Summary

Clauses which exclude or limit a party’s liability under a contract are often the subject of much negotiation in the process and engineering sectors. They are a key factor in the assignment of risk between the parties, and in the determination of price. It is common practice for such clauses to expressly state that they will not apply to a party’s liability for wilful default or deliberate breaches of contract. Where a contract does not contain such a statement, to what extent will a party’s wilful default or deliberate breach be covered by the exclusion or limitation of liability?

Wilful Default

The concept of wilful or deliberate default/breach under English law has been the subject of several cases, yet there has been no consistent approach as to its scope. Potentially the concept is a broad one, and may be interpreted as including any deliberate act which results in a default under or repudiatory breach of the contract.

Consider circumstances in which a party terminates a contract early without any default by the other party, where it has no express contractual right to do so. Or a contract which contains performance guarantees which are subject to liquidated damages, or a requirement to expend a specified amount remedying defects, following a failure to meet the required performance. The party which has given the performance guarantees may refuse to carry out any further work once the financial cap on liquidated damages or spending has been reached. Both of these scenarios are capable of constituting wilful or deliberate defaults/breaches.

Excluding Liability under English Law: NetTV and AstraZeneca

There is no rule under English Law that a party’s liability for wilful or deliberate default/breach cannot be excluded or limited. However, two well reported cases have taken different approaches in relation to restrictions on a party’s ability to exclude or limit liability.

In the case of Internet Broadcasting Corp Ltd (t/a NetTV) v MAR LLC (t/a MARHedge) [2009], a deputy judge in the High Court took a “stricter approach” to construing exclusion and limitation clauses, finding that there was a rebuttable presumption that an exclusion clause will not cover liability for personal deliberate repudiatory breaches. The deputy judge stated that “very clear and strong drafting” would be required to exclude or limit a party’s liability. In effect, an exclusion or limitation clause would need to explicitly state that it was intended to apply to the party’s wilful or deliberate default/breach.

Whilst the decision was controversial, had NetTV not been decided in this way the claimant (and non-defaulting party) would have been deprived of a proportionate remedy, as a clause in the contract excluding liability for loss of profits would have bitten and removed the claimant’s claim for loss of profits, being its only meaningful claim. It is clear that the deputy judge was influenced by this in reaching his decision.

In the subsequent case of AstraZeneca UK Ltd v Albemarle International Corp [2011] the application of an exclusion clause following a deliberate repudiatory breach was once more considered by the High Court, which came to a very different conclusion. Whilst the case was ultimately decided on another point of law, making his comments obiter, the judge was unequivocal in his view that NetTV had been wrongly decided, stating that:

“the judgment in [NetTV] is heterodox and regressive and does not properly represent the current state of English law. If necessary, I would decline to follow it.”

The judge felt that there should be no special rule that wilful or deliberate defaults/breaches will not be covered by an exclusion clause unless expressly stated. He did agree with the NetTV decision that a rebuttable presumption applied. The judge’s comments in AstraZeneca appear to represent a more sensible approach, and are likely to be followed in the future.

Conclusion

Whilst the AstraZeneca case would indicate that unless an exclusion or limitation clause specifically carves out a party’s liability for wilful or deliberate default/breach the exclusion or limitation may be relied upon, the decision in NetTV remains good law. Until such time as the approach in AstraZeneca is followed, parties should take particular care when drafting an exclusion or limitation clause where seeking to cover wilful or deliberate defaults/breaches.

A prudent approach requires wording to be inserted in the contract to expressly state that any exclusions or limitations are intended to cover a wilful default or deliberate breach by one, or either, of the parties.