Thursday, November 29, 2012

Indemnity clauses and criminal proceedings

Earlier this week, the Court of Appeal decided another interesting case involving contractual interpretation – this time interpreting and determining the scope of an indemnity clause. The case was one of the many fall-outs of the ongoing News of the World (“NOTW”) saga, and involved a claim brought by Mr Coulson, former editor of NOTW, against his former employers.

On the termination of Mr Coulson’s employment in 2007, News Group Newspapers Limited (“NGN”) and Mr Coulson had entered into an agreement which included the following clause:

To the extent that it is lawfully able to do so, [NGN] will pay any reasonable professional (including, without limitation, legal and accounting) costs and expenses properly incurred by [Mr Coulson] after the Termination Date [viz. 28 February 2007] which arise from his having to defend, or appear in, any administrative, regulatory, judicial or quasi-judicial proceedings* as a result of his having been the Editor of the News of the World.

In 2011, Mr Coulson was arrested as part of the investigations into NOTW; and he sought to recover from NGN the costs of defending the criminal proceedings brought against him. NGN agreed to indemnify him for costs incurred on account of the civil inquiries, but argued that the costs incurred in defending criminal proceedings were not recoverable under the indemnity clause. In his subsequent claim, Mr Coulson failed in the High Court, but succeeded on appeal in Andrew Coulson v News Group Newspapers Limited.

NGN denied liability to indemnify Mr Coulson for the costs incurred in defending the criminal proceedings on the principal ground that criminal proceedings fell outside the scope of the indemnity clause.

First, NGN argued that since illegal/criminal activities were not within the scope of Mr Coulson’s employment as editor, the criminal proceedings were not ‘a result of his having been the Editor of the News of the World’. Therefore, the costs and expenses of defending these proceedings were not recoverable pursuant to the clause.

Secondly, NGN contended that the clause only allowed the recovery of costs and expenses which were ‘reasonable’ and ‘properly incurred’. The costs incurred in defending criminal proceedings did not satisfy these requirements.

McCombe LJ, delivering the decision of the Court, rejected both these contentions. He observed that there was “nothing inherently objectionable” in a clause which applied to the defence of criminal proceedings; the applicability of the clause depended instead on the nexus between the employment and the subject matter of the criminal proceedings. The relevant question was “whether the criminal allegations arise out of how the employee went about the performance of his job or whether they arise out of some act having nothing whatever to do with performing the job”.

The Court of Appeal disagreed with the the judge at first instance that since Mr Coulson’s duties as editor comprised only lawful duties, it cannot have been intended that activities outside his lawful responsibilities would be covered by the indemnity. If that were true, the clause would also not apply to libel or contempt of court proceedings, which would certainly be expected to fall within the scope of an indemnity granted to the editor of a newspaper. Admittedly, if the charge arose out of conduct which had nothing whatever to do with Mr Coulson’s job or its attempted performance, the clause would not apply. However, the charges here arose “out of the allegedly criminal manner of his performance of his role as editor” and therefore were covered by the clause.

As to whether the costs were ‘reasonable’ and ‘properly incurred’, the Court held that ‘reasonable’ refers only to the quantum claimed and not the circumstances in which the costs were incurred. The phrase ‘properly incurred’ posed the question whether Mr Coulson could claim the costs only if his defence was successful, or whether even costs incurred in unsuccessfully defending the criminal proceedings could be recovered. Applying the principles laid down in Investor Compensation Scheme, the Court held that given the circumstances at the time of the agreement, the costs of defending criminal charges cannot have been outside the contemplation of the parties. It would be “artificial in such circumstances to have expected that the indemnity would be subject to a scrutiny of the nature or merits of the intended defence to the charges or subject to the outcome of the trial itself … ‘properly incurred’ in this contract simply means costs of a nature properly to be regarded as required in the defence of the particular proceedings in question”.

In addition, NGN relied on the common law maxim ex turpi causa non oritur actio, which states that a claim cannot be founded on a criminal/illegal act. This is a controversial area in English law, with conflicting decisions on the strength of the nexus required between the illegality and the claim. However, in this case, the Court of Appeal (and the judge at first instance) rightly held that “there is nothing contrary to public policy in one person providing funds to another for that other to defend himself against a criminal charge”. If the claim had sought to recover a fine imposed for an illegality, the maxim would apply. It did not, however, have the effect of precluding a claim for recovering costs incurred in merely defending criminal proceedings.

