Exclusion clauses will not give protection where there has been a deliberate personal repudiatory breach of contract.
AUGUST 2009
There is much legislation governing the inclusion and use of exclusion clauses in contracts and such clauses are very difficult to enforce. In addition to the statutory requirements, courts are able to control the use of exclusion clauses through their interpretation of contracts and if a clause is at all ambiguous or uncertain it will generally be construed against the party that is seeking to rely on it.
The court will also look to the intention of the parties when interpreting an exemption clause. The more serious the breach, the clearer and more unambiguous the exclusion clause will have to be to convince the court that the parties intended to exclude their remedies for such a breach. For example, whilst there is no rule stating that liability may not be excluded for a fundamental breach of contract, a clause that attempts to effect such a major exemption will have to be particularly clear before it will be enforceable.
In the case of Internet Broadcasting Corporation Ltd (t/a NETTV) v MAR LLC (t/a MARHedge), Internet Broadcasting Corporation Ltd (“IBC”) had entered into an agreement with MAR LLC (“MAR”), by which IBC agreed to set up an internet television channel that would broadcast content provided by MAR. The agreement stated that it could not be terminated for three years unless one party committed a material breach of contract. The agreement also contained an exclusion clause, which purported to exclude liability for “loss of profit, anticipated profit, revenues, anticipated savings, goodwill or business opportunity, or for any indirect or consequential loss or damage”.
One year after the commencement of the agreement, MAR gave notice to IBC terminating the contract with immediate effect. IBC sued MAR for loss of profits, claiming that MAR had deliberately committed a repudiatory breach of the agreement. MAR sought to rely on the exclusion clause to avoid liability.
It was held that the exclusion clause was not sufficient to cover the deliberate breach committed by MAR. Firstly, there was a rebuttable presumption that the clause was not intended to cover a deliberate breach of contract. In addition, the court emphasised the personal nature of the breach. Where a breach is the fault of the person seeking to rely on the exclusion clause or, in the case of a company, by the relevant controlling mind of the company (usually being the directors) rather than, for example, an employee, it is very likely to be uninsurable. Therefore, an even stricter approach to construing the exclusion clause must be taken, as it is less likely that the parties would have intended the words of the clause to cover a deliberate personal repudiation than, for example, a repudiation by reason of vicarious liability.
The court decided that any reasonable businessman, reading the clause with an eye to an allocation of insurable risk, would understand that it did not extend to risks that were uninsurable, or very unlikely to be insurable, such as losses flowing from a deliberate, personal, repudiatory breach. As the exclusion clause did not contain any clear statement that deliberate wrongdoing was intended to be covered, it did not cover such wrongdoing.
The approach taken in this case demonstrates that where a party wishes to exclude all liability for breach of contract, including a deliberate personal breach, it will have to use very clear and strong language if it is to successfully persuade a court that the parties intended the words to cover such a case. Where such strong language is drafted into a contract, both parties should be aware that they will have no remedy if the other deliberately breaches the agreement. Where exclusion clauses are contained in existing contracts, parties should take care not to assume that they can be relied upon in all situations and might want to consider seeking advice before committing a deliberate repudiatory breach of contract.
If you would like any further information about the issues raised in this newsletter, or any other aspect of Corporate Law, please contact a member of Goodman Derrick LLPs Corporate Department on 0207 404 0606.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice.
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