A party's ability effectively to exclude liability for a deliberate repudiatory breach of contract has been in some doubt in the past couple of years. In 2009, the High Court held in Internet Broadcasting Corporation Ltd v. MAR LLC1 that there is a strong presumption against interpreting an exclusion clause as having that effect. There was considerable criticism of that decision, but until now no reported judicial comment on it. That has changed with the decision in AstraZeneca UK Ltd v. Albemarle International Corporation.2 This takes the view that IBC is wrong and should not be followed. Unfortunately the decision on this point is obiter. Nonetheless, it provides useful reassurance on the correct legal analysis in this area. This in turn facilitates clearer guidance on how to draft exclusion clauses to achieve your commercial purpose.
The Decision in IBC
IBC and MAR signed a joint venture agreement. Under this, MAR agreed to provide an internet TV channel on which IBC would broadcast financial information. The agreement was for three years, though either party could terminate early for material breach by the other. One year into the contract, MAR terminated the agreement. IBC was not in breach and MAR had no grounds for the termination. IBC claimed damages for loss of profits. However, IBC relied on an exclusion clause excluding any liability:
"for any damage to software, damage to or loss of data, loss of profit, anticipated profit, revenues, anticipated savings, goodwill or business opportunity, or for any indirect or consequential loss or damage".
The court accepted that, taken literally, the clause applied to any breach of contract. But the judge thought there must be a presumption against this literal interpretation if it would defeat the whole purpose of the agreement. The parties had intended their joint venture to operate for an agreed period with a view to mutual profits. A lost profits claim was the only substantive remedy open to IBC for MAR's breach. The court therefore interpreted the clause as not applying to a deliberate repudiatory breach of contract.
Previous case law had rejected the approach of classifying particular breaches as "serious" or "fundamental" ones. The IBC decision gave this classification renewed relevance, at least when drafting and interpreting exclusion clauses. The court made clear that parties must use clear language if they intend an exclusion clause to remove liability for deliberate repudiatory breaches. Since IBC, parties wishing to achieve such a result have needed to ensure their clause expressly covered that type of breach, despite the widespread view the case was wrongly decided.
The Facts of AstraZeneca
AZ and Albemarle entered a three-year contract for Albemarle to supply a chemical, DIP, to AZ. AZ would distil the DIP to produce the anaesthetic propofol. Clause H of the contract stated that, if AZ decided to stop distilling DIP and instead obtain propofol directly from a third party, Albemarle would have the right of first refusal to supply propofol to AZ.
Clause M was the relevant exclusion clause. It provided that:
"No claims by [AZ] of any kind, whether as to products delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product in respect of which such damages are claimed; and failure to give written notice of claim within 60 days from the date of delivery, or in the case of non-delivery, from the date fixed for delivery, shall constitute a waiver by AZ of all claims with respect thereto. In no case shall AZ or Albemarle be liable for loss of profits or incidental or consequential damages."
Events, in summary, unfolded as follows:
11 October 2007 – AZ advised Albemarle that it intended to buy propofol from a third party. Albemarle objected that AZ had not offered it the right to match the third party terms.
9 November 2007 – AZ placed an additional order for DIP, to build up stocks. Albemarle refused to supply the extra product.
4 January 2008 – AZ placed another extra order for DIP, again declined by Albemarle.
25 January 2008 – Albemarle allegedly matched the third party terms for the supply of propofol. AZ rejected that offer, however.
3 March 2008 – Albemarle gave notice to terminate the DIP contract for AZ's breach of clause H.
Later, AZ started proceedings against Albemarle alleging repudiatory breach of contract entitling AZ to terminate, due to Albemarle's refusal to meet the orders for extra DIP.
Was AZ or Albemarle in breach?
The court held AZ was in breach of clause H. The right of first refusal required AZ to disclose full details of the third party's offer once it decided to switch to propofol. And if Albemarle matched the third party terms, AZ had to accept Albemarle's offer. Albemarle had a right to terminate for AZ's breach; it had not waived that right by its ongoing willingness to negotiate with AZ.
Albemarle was also in breach when it failed to honour AZ's November 2007 order. (Time for performance of the January 2008 order had not fallen due when Albemarle terminated.) But this single failure to supply was not a repudiatory breach in the context of a 3-year contract. AZ therefore had no right to terminate. It still had an obligation to allow Albemarle a right of first refusal under clause H.
In summary, Albemarle had a claim for lost profits for breach of clause H and AZ's failure to award it the propofol contract. AZ had a damages claim for any losses resulting from Albemarle's refusal to meet the November 2007 order.