This decision is of significance for indemnity clauses in employment or retainer contracts and even for D&O (directors and officers) insurance policies. Many such contracts contain indemnity clauses which are similarly widely drafted. Admittedly, the special circumstances of this case meant that criminal proceedings were certainly in the contemplation of the parties at the time of the agreement. It is also important to note that the Court of Appeal relied on the fact that this indemnity clause was wider than the clause in Mr Coulson’s employment contract, which indicated that it was intended to have a wider scope. However, notwithstanding these distinguishing aspects of the case, some important lessons to take away are:

• The alleged criminality of the conduct does not necessarily take it outside scope of employment- if the charge arises from the criminal manner of performing the job, it can fall within the indemnity clause;

• ‘Reasonable costs’ usually refers to the quantum of the costs and not the purpose for which they have been incurred;

• ‘Properly incurred’ does not require that the criminal proceedings be defended successfully. (However, it is not clear to what extent the Court’s conclusion on this point was influenced by the peculiar circumstances of this case); and

• The ex turpi causa maxim cannot be applied to reject a claim to recover the costs of defending criminal proceedings.

* The interpretation of 'proceedings' (and whether this required the bringing of a charge) was also an issue in this case. However, given its procedural nature, this issue is of limited relevance for present purposes.

Settlement of Charges Between Indian Brokerages and the US SEC

Earlier this week, four Indian brokerage houses entered into settlements with the US Securities and Exchange Commission (SEC) for charges of carrying on brokerages services to institutional investors in the United States (US) without registration under the US Securities Exchange Act of 1934 (the Exchange Act). The SEC’s press release and the orders pertaining to the four brokerages are available here.

SEC’s charge arose on the ground that the brokerages were carrying out activities in the US that required registration under the Exchange Act, unless they were able to avail of exemptions. However, none of this was obtained by the brokerages. As the SEC notes, “Section 15(a) of the Exchange Act generally prohibits a broker or dealer from making use of the mails or any instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of any security without being registered with the [SEC] as a broker-dealer”. SEC charged the brokerages for violation of this provision and the relevant rules.

It is important to consider the type of activities that were carried out by the brokerages, which were said to contravene US securities laws. These include:

-       Travel to the US to meet with US investors;

-       Contact with US investors through email and telephone calls;

-       Transmission of research reports on Indian companies to US investors;

-       Purchase and sale of shares on Indian stock exchanges on behalf of US investors;

-       Entering into commission sharing agreements with US registered broker-dealers, and soliciting and providing brokerage services through them;

-       Organizing and sponsoring investor conferences in the US;

-       Participation as a broker in offerings of Indian companies, including initial public offerings, follow-on public offerings and qualified institutional placements (QIPs), which were carried predominantly in India but with some shares being marketed and sold to US investors.

Although the charges were settled by the brokerages without accepting or denying the findings of the SEC, the above discussion provides some guidance as to the type of activities by Indian brokerages that could be called into question by US securities laws.

Of course, the most viable option from a regulatory standpoint would be for brokerages carrying out such activities to register themselves with the SEC. This is particularly relevant given the effects of globalization and the cross-border nature of the securities markets. Several domestic Indian offerings of securities are extensively marketed to overseas investors. Hence, compliance with securities laws in those jurisdictions becomes important from a regulatory perspective. Given that both the substantive laws and enforcement in the US are quite strong, we find instances such as the present charges/settlements, but the same would apply in other leading capital market jurisdictions as well.

Friday, November 23, 2012

The crisis that SAT is heading towards

On November 1, 2012, this blog had a post on a writ petition relating to the absence of a Presiding Officer in the Securities Appellate Tribunal (“SAT”).   I wrote a piece in the Business Standard in my column on November 12, 2012 about how the SAT needs to be handled with care.

Since then, some more facts have become apparent.  One of the remaining two members of the SAT will retire right after Christmas, which would render the SAT as a dysfunctional one-man tribunal again – a position it was placed in, around January 2009.   It would not be open to the SAT to then conduct any final hearing, and it may only admit appeals and grant interim relief.

Worse, members of the SAT are selected by a committee comprising the Union Finance Secretary, the Reserve Bank of India Governor and the Presiding Officer of the SAT.  The Presiding Officer chairs this committee.  Now, there is no Presiding Officer and therefore, appointment of another member, could itself be rendered difficult, and could lead to litigation in the current environment, where any statutory appointment is prone to being a subject matter of challenge.

