Local Government - July 2009
High Court holds that exclusion clause does not apply to a
deliberate personal repudiatory breach of contract.
Repudiatory breach
A repudiatory breach of the contract is a breach so fundamental
that it permits the distressed party to terminate performance of
the contract and claim for damages. The breach goes to the heart of
the contract and if a breach occurs the innocent party has the
choice of either:
i) continuing with the contract , known as affirmation of the
contract; or
ii) treating the contract as at an end, accepting the
repudiation.
Inevitably, whether a particular breach is sufficiently serious
to count as “repudiatory” will depend on the circumstances.
Exclusion clauses
Exclusion clauses purport to exclude liability for breach of
contract and are often included within the terms of the contract
and agreed by the parties. Such exclusion clauses are controlled at
common law and by statute. The Unfair Contract Terms Act 1977
(UCTA) has given the courts a statutory means of controlling such
clauses and courts control the use of exclusion clauses through
their interpretation of the contract.
It may seem odd at first sight that a party who deliberately
repudiates a contract should at the same time be able to rely on a
clause in the contract excluding his liability for that breach. The
normal anticipation of commercial parties is that a party who
repudiates his contractual obligations should be liable to
compensate the suffering party. This supports the underlying
principle against allowing a party to profit from his own wrong
doing.
However there is no rule of law that a party may not exclude
liability for a fundamental breach of contract. Furthermore,
following on from key cases such as Photo Production Limited v
Securicor Transport Limited [1980] 1 AC 827, the issue is one of
construction only and if parties to the contract have agreed the
term and it covers the situation which one party seeks to rely on,
the courts should respect the parties’ decision.
Identifying and allocating risks between the parties themselves
enables them to identify who is expected to insure against which
risk. All businesses are at increased risk during the current
economic climate and therefore the opportunity to identify and
minimise liability from the outset is good business planning.
Recent developments
Recent developments indicate a significant change in the use of
exclusion clauses particularly when parties wish to apply them to a
deliberate repudiatory breach of the contract. In the recent case
of Internet Broadcasting Corporation Ltd (t/a NETTV) and NETTV
Hedge Funds Ltd (formerly MARHedge TV Ltd) v MAR LLC (t/a MARHedge)
[2009] EWHC 844 (Ch) the high court ruled that there is a
rebuttable presumption that an exclusion clause should not apply to
a deliberate personal repudiatory breach of the contract.
The deputy judge found that the wording of the exclusion clause
in the above case did not use the “strong” language required to
displace the presumption that such clauses should not apply to a
deliberate personal repudiatory breach.
Facts of the case
NET TV entered into an agreement with MR Hedge under which NET
TV agreed to set up a dedicated internet television channel to
broadcast material provided by MR Hedge. Under clause 13, the
agreement could not be terminated for 3 years except in response to
a material breach. Clause 17 of the agreement stated that neither
party be liable to the other for damages 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 defendant sought to
rely on clause 17 after it gave notice to NET TV terminating the
contract with immediate effect. NET TV claimed that the defendant
had wrongfully and deliberately committed a repudiatory breach of
the contract suing for loss of profits. The Judge found in NET TV’s
favour, holding that clause 17 did not cover the deliberate
personal repudiatory breach of contract committed by the defendant.
Clause 17 contained no clear statement that deliberate wrong doing
was intended to be covered.
Extending an exclusion clause to cover deliberate repudiatory
breaches of contract proves difficult when attempting to rely upon
it at the court stage. The absence of the availability of insurance
to protect the claimant in the Internet Broadcasting case was vital
to the courts’ decision. The innocent party would have very little
protection when considering the fact that few insurers would be
willing to insure against a deliberate repudiatory breach. The
principle that an exclusion clause should not normally be construed
to cover an uninsurable risk contributes to the courts’ stricter
approach.
Drafting of your contract
Whilst the courts do not have jurisdiction to strike down an
exclusion clause simply because it is unreasonable the courts now
wish to see clear and certain wording, facilitated by strong and
precise drafting. If an exclusion clause is ambiguous or uncertain,
it will generally be construed against the party trying to rely on
this – The Contra Proferentem Rule. The reasoning behind this rule
is to encourage drafting of a contract to be as clear and explicit
as possible and to take into account as many foreseeable situations
as it can. The more radical the breach, the clearer the language
must be to satisfy the court.
In the light of the above case key aspects are drawn to our
attention highlighting a notable development in the area of
exclusion clauses.
- Exclusion clauses will be construed in a way which is not at
odds with the main purpose of the contract and may not protect a
deliberate personal repudiatory breach.
- Where a party is a corporate body, repudiation will be personal
if it is taken by the “controlling mind” of the body.
- Clear and strong language is required when drafting exclusion
clauses in order to rebut the presumption that an exclusion clause
should not cover a deliberate repudiatory breach - words such as
“under no circumstances” or “including deliberate repudiatory acts”
would be required.
- The availability of insurance is a relevant factor. It is less
likely to insure against deliberate personal repudiatory breaches
and so exemptions from liability may be rarer in such cases. A
stricter approach will be taken.
- The majority of terms and conditions in current contracts
contain terms and conditions similar to those in clause 17 in the
above case and may now need to be reviewed.
If you would like any further information or require any advice
concerning exclusion clauses and the drafting of your contract
please contact Ian Vicary at http://immediacy.weightmans.com/edit/ian.vicary@weightmans.com