Impact of the Exclusion Clause
AZ argued the IBC principle applied. Albemarle had decided not to honour the extra orders. That was a deliberate repudiatory breach and clause M therefore did not cover it. As already indicated, the court said only the first failure to supply was a breach, and not a repudiatory one at that. The court also held it was not a deliberate breach. Albemarle honestly, though wrongly, thought it was within its contractual rights not to honour the order, based on advice from US lawyers. For both reasons, the principle in IBC could not apply.
The judge still took the opportunity to explain why, even if there had been a deliberate repudiatory breach by Albemarle, he would have declined to follow IBC. That case had, almost by stealth, tried to revive the doctrine of fundamental breach. But the House of Lords had decisively rejected the suggestion that deliberate breaches must be treated differently from other breaches.3 Deliberate breaches could be minor (sounding in damages only) or repudiatory (giving the innocent party a right to terminate). They were not a separate category to which different principles applied.
Applying that reasoning to exclusion clauses, it is always simply a matter of interpretation as to what breaches and liability they cover. Here, the drafting of clause M was clear. It covered any breach of Albemarle's delivery obligations, regardless of whether that breach was deliberate or not. Albemarle had validly limited its liability for failing to meet the November 2007 order.
That dealt with the IBC issue. But the judge also had to consider if clause M limited AZ's liability for Albemarle's lost profits claim resulting from the refusal to award it the propofol contract. Albemarle argued the correct interpretation of the exclusion clause was that the second limb, dealing with claims for loss of profits or consequential losses, was restricted to the same matters as the first limb. In other words, clause M only covered the sale and purchase of DIP. It did not exclude or limit claims arising from a decision to replace the DIP contract with one for propofol. AZ disagreed and contended the second part of the clause was of general application.
The court considered the general rules of interpretation. Specifically, the contra proferentem principle applies to an exclusion clause. That meant the court must interpret clause M strictly against AZ, as the party seeking to rely on it. AZ's interpretation, if upheld, would leave Albemarle with no substantive remedy where, as in this case, AZ breached the rights of first refusal in clause H. Those rights would then effectively amount to a statement of intent only. The court should strive to avoid such a result. In contrast, if using Albemarle's interpretation, the second limb of clause M made commercial sense. For example, it could apply to limit Albemarle's right to recover lost profits if AZ breached its annual order requirements under the DIP contract. But the limitation of liability in clause M did not, if properly interpreted, apply to Albemarle's claim for lost profits resulting from AZ's failure to grant it the propofol deal.
AstraZeneca provides several useful drafting lessons for a party seeking to exclude or limit its liability for breach of contract:
- Although the judge's comments on IBC are obiter, they strongly suggest that an otherwise valid exclusion clause covering liability for breach of contract will apply even where the breach was deliberate. Make express provision if you want to preserve liability for deliberate breaches.
- Conversely, if you want to exclude liability for deliberate breach, AstraZeneca suggests specific wording is unnecessary. However, until a court deals with the issue substantively, it may be safer to keep an express exclusion to this effect. Remember, however, that the rules of interpretation, and especially the contra proferentem rule, may still give the court latitude to strike down such a provision, so draft clearly. If the Unfair Contract Terms Act (UCTA) applies, your attempted exclusion may in any event be doomed
- More generally, take care with clauses that deal with exclusions or limitations of liability in several different scenarios. Use separate sub-clauses to deal with each separate exclusion. In AstraZeneca, this could have avoided the ambiguity over how the parties intended to qualify each of the limbs in clause M. Using different sub-clauses may also increase the chances of the court severing an individual provision that it later finds to be unreasonable or otherwise invalid.4
- A cap on any non-excluded liability is clearly a sensible back-up. But make sure, unlike the AstraZeneca clause, that it applies to all relevant heads of damage.
- Also take care when attempting to exclude consequential or indirect losses. In AstraZeneca, the problem was that the court considered the exclusion of consequential losses (and lost profits) only related to liability arising from the sale and purchase of DIP. But an additional issue is often whether the court will characterise the type of loss suffered as consequential or indirect loss. This always depends on the context of the contract. For example, the court has recently held that ex gratia compensation, paid to a party's customers following billing problems resulting from defects in the IT system supplied by the defendant, was a direct loss.5 The party was therefore not covered by a general exclusion of consequential loss or lost profits. There is no substitute for considering, at the drafting stage, exactly what types of losses you might suffer from a breach. If you intend to exclude liability for such losses, list the specific examples in the exclusion clause. An alternative approach is to spell out exactly what losses you will be liable for. In either case, it is sensible to include a “catch-all” general provision, so long as this does not cut across any specific exclusions you have provided for.