Thursday, November 22, 2012

Deliberate Repudiatory Breach and Exemption Clauses - Part II

An earlier post discussed the High Court decision in NetTV, which held that there is a presumption against an exemption clause in a contract also applying to deliberate repudiatory breaches, unless the clause was clearly intended to apply to such breaches. However, in a subsequent decision in June last year, Flaux J severely criticised the line of reasoning adopted in NetTV, considering it “heterodox and regrressive”.

In Astrazeneca v Albemarle (commented on earlier on a different point), the primary issue before the court was whether the defendant’s right of first refusal had been breached, and if so, whether the exemption clause limited the claimant’s liability for lost profits. In addition, there was an issue of whether the defendant’s subsequent refusal to perform the contract was repudiatory, and whether the exemption clause applied to such breaches. The Court held that the right of first refusal was in fact breached, and that the exemption clause did not apply (on grounds superficially similar, but in fact different from the repugnance exception discussed in the earlier post). In addition, the Court also found that there had been no deliberate repudiatory breach of the contract by the defendant, since it genuinely but mistakenly believed that it was acting within its legal rights in refusing to perform the contract. Therefore, the issue of whether losses resulting from such a breach fell outside the scope of the exemption clause did not fall to be decided. However, since this issue was fully argued by both sides, Flaux J nevertheless expressed his view.

Flaux J observes that Moss QC’s reasoning in NetTV proceeds on an incorrect reading of Suisse Atlantique and Securicor, and is not in keeping with the modern English case law moving away from the concept of fundamental breach. He relies on quotations from these two cases which indicate that the House of Lords rejected any rule which distinguished between breaches based on whether they were deliberate, and also rejected the existence of the sort of presumption proposed by Moss QC. Based on this review, Flaux J concluded that there is no place for any presumption when interpreting the scope of an exemption clause. The question of whether an exemption clause applied to a given case was a pure question of construction. Since the clause in question here stated: “No claims by [AZ] of any kind, whether as to the products delivered or for non-delivery of the products”, Flaux J observed that, if it required to be decided, he would have held that the clause was sufficiently clearly worded to cover any breach of the delivery obligations, whether deliberate or otherwise.

For starters, there is no doubt, based on a reading of Securicor and the rich jurisprudence of the English courts on the issue of contractual interpretation (the latest addition to which is Campbell v Daejan Properties), that when interpreting a contract the intention of the parties reign supreme, and blanket rules are to be avoided. Therefore, if NetTV held that in the absence of express language, irrespective of the parties’ intentions, an exclusion clause will not apply to deliberate repudiatory breaches- it would have been incorrect.

However, Moss QC in NetTV does not seem to be laying down such a blanket rule. All he seems to be saying is that when interpreting an exclusion clause, there is a presumption that parties did not intend deliberate repudiatory breaches to be covered by it, unless the circumstances suggest that they did. Admittedly, the relevant ‘circumstances’ need not be restricted to the language of the clause itself (though some parts of NetTV convey this impression). If it is accepted that the presumption may be rebutted either by express contractual language or other evidence of parties’ intentions, Moss QC’s proposition seems entirely sound.

As to Flaux J’s reliance on Securicor, it important to note that the appeal in Securicor was against a Court of Appeal decision which held that “where there had been a fundamental breach by a party to a contract, there was a rule of law which prevented him from relying upon any exclusion clause appearing in the contract, whatever its wording might be” (per Lord Diplock). That is the sort of rule of law Lord Wilberforce had in mind when he dismissed the “the superimposition of a judicially invented rule of law”. Given that Moss QC’s line of reasoning is more nuanced, and defers to parties’ intention, Flaux J’s labelling of NetTV as “heterodox and regressive” may have been unwarranted.

The Court of Appeal in Shared Network Services has now granted leave to appeal against another decision of Flaux J, in which he presumably follows his reasoning in Astrazeneca. Lewison LJ (when granting leave) states that “While I consider that Flaux J was right, and that the appeal does not have a real prospect of success, the point is an important one and the conflict of authority should be resolved by the Court of Appeal”. Flaux J’s first instance decision in Shared Network Services is not available, and therefore it is not clear whether Lewison LJ considers that Flaux J is right as a matter of law, or thinks that he came to the right decision on the facts of the specific case, irrespective of what the position in law is. Given that leave to appeal has been granted, the latter seems the more plausible explanation; though in the absence of a real prospect of success, it is likely that the appeal will not be pursued further.

