Exclusion clauses and deliberate repudiatory breach: NETTV reconsidered

In the recent case of AstraZeneca UK Limited v Albermarle International Corporation and another [2011] EWHC 1574 (Comm), the High Court has criticised the "strong presumption" applied in Internet Broadcasting Corporation Ltd (t/a NETTV) and another v MAR LLC [2009] EWHC 844 (Ch) that an exclusion clause does not apply to a deliberate repudiatory breach. Gary Milner-Moore and Joanne Keillor comment.

Whilst this is an interesting examination of the NETTV decision, which has raised issues for commercial parties and commentators alike, the comments on this issue in AstraZeneca are obiter since the judge held that the breach in that case had been neither deliberate nor repudiatory. There is a need for commercial contract drafters to remain cautious in the drafting of exclusion clauses pending clear appellate authority and they may wish to include express wording to put the matter beyond doubt.

NETTV decision

In NETTV, the defendant gave notice purporting to terminate its agreement with the claimants with immediate effect and then ceased performing its obligations under the contract. The claimants issued proceedings seeking damages for loss of profits. The defendant admitted being in repudiatory breach of the agreement, but sought to rely on an exclusion clause which provided that neither party would be liable to the other "for any damage to or loss of data, loss of profit, anticipated revenues, anticipated savings, goodwill or business opportunity, or for any indirect or consequential loss or damage".

Gabriel Moss QC, sitting as a Deputy High Court Judge, held that there is a strong rebuttable presumption that an exclusion clause should not apply to a deliberate, repudiatory breach of contract. Very "clear" or "strong" language would be required to persuade a court that the parties intended an exclusion clause to cover such a breach (and particularly clear language would be needed in the case of deliberate "personal" wrongdoing, i.e. by the controlling mind of the company). Applying the presumption, the clause was held to be ineffective as it did not expressly state that it was intended to cover deliberate wrongdoing, let alone deliberate personal repudiatory wrongdoing.

This decision was thought by some to be inconsistent with the modern approach to contractual construction, as stated by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society (No.1) [1997] UKHL 28. This approach envisages the court looking for the meaning the contract would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the contract (the "factual matrix"). In West Bromwich, Lord Hoffmann stated that "almost all the old intellectual baggage of 'legal' interpretation of contracts has been discarded". The existence of a strong presumption arguably contradicts this.

The courts have historically construed exclusion clauses strictly against the party seeking to rely on the clause. Other rules, principles and presumptions were developed, such as the need for express words to exclude liability for negligent breaches of contract encapsulated in the Privy Council case of R v Canada SS Lines Ltd [1952] AC 192 (as tempered by cases such as HIH Casualty and General v Chase Manhattan [2003] UKHL 6). It was also at one time supposed that a party would be precluded from relying on an exclusion clause where he had been guilty of a fundamental breach of contract or the breach of a fundamental term. However, this was firmly rejected by the House of Lords in Photo Production Ltd v Securicor [1980] AC 827. To some, the NETTV decision sought to resurrect aspects of the fundamental breach approach rejected in Photo Productions.

The NETTV case was itself initially subject to appeal, but that appeal was not pursued. The High Court has now reconsidered these issues in the AstraZeneca case.

AstraZeneca decision

A dispute arose between AstraZeneca (AZ) and Albemarle under a supply agreement for pharmaceutical products. Albermarle terminated the supply agreement. There were many factual issues and subsidiary points of construction. However, for present purposes, the point of greatest interest was the contractual limitation provision (clause M) which stated: "No claims by BUYER of any kind, whether as to the products delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product in respect of which such damages are claimed…In no case shall BUYER or SELLER be liable for loss of profits or incidental or consequential damages."

Mr Justice Flaux found that Albermarle was in breach of the supply agreement in failing to fulfil certain orders, but its breach was not so serious as to amount to a repudiation of the contract. Further, it was not deliberate, as it was made as part of a genuine (albeit mistaken) belief, on the basis of legal advice, that it was acting within its contractual rights. Pursuant to the first sentence of clause M, AZ's damages for that breach were limited to the purchase price of the relevant products under the agreement.

The Judge went on to consider AZ's case that clause M would not cover deliberate repudiatory breach. He did so on the basis that this had been fully argued, even though it was strictly irrelevant (and thus obiter) since he had concluded that there was no such breach on the facts. Flaux J stated that:

• The conclusion in NETTV about the application of a strong presumption and the need for "clear" and "strong" language is "wrong on the modern authorities and effectively seeks to revive the doctrine of fundamental breach… albeit under the guise of 'deliberate repudiatory breach'";
• Since Photo Production, the rejection of any doctrine of fundamental breach has continued, with the courts more inclined than ever to eradicate anomalous categories of case or obsolete principles which might lend credence to the survival of the doctrine;
• Whilst exclusion clauses are construed strictly against the party who seeks to rely on the clause, it is a question of construction of the clause in every case as to whether it covers the particular breach in question;
• The NETTV judgment is "heterodox and regressive and does not properly represent the current state of English law. If necessary, I would decline to follow it". Even if Albermarle's breach had been a deliberate repudiatory breach, the question of whether any liability for damages for that breach was limited by clause M would simply be one of construing the clause, albeit strictly, but without any presumption.
• In his view, the opening words of clause M ("No claims by [AZ] of any kind, whether as to products delivered or for non-delivery of the products") were "clearly wide enough" to cover the situation.

Comment

NETTV raised issues for commercial parties both as to the drafting of exclusion clauses and as to the interpretation of clauses in existing contracts.

It may be the case (even more so in the current economic climate) that a party walks away from a contract and then relies upon the exclusion/limitation clauses to exclude/limit their liability. These "breaches" are often deliberate and "personal" in the sense that they are carried out by the controlling mind of a corporate party to a contract. If NETTV is correct, express wording would be needed to make it clear that parties intended such breaches to be covered by an exclusion clause and careful consideration would be needed as to the wording of existing clauses and the possible need to amend those clauses.

Flaux J's comments about NETTV case were obiter, and are therefore persuasive rather than determinative. However, we understand that AstraZeneca has sought permission to appeal. We await any Court of Appeal judgment with interest, since this is an issue which would welcome clear appellate authority.

In the meantime, commercial contract drafters need to remain cautious. If AstraZeneca rather than NETTV is an accurate statement of the position, an exclusion clause may be interpreted to apply to a deliberate repudiatory breach, even in the absence of express words. However, in order to put the matter beyond any doubt as matters stand (and pending clear appellate authority), parties may wish to consider stating expressly whether or not it is intended that an exclusion clause will apply to a deliberate repudiatory breach.