Exemption clauses need strong words to survive deliberate, fundamental breaches, says High Court

Out-Law News | 06 May 2009 | 3:05 pm | 2 min. read

Someone who deliberately breaches a fundamental term of a contract generally cannot rely on exemptions in the contract to avoid liability to the other party without clear, strong language to that effect, the High Court has ruled.

The wording of a clause that purports to limit liability must demonstrate that the parties intend to apply the exemption to acts of deliberate wrongdoing by one party, according to the judge. The ruling could prompt changes to exemption clauses in some contracts.

When a breach of contract is fundamental it is called a repudiatory breach. There was a time when exemptions and limitations on liability in a contract did not operate in the face of repudiatory breaches.

A House of Lords ruling in 1980 in a case involving Photo Production Ltd changed that. That ruling said that a party to a contract could rely on exemptions from or limitations on liability for a repudiatory breach but only if the contract was very clear.

Applying that approach, the High Court has just ruled that an exemption clause did not cover a case of deliberate repudiatory breach. But the implication of the ruling is that future contracts may have to be even clearer about such exemptions.

NetTV was an online television company, and MARHedge an information services company in the financial services market. The two agreed to collaborate on online video content for the hedge fund industry.

After earning £600,000 in nine months, the venture came to a halt when MARHedge walked away from it and stopped providing content for the channel.

The resulting court case dealt with whether or not MARHedge could rely on a contractual clause that said neither party could be liable for damages for loss of profits to the other.

Mr G Moss QC, sitting as a deputy High Court Judge, said that the literal meaning of the words in a contract are not necessarily enough to allow someone to escape liability for his actions. "An exemption clause will never normally be interpreted as extending to a situation which would defeat the main object of the contract or create commercial absurdity, despite the literal meaning of the words used," he said.

He said that this was a case where the literal reading would not be just. "A literal reading of the exemption clause would enable either party deliberately and personally to repudiate at any time during the agreed period without any consequences as to lost profit," said Mr Moss.

The judge also said that the kind of termination of the contract in question in the case was one for which exemption should be rarer, because it was unlikely to be possible to insure against it.

"Although insurance is generally available for non-deliberate acts and for vicarious liability, I suspect that it is non-existent or very rare in the case of deliberate wrongful conduct by one contractual party repudiating the contract entirely. lt cannot therefore sensibly be the function of an exemption clause, in normal circumstances, to allocate insurable risk with regard to a deliberate repudiatory act by a party himself, as opposed to a servant or agent for that party," he ruled.

"If the parties intend an exemption clause to cover a deliberate repudiatory act by one party or either party personally, one would expect to see 'clear' language in the sense of 'strong' language, for example , 'including deliberate repudiatory acts by the parties to the contract themselves ...'," ruled Mr Moss.

"My conclusion on the preliminary issue is therefore that [the contract] does not cover the deliberate personal repudiatory breach in the present case," he said.

The likely impact of the ruling is uncertain. In particular, it is not clear if the judgment applies only to deliberate repudiatory breaches that are also personal. In the case before him, Mr Moss noted that the breach was caused by the act of the controlling mind of the company. It is unclear if a repudiatory breach that is caused by the decision of a large board of directors would be treated in the same way.

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