Until this conflict is resolved, either in Shared Network Services or a different case, this area of law remains unclear, and of significance to both contentious and transactional lawyers:

• Purely as a matter of precedent, Moss QC’s reasoning forms part of the ratio in NetTV and therefore would trump Flaux J’s obiter observations in Astrazeneca. Therefore, when interpreting an exclusion clause which is worded simply as including “any breach”, in the absence of evidence that parties so intended, the better view is that it does not include deliberate repudiatory breaches.

• The conflict also poses an additional consideration when advising on the drafting of contracts governed by English law. Although suggesting the express inclusion of deliberate repudiatory breaches in an exclusion clause may send wrong signals to the other side, if the intention of the parties is to make the clause completely watertight, this is an issue requiring discussion.

Tuesday, November 20, 2012

Should Government Companies Be Exempt From the Takeover Regulations?

Today’s Business Standard carries a report indicating that SEBI is in the process of considering a general exemption to the Government from making a mandatory open offer under SEBI’s Takeover Regulations 2011. This comes in the wake of two specific exemptions granted by SEBI this year in the case of IDBI Bank and IFCI whereby the Government was given special dispensation from making an open offer when it increased its stake in the companies due to conversion of securities into equity shares.

Currently, under the 2011 Regulations, SEBI has the power to grant exemptions on a case-by-case basis, which it has exercised in the two cases mentioned above. But, any grant of blanket exemptions to the Government would be a retrograde step. There is no compelling reason for the Government to be treated on a special footing compared to private acquirers because the Regulations are in the end analysis concerned with the protection of minority shareholders in a listed company. By creating such an exemption, SEBI would be discriminating against shareholders of government companies, as they would lack an exit opportunity through an open offer that is available to shareholders in non-government companies.

Moreover, the grant of such dispensation to the Government does not augur well in terms of ensuring compliance with securities regulation in the interest of investors. The Government ought to be setting an example by undertaking the obligations under securities regulation such as the Takeover Regulations and paving the way for ensuring compliance by private acquirers, thereby protecting the interests of minority shareholders in public listed companies. This method of carving out special provisions for government companies, that began with the lower minimum shareholding of 10% rather than the larger 25% limit for other companies, stands no reason when judged against the purpose of the Takeover Regulations, which is to provide an equal exit opportunity to minority shareholders when there is a change in control of the company.

Such moves could give rise to governance implications in a broader sense. For example, there is already a dispute over the governance matters in Coal India Limited between the Government, which is the controlling shareholder, and a minority shareholder, which has also resulted in litigation that is pending before the Indian courts. Such matters could also be significant in the context of the government disinvestment programme where the limitation of protection to minority shareholders in listed companies substantially owned by the Government could impact the success (or otherwise) of such programme.

It would therefore be preferable for SEBI to exercise the power of exemption on a case-by-case basis as per the current practice. That would not only provide the flexibility to deal with specific circumstances such as those that arose in the IFCI and IDBI Bank cases, but at the same time it would require SEBI to apply its mind to individual cases rather than to deal with them on an overall basis as proposed.

Sunday, November 18, 2012

Front running not a crime, if committed by non-intermediaries - SAT

As highlighted in an earlier post, the Securities Appellate Tribunal (SAT) has held that front running, carried out by a non-intermediary, is not in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations”).
The facts, as narrated in the SAT order, are simple enough. An employee (“D"), designated as a portfolio manager of a certain foreign institutional investor (FII), came to know of certain proposed large trades by such FII. He organized with his cousins to carry out their own personal trades ahead of such trades. The next step was to reverse them when the FII itself came to trade. Considering the size of the proposed FII trades, it appeared that if D traded first, he would be able to move the price in a particular direction. This movement, coupled with the trades of the FII, would help them make a profit in the reserve transaction he would carry out with such FII. He (with his cousin) allegedly made, and consistently too, such profits amounting to approximately Rs. 1.50 crores.
The Adjudicating Officer held that these transactions were in violation of Regulation 3(a) to 3(d) of the PFUTP Regulations. A penalty aggregating to Rs. 11 crores was levied on D and his cousins.

On appeal, the SAT reversed the order of the AO on two grounds.

Firstly, it took a view that front running was made a specific violation of the PFUTP Regulations and it referred to front running by intermediaries only. It compared with the PFUTP Regulations of 1995 which, according to SAT, covered front running by “any person”.  Since D and his cousins were not intermediaries, this clause could not apply to them.

