Two recent High Court cases have demonstrated the contractual impact an act of deliberate wrongdoing can have. In two very different circumstances, the wrongful act in question had the damaging effect of removing the applicability of a clause drafted specifically to protect the party at fault.
Exclusion of liability clause
The first case concerned the issue of whether an exclusion of liability clause applies where a party deliberately and wrongfully breaches a contract.
It relates to a joint venture entered into between NETTV and MARHedge to set up an interactive internet television channel dedicated to the hedge fund industry. NETTV set up the infrastructure of the website and MARHedge provided content for the channel. The business model was eventually successful and several thousands of pounds were remitted to MARHedge as part of a revenue sharing deal.
MARHedge subsequently terminated the agreement wrongfully and, during the trial, accepted that it had no contractual justification for the termination. However, MARHedge sought to rely on its exclusion clause which excluded any liability for loss of profits, the main loss that NETTV suffered.
The judge considered the position carefully and held that for an exclusion clause to apply to a deliberate act of wrongdoing, this intention must be expressed clearly in the drafting. The more radical the breach then the stronger the language needed to exclude liability. Further, the judge advised that the proper function of exclusion clauses between commercial parties is to allocate insurable risk. They should not generally cover uninsurable losses especially where the breach in question was a deliberate act of wrongdoing. The judge noted that the clause was not invalid, but did not apply in relation to a deliberate and wrongful breach. As such, the judge ruled that NETTV was able to recover all its losses without the exclusion of liability clause applying.
The second case involved a franchise agreement for the provision of inspection services to gas and electrical appliances. Prior to the start of the contract, the owner of the franchise (or franchisor) had made a number of representations highlighting the profitability expectations of the enterprise to encourage the franchisee to buy in to the business. However, shortly after the franchise was entered into it soon became clear that the business did not live up to these expectations.
As is common in franchise agreements, the contract contained a non-reliance clause whereby the franchisee acknowledged they had not relied on any representations of the franchisor and had made their own independent investigations into all relevant matters before agreeing to enter the franchise. The franchisor sought to rely on this clause to prevent any liability for its representations.
The judge found that the franchisor was guilty of fraudulent misrepresentation and had deliberately missold the franchise to the franchisee. As such, the non-reliance clause was held to provide no defence in relation to the franchisor's deliberate and wrongful statements.
Neither of the clauses in question were unusual and in fact are very typical of those found in commercial agreements. For example, the exclusion clause stated that neither party excluded liability for death or personal injury or for any category of loss that cannot be excluded at law. In addition, the usual categories of losses were excluded including loss of profits, indirect and consequential losses. The majority of exclusion clauses are drafted in this way and as such may not apply if a party wrongfully breaches a contract.
The second case (which will likely apply to any supplier, including for example a supplier of an IT system) suggests that where a party deliberately or recklessly overstates the prospects or understates the failure rate of their business/service they risk being found liable for fraudulent misrepresentation, irrespective of any non-reliance clause.