under clause 13.1.3 of Schedule 2.[46]Mr Power also sought to rely on the words “Fault Attribution” in the heading to Schedule 11 in support of his submission that Schedule 11 limited Elster’s liability. But those words have a very different meaning to “Limitation of Liability”; they usually denote the attribution of fault to one party or another in any given circumstance. They do not indicate some sort of overall limit of one party’s liability to the other. Indeed, it is difficult to see how, even on Elster’s case, they had that effect, since Schedule 11 did not in fact attribute fault at all: on the contrary, it operated on the basis that the AMR units would be replaced without proof of fault. So the heading is not, and certainly does not suggest with anything like the necessary clarity, that it is a limitation of liability provision. 8.3. The Extreme Nature of Elster’s Interpretation[47]Thirdly, Elster’s interpretation of Schedule 11 as a limitation of liability provision would mean that - at least on the face of it - SEW had no rights at all after year 5; that indeed they would have to pay for replacement AMR units, even if they were not in accordance with the specification. As Mr Power conceded in answer to questions from my Lord, Lord Justice Zacaroli, from year 6 on, SEW would have no right to claim damages under Schedule 11. That reading of Schedule 11 would make it, at least from the start of year 6 on, an exclusion clause, and would be a complete reversal of the ordinary position. There are no words that suggest such an extreme outcome.[48]Further, when my Lord, Lord Justice Males, suggested to him a scenario where SEW had lost all faith in Elster’s AMR units - that they considered them unfit for purpose and had gone to a new supplier - Mr Power conceded that it might be different (such that Schedule 11 would not apply as a limitation of liability provision) if the AMR units had been ‘doomed from the start’. He said that that was not this case. But two points arise from that answer. First, I am not so sure that that is not an accurate description of what happened here, given the reliance in the Particulars of Claim on defects occurring from a very early stage. But more importantly, Mr Power’s answer again showed the extreme position into which Elster were driven, by seeking to rely on what was, on any view, a very limited warranty, in a scenario where the defects in the AMR units were fundamental or widespread. 8.4. The ‘Notional Cost’ Argument[49]Possibly aware of the difficulties revealed by my Lords’ respective questions, Mr Power advanced the alternative argument noted by the judge at [129] (and which I have called the notional cost argument). He suggested that Schedule 11 could still operate as a limit on the damages which SEW might recover even if SEW had not asked Elster to provide replacement AMR units, and had instead made clear that they did not want them because they no longer had faith in Elster’s products. His argument was that, in those circumstances, SEW’s damages would be limited to the notional cost to Elster of providing such units. But in my view, that proposition only has to be stated for its fundamental flaws to become immediately apparent.[50]Schedule 11 makes no mention of any such entitlement or limitation. As I have said, from the start of year 6 onwards, the table provides the opposite: that SEW would actually be paying Elster for the replacement AMR units. In those circumstances, it is impossible to see how it could be argued that the same Schedule allowed SEW to claim the notional costs to Elster of the same replacement AMR unit. It was also unclear what the basis might be for this unexpressed term entitling SEW to recover the notional cost. No implied term was suggested and, as I have said, such an implied term would appear to be contrary to the express terms anyway.[51]The notional cost argument, that Schedule 11 limited SEW’s damages to the cost to Elster of providing replacement AMR units, would also appear to presuppose that Schedule 11 gave Elster the right to supply replacement AMR units if the originals were found to be faulty. Mr Darton KC disputed that, contrasting it with the position under some standard forms of building contract, where a contractor had the right to go back to carry out and complete snagging works. In such circumstances, if the employer unreasonably ignores that right, and engages another contractor to do the snagging work, the employer’s measure of loss is the notional cost to the original contractor of doing the snagging works, not the actual cost incurred by the replacement contractor: see Pearce and High Ltd v Baxter [1999] 66 ConLR 110 at [18]-[19], affirming the decision of HHJ Stannard in William Tomkinson and Sons Ltd v The Parochial Church Council of St Michael 1990 C.L.J. 319. Here there was no equivalent right on the part of Elster to replace the defective AMR units, so the notional cost argument cannot run. Such a right would also flatly contradict SEW’s right in clause 13.2 of Schedule 2 to claim from Elster the additional cost of sourcing replacement products in the market.[52]Finally on the notional cost argument, I would add that such a quantification exercise would be very uncertain, since SEW would have no idea what a replacement unit might cost Elster (because that might turn on the sub-supply contracts into which Elster had entered many years before). That observation would not, of itself, be fatal to the notional cost argument, but it provides further support for my view that it is inherently unlikely. 