In a recent and potentially important decision (Internet Broadcasting Corporation Ltd (t/a NETTV) v MAR LLC (t/a MARHedge)) the High Court has clarified the extent to which exemption clauses can be relied on to avoid paying damages for deliberate personal repudiatory breaches of contract.
Exemption clauses seek to absolve a party from some or all liability arising under a contract, sometimes by capping the defaulting party’s liability to a fixed amount (eg the cost of any initial investment) and/or excluding that party’s liability for certain types of damage altogether (eg liability for the innocent party’s loss of profits).
A repudiatory breach of contract is a breach which is sufficiently serious to allow the innocent party both to treat itself as discharged from its further liabilities under the contract and to sue for damages.
In the NetTV case, the parties entered into an agreement in May 2005 whereby the claimant agreed to provide interactive internet TV services to the defendant, a provider of services to the hedge fund sector. The parties agreed to share revenues generated under the agreement and the agreement had an initial term of at least 3 years. The agreement included an exemption clause stating:
“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.”
In May 2006, the defendant terminated the agreement with immediate effect. It gave no reason for doing so although by the time of the trial it had accepted that it had no contractual justification for terminating. In other words, through no fault of the claimant, the defendant simply turned its back on the agreement resulting in the claimant’s loss of its set-up investments and the profits it had expected to make over the full 3 years of the agreement. The defendant’s termination amounted to a deliberate repudiatory breach of the agreement. At trial, the defendant sought to rely on the exemption clause to limit its liability to the claimant.
After careful deliberation and analysis, the court rejected this defence, finding for the claimant notwithstanding the exemption clause.
A key factor in this case was that the defendant’s decision to terminate the agreement was “personal” by which the court meant that the decision was taken by the defendant (or its “controlling mind”) and had not been brought about by or imposed on the defendant vicariously as a result of the acts or omissions of any third parties.
In its judgment the court made the following points:
- There is nothing in law preventing parties to a contract from agreeing to exclude all types of liability including deliberate personal wrongdoings. If, however, the exclusion clause relied on is ambiguous then the normal rules of contractual interpretation will apply.
- As regards contractual interpretation, the exemption clause will be construed against the party seeking to rely on it and there will be a strong presumption against that clause being construed so as to cover deliberate personal wrongdoings.
- This presumption is rebuttable but the party seeking to rely on the exemption clause must point to very clear and strong language, especially where that clause is intended to cover deliberate personal wrongdoings in respect of which insurance is not available or is unlikely to be available.
- The strong presumption against stretching the effect of exemption clauses to deliberate personal wrongdoings means that words which, in their literal sense, arguably cover deliberate wrongdoings, will not be construed so as to do that if that would defeat the “main purpose” of the contract or would allow a party to breach its contractual obligations with impunity.
- The proper function of an exemption clause is to allocate insurable risk between the parties. An exemption clause will not normally be construed so as to cover any uninsurable risk including, in particular, deliberate personal wrongdoings by a party to the contract.
Conclusion
The message this judgment sends is that, in certain circumstances, exemption clauses may not have the effect the parties think they do. Some further thoughts are:
- If you are thinking of dropping tools and walking away from a contract in the hope of relying on an exemption clause, think again. Check your contract carefully and seek legal advice.
- Before relying on the exemption clause ahead of a deliberate personal breach of contract, consider whether any loss that is likely to arise is insured or insurable. If it is not then the clause is unlikely to assist you. Insurance is unlikely to be available for deliberate acts of contractual default, ie where there is no accidental or forced occurrence.
- The court confirmed its dislike of exemption clauses which, if deployed, would defeat the main purpose of a contract and/or leave an innocent party with no real redress. It is important to consider carefully the position of the innocent party.
- If you do wish to exclude liability for deliberate personal wrongdoings, clear and strong terms must be used. Had the exemption clause in the NetTV case been worded as follows, it is likely that the defendant could successfully have relied upon it against the claimant:
“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 even if such losses [etc] result from the parties’ deliberate personal repudiatory breach of this agreement.”