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(1) Interactive E-Solutions JLT (2) Interactive E-Solutions DMCC -v- O3B Africa Limited

The Court of Appeal on 30th January has provided important guidance on the interpretation of exceptions to limitation or exclusion clauses, for ‘fraud’, provisions which very commonly feature in commercial contracts, and in so doing uphold an order striking out/giving summary judgment against a counterclaim for US$55 million.

The proceedings involve a claim for unpaid fees arising from the provision by the Claimant, O3B, of satellite bandwidth to the Defendant, Interactive, for onward sale to fixed line and mobile telephone operators in Pakistan. In its defence Interactive has alleged that certain regulatory approvals were not obtained from Pakistan, and that this was the responsibility of O3B. Interactive also brought a counterclaim for breach of contract, arising from the same allegation of failure to obtain regulatory approvals along with complaints about technical defects in the satellite system, in the amount US$55 million, representing alleged loss of profits. The counterclaim, however, faced the hurdle of a limitation clause in the contract between the parties, providing for a contractually prescribed remedy in place of damages in the event of a breach by O3B.

It was common ground that the limitation clause was, on its face, effective. However Interactive sought to rely on an exception to the limitation clause, contained in the provision itself, for “fraud”. It sought to adduce new allegations of dishonesty not against O3b directly but against a third party which acted essentially as a subcontractor to O3B in the provision of the services, claiming that that third party had tried (though not succeeded) to deceive Pakistani authorities in relation to regulatory compliance. Notably no actual cause of action in fraud was pleaded against O3B: instead, Interactive argued that some dishonesty in the factual matrix was sufficient to invoke the “fraud” exclusion and so displace the effect of the limitation clause.

O3B applied for summary judgment and strike out of the counterclaim and succeeded at first instance before Mr Richard Salter Q.C., sitting as a Deputy High Court Judge, in September 2017. Interactive obtained permission to appeal on the question whether the judge was wrong to conclude that Interactive had no real prospect of success in bringing its counterclaim within the “fraud” carve-out, unless it could plead a cause of action in fraud, be it deceit or some other cause of action of which dishonesty is a constitute element (which it could not do).

The point was raised in submission that, while ‘fraud’ carve-outs to limitation and exclusion clauses are commonly found in commercial contracts, the term ‘fraud’ itself it not strictly a cause of action or legal term of art. But O3B contended that it must denote a cause of action of which dishonesty is a necessary element, otherwise the scope is indeterminate and would lead to absurdity.

The Court of Appeal, comprised of Lord Justice Lewison and Lady Justices Arden and Asplin, dismissed the appeal. Lewison L.J. concluded: “In the context of legal liability for claimed loss, it seems to me that the only workable criterion is whether an allegation of fraud is a necessary ingredient of the legal basis on which loss is claimed: in other words, whether an allegation of fraud is a necessary averment to a cause of action.”

David Cavender Q.C. and Michael Clark represented the successful Respondent, O3B.

The judgment can be read here.