8.5. Summary[53]Accordingly, for all these reasons, I consider that the judge was wrong at [101] to say that SEW’s “entitlement” was limited by Schedule 11. The words of Schedule 11 did not purport to limit SEW’s entitlement to damages if there were breaches of the Framework Agreement and replacement AMR units were not supplied by Elster. Schedule 11 existed only to identify the parties’ rights and liabilities if replacement AMR units were provided by Elster. In any event, the words in Schedule 11 did not have the necessary clarity to be construed as depriving SEW of their normal rights and remedies, or limiting Elster’s liability to them in such a significant way. Any other interpretation of Schedule 11 leads to an extreme and unreal outcome: the simple answer is that, if there were no replacement AMR units being supplied by Elster, Schedule 11 was inapplicable.[54]Furthermore, the alternative contention that, even if a replacement AMR unit was not provided by Elster, Schedule 11 would still operate by reference to the notional cost to Elster of supplying such an AMR unit, is not supported by any part of Schedule 11 and, in my judgment, is actually contradicted by it.[55]The final question that arises is, if Schedule 11 is not a limitation of liability clause, then how, if at all, can it work with Schedule 2?[9]Clause 13.1.3 of Schedule 2[56]SEW have always submitted that Schedule 11 was not incompatible with the rest of the Framework Agreement, provided that it was read as being operable only if SEW decided to trigger the option at 13.1.3 in Schedule 2 (namely, SEW giving Elster the opportunity to remedy defects or supply replacement AMR units).[57]The judge said at [103] that it was frankly difficult to conceive how anybody could have believed that Schedule 11 was designed solely to flesh out one of the options in clause 13. I too was originally sceptical about that argument, because it seemed a little unrealistic to treat Schedule 11 as optional at SEW’s behest: compared to, say, the options at clauses 13.1.5 and 13.1.6, clause 13.1.3 was very limited and therefore seemed an option that was unlikely ever to be triggered.[58]However, having identified Schedule 11 as operating only when Elster were proving replacement AMR units, and having found that Elster had no freestanding right to provide such units, I am satisfied that the link between clause 13.1.3 and Schedule 11 contended for by Mr Darton KC provides the final piece of the puzzle. Schedule 11 only operated if Elster were providing replacement AMR units, and they would only have been doing that if SEW had asked for them. If SEW had not asked for them, clause 13.1.3 and Schedule 11 would not be triggered and, as Schedule 2 made plain, the other remedies (including those of clauses 13.1.5 and 13.1.6) were available to SEW at their discretion.[59]In addition, having been taken through the Particulars of Claim, I can see that SEW may well have operated some version of clause 13.1.3 in the earlier years of the Framework Agreement. Schedule 11 has therefore played a role in precisely the way that might have been expected. But the time apparently came when SEW decided they could no longer trust Elster’s products and therefore sought damages instead. That was a matter for them. SEW did not trigger clause 13.1.3, and so the warranty limiting the cost to Elster (in years 1-5) and to SEW thereafter, was of no application.[60]In my view, this reading of clause 13 of Schedule 2 and Schedule 11 also makes wider commercial sense. If defective units were sporadic, or if the problems appear to be ironed out in the first few years of the contract, then it is easy to see why clause 13.1.3 might have been utilised. There were also other advantages to SEW of using this option: Schedule 11 does not require proof of fault and it may well go beyond the normal six year contractual limitation period. However, if problems with the AMR units persisted, and were considered by SEW to be generic, then SEW might reach a point where they would no longer want any replacement units from Elster because they no longer trusted Elster to be able to deliver a product that was fit for purpose. In those circumstances, SEW were not bound to ask for or receive replacement AMR units which they did not want, from a supplier that they did not trust, or to have their damages limited by reference to the notional cost to Elster of providing such replacement products.[61]It is, however, appropriate to sound one note of warning to SEW at this stage. I consider that their present pleading of damages is defective because it is put by reference to a series of very global figures. Moreover, it appears to assume that SEW are entitled to claim, as damages, the cost of buying and installing new AMR units 8, 9 or 10 years after the Framework Agreement had been concluded (and perhaps even longer). At first blush, I do not think that can be right as a matter of principle. Through its discounted price mechanism, Schedule 11 was warning SEW that, as time went on, there had to be an allowance for betterment. That seems to me to be correct, and I think Mr Darton accepted it as a matter of principle. So although SEW’s damages claim is not limited by Schedule 11, SEW would still have to give proper credit for the betterment involved in replacing a defective AMR unit after 8 years’ operation with an entirely new AMR unit.[10]Incompatibility[62]Both parties had alternative arguments based on the proposition that Schedule 11 and Schedule 2 could not be reconciled. Since I am firmly of the view that they can be, there is no need to set out any concluded view on incompatibility. If they were incompatible, I could see the force of Mr Power’s submission that the homemade, non-lawyerly language of Schedule 11 should take precedence over the general legalese of Schedule 2, but that could only have been on the basis that the words in Schedule 11 were clear enough to amount to a limitation of liability clause. Since, for the reasons that I have given, they were not, I am much more doubtful as to the application here of the principle that the specific outweighs the general. However, since on my primary findings the problem does not arise, I do not need to deal with the point further.[11]Answers to Grounds 2 and 3 of the Appeal[63]For the avoidance of doubt, I summarise my response to each Ground of Appeal individually.

