Exclusion clauses and deliberate personal repudiatory breach

Parties are free to modify, exclude or limit their obligations to each other and often do this by using what are commonly known and referred to as exclusion of liability clauses.

The freedom to exclude liability is tempered, in certain cases, by the restrictions set out in the Unfair Contract Terms Act 1977 (UCTA). (For example, where a party deals on another party’s standard terms of business, any exclusion or limitation is required to pass the UCTA “test of reasonableness”.)

Where UCTA does not apply, the question as to whether an exclusion clause effectively limits a party’s liability is a question of interpretation of the contract.

The court in the following case had to decide whether an exclusion of liability clause applied to a deliberate personal repudiatory breach of contract.

Internet Broadcasting Corporation (trading as NETTV) v MAR LLC (trading as MARHedge) [2009] EWHC 844 (Ch)

The parties entered into a joint venture agreement (Agreement) under which the contractor, agreed to construct and provide an internet TV channel together with the broadcaster who was to provide hedge fund information and services in order for the parties to broadcast hedge fund information.

The broadcaster was exclusively controlled by its president, Mr Lynch. The term of the Agreement was 3 years, save for a right to terminate in the event of a material breach of contract.

After one year the broadcaster terminated the Agreement upon notice to the contractor with immediate effect. The broadcaster subsequently accepted that it had no contractual justification for terminating the Agreement.

The contractor sued for loss of profits claiming that the broadcaster had wrongfully and deliberately committed a repudiatory breach of the Agreement.

What effect did the exclusion clause have on the contractor’s claim for loss of profit?

The court had to consider whether on a true construction, the exclusion clause excluded the contractor’s claim to recover loss of profit in circumstances where (as here) the loss of profit arose due to the broadcaster’s deliberate repudiatory breach of the Agreement.

The exclusion clause stated:

“17. Subject to clause 16 neither party will be liable to the other 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.”

[Emphasis added]

The court considered the following issues.

Was there a presumption that the exclusion clause did not apply to a deliberate repudiatory breach?

The court accepted that it was a matter of construction whether or not an exclusion clause applied to a repudiatory breach (or, indeed, any breach). The court noted that the more serious the breach, the stricter the clause should be interpreted.

Relying on obiter dicta in Photo Production v Securicor Transport Ltd [1980] AC 827, the court held that there was a rebuttable presumption that the exclusion clause did not have any effect in relation to a deliberate repudiatory breach.

In order to rebut this presumption - so that the exclusion clause extended to cover a deliberate repudiatory breach - the court held that clear and strong language was needed.

In the case of a personal and deliberate repudiatory breach, words such as “including deliberate repudiatory acts by the [parties to the contract] themselves” would be required.

Since there was no clear wording in this case, the presumption was not discharged.

What approach should the court take where there was personal wrongdoing?

The court drew a distinction between a deliberate repudiatory breach by a party himself (here, Mr Lynch, the controlling mind of the broadcaster) and a deliberate repudiatory breach by a party’s agents or employees (who were not the controlling mind of the party). (The party in question would simply be vicariously liable for its employees’ or agents’ actions).

As there were no strong words suggesting that the exclusion clause should apply to a breach arising out of personal wrongdoing, a strict approach should be taken in deciding whether or not the exclusion clause applied to such a breach.

Did a literal reading of the exclusion clause deprive the contractor of a meaningful remedy?

The court held that words which in a literal sense appeared to extend to cover a deliberate repudiatory breach should not be given their literal meaning where they were repugnant (which they were not in this case) or where that reading would defeat the purpose of the Agreement.

Here, the main purpose of the Agreement was a joint venture in internet broadcasting for mutual profit for an agreed period. On the facts, the only substantial claim the contractor had was one for loss of profits. A literal reading of the exclusion clause would deprive the Agreement of “any real meaning” from the contractor’s perspective. Accordingly, the literal meaning of the clause should not be followed.

Was a personal repudiatory breach an uninsurable risk?

The court noted that exclusion clauses allocate risk between parties. Usually, non-deliberate acts and acts for which a party was vicariously liable were insurable.

In this case, the personal repudiatory breach by Mr Lynch was unlikely to be insurable. An exclusion clause was not usually to be construed to cover an uninsurable risk.

The court’s decision

For all of the above reasons, the court held that the exclusion clause was not effective. The broadcaster was liable for the loss of profits suffered by the contractor.

Editors’ comments

This case was concerned about the rules of construction in managing exclusion clauses - UCTA had no application in the case.

The case confirms the existing position regarding the construction of exclusion clauses for fundamental breach. Whether a clause operates to exclude or limit liability for fundamental breach depends on what the court considers to be the meaning and legal effect of the clause (applying rules of construction) (Photo Production Ltd v Securicor Transport Ltd). Applying these rules, the more serious the breach, or the consequences of the breach, the less likely the court is to find that an exclusion clause is effective. In particular, the court will construe strictly an exclusion clause which limits seeks to exclude or limit liability in cases of “deliberate breach” unless there are clear words showing that the exclusion clause was intended to cover such a breach.

The case also establishes that a higher, stricter test should be applied in cases where there has been a deliberate personal repudiatory breach. In such cases, there is a presumption that the exclusion clause is not intended to cover such a breach.

The case may indicate a trend for courts to require particularly strong and clear wording before it will construe an exclusion clause as applying to a deliberate personal repudiatory breach.

The drafting of the exclusion clause in this case did not specify the circumstances in which the clause could be triggered. Frequently, exclusion clauses state that parties will not be liable for certain losses “arising at any time from any cause whatsoever” which makes clear that the clause should apply in the widest of circumstances. Had this wording had been included in the exclusion clause, it is unclear whether this have been enough to exclude liability for a deliberate personal repudiatory breach.

As a result of this case, if a party wishes to exclude liability for a deliberate breach (personal or otherwise), it would be advisable to include wording in the exclusion clause to this effect. Such wording might refer specifically to “deliberate breach” or may refer to “wilful default” (as is sometimes seen in contracts).

View: Internet Broadcasting Corporation (trading as NETTV) v MAR LLC (trading as MARHedge) [2009] EWHC 844 (Ch)