Ground 2 (i) The Heading of Schedule 11

(i) The Heading of Schedule 11

[64]SEW complain that the judge relied on the heading of Schedule 11, and the words “fault attribution”, but from my reading of the judgment, he did not give them any great weight. My primary construction of Schedule 11, although very different to that of the judge, also gives those words no weight. For the reasons given at paragraph 46 above, I disagree with Mr Power that they help Elster or are an accurate description of Schedule 11. So either way, I do not consider that the words in the heading affect the outcome of this appeal.

Ground 2 (ii) Collateral Warranty

[65]On SEW’s case, the argument that Schedule 11 was a collateral warranty really goes back to the core submission that replacement was an option at SEW’s discretion under clause 13.1.3. I am not sure that Schedule 11 was a collateral warranty in the strict sense. But I have concluded at Section 8 above that SEW are right that Schedule 11 presupposed a request from SEW to Elster to replace a faulty AMR unit, and that, in the absence of such a request and such a replacement, Schedule 11 did not apply.

Ground 2 (iii) Different Obligations

[66]SEW are right that, for a variety of reasons, Schedule 11 was doing something different from Schedule 2: see Section 8 above. But this ground is put in unhelpful language: contrary to how it is framed, Schedule 11 is not irreconcilable with Schedule 2, and not even SEW’s primary case suggested otherwise.

Ground 2 (iv) The Utilities Procurement Background

[67]SEW’s argument that somehow Schedule 11 had to be construed “against the utilities procurement background” was rejected by the judge as irrelevant. I agree with him. It was for both parties to check and agree the proposed documentation and the terms of the Framework Agreement, regardless of the background. SEW were unable to point to any particular part of the procurement background that had any direct bearing on the proper interpretation of Schedule 11.[68]Ground 2 of the appeal also includes the alternative suggestion that the provisions of Schedule 2 and Schedule 11 were irreconcilable and Schedule 2 had priority. This does not arise for the reasons noted above. On this basis, it is an oddity of this appeal that none of the separate parts of Ground 2 really capture the essential point of construction on which SEW have been successful; Ground 2(ii) perhaps comes closest.

Ground 3 The Strict Test

[69]Ground 3 of the Appeal is that the judge failed to apply the strict test for the construction of limitation clauses and did not give sufficient weight to the Sale of Goods Act. The reference to a ‘strict test’ is erroneous, as explained in Section 6 above. The simple position is that, for the reasons set out in Section 8 above, the words in Schedule 11 were not, on any view, clear enough to amount to a limitation of liability. The Sale of Goods Act point was irrelevant.

Conclusion

[70]For the reasons that I have given, despite my dismissal of or doubts about many of the grounds of appeal, I conclude that SEW’s fundamental point, that the judge misinterpreted the Framework Agreement, is correct. If my Lords agree, I would therefore allow this appeal. LORD JUSTICE MALES:[71]I agree.

LORD JUSTICE ZACAROLI:

[72]I also agree.

Cited in 2 later judgments