In the words of SAT, “In the absence of any specific provision in the Act, rules or regulations prohibiting front running by a person other than an intermediary, we are of the view that the appellants cannot be held guilty of the charges levelled against them.”.

Secondly, it held that front running at best amounted to a fraud by D on his employers. It also noted that the employer had punished him by, effectively, making him resign. It did not, SAT held, amounted to a manipulative practice or a fraud on the market. Hence, the provisions of Regulations 3(a) to 3(d) could not apply to the present facts.

As the SAT observed, “The alleged fraud on the part of Dipak may be a fraud against its employer for which the employer has taken necessary action. In the absence of any specific provision in law, it cannot be said that a fraud has been played on the market or market has been manipulated by the appellants when all transactions were screen based at the prevalent market price.”

The decision raises several concerns and questions. There is surely some point to SAT’s view that unless there is a manipulation in or fraud on the market, a purely private wrong cannot be punished by SEBI unless there is a specific provision prohibiting it. However, the question still remains that when such a wrong is carried out in the market, how private does it indeed remain? And if it remains unpunished, whether it will affect the credibility of the market?

The question also arises whether the decision was arrived at because the charges were framed too narrowly limiting it to specific clauses in the PFUTP Regulations. Or whether the decision has a broader scope and that such decision would apply generally leaving with SEBI no powers – either under the other clauses of the PFUTP Regulations or under the Act - to deal with such acts.

There is another point that the SAT made which does not seem to be correct. It held that the 2003 PFUTP Regulations made a departure from the 1995 PFUTP Regulations. The 1995 PFUTP Regulations, as per SAT, prohibited front running by any person. The 2003 PFUTP Regulations, however, prohibited front running by intermediaries only.

SAT observed, “We are inclined to agree with learned counsel for the appellants that the 1995 Regulations prohibited front running by any person dealing in the securities market and a departure has been made in the Regulations of 2003 whereby front running has been prohibited only by intermediaries.” (emphasis supplied)

The relevant Regulation 6 does start with the phrase “No person shall…”. However, clause (b), which seems to be the relevant clause SAT refers to as specifically referring to front running, reads as follows:-

“(No person shall) on his own behalf or on behalf of any person, knowingly buy, sell or otherwise deal in securities, pending the execution of any order of his client relating to the same security for purchase, sale or other dealings in respect of securities.

Nothing contained in this clause shall apply where according to the clients instruction, the transaction for the client is to be effected only under specified conditions or in specified circumstances;” (emphasis supplied)

Thus, while the prohibition is on any person, the prohibition applies provided such dealing is “pending the execution of any order of his client”.

Having said that, it is also clear that the present facts and decision was not with reference to 1995 Regulations but the 2003 Regulations and they do refer specifically to intermediaries. Still, this distinction sought to be made appears to be erroneous.

It seems certain, considering the nature of the transaction, and the amounts involved and the other cases of a similar nature, that SEBI will appeal this case before the Supreme Court.

Friday, November 16, 2012

Front-running is no crime, says SAT

The Securities Appellate Tribunal has given an interesting ruling that front running by an investor (who is not an intermediary) is not a violation of the SEBI FUTP Regulations 2003. It held this essentially on two grounds. Firstly, it held that the 2003 Regulations consider front running as a violation only if it is carried out by an intermediary but not if carried out by others. Secondly, even otherwise, it neither amounts to manipulation nor a fraud on the market. The orders levying penalties on the appellants were thus set aside.

While this case and relevant facts will be discussed in a separate detailed article here later, a quick and brief background may be made here as a summary. The appellant was a portfolio manager of a foreign institutional investor (FII). It was alleged that the appellant, along with other parties, carried out front running of the trades of the FII. That is to say, the appellant was alleged to have carried out trades before and in anticipation of the trades of the FII and then reversed the trades when the FII actually carried out such trades. Thus, he - in concert with his alleged associates - purchased shares when he anticipated that the FII will purchase shares. When the FII actually purchased shares, he sold the shares. He was thus able to profit from such transactions. He and his alleged associates were charged with front running and thus violation of the SEBI FUTP 2003 and penalties were levied. However, these orders were reversed by the SAT.

Thursday, November 15, 2012

Deliberate Repudiatory Breach and Exemption Clauses - Part I

Earlier this year, the Court of Appeal granted leave to appeal from a decision of Flaux J in Shared Network Services v Nextiraone, on the basis that the case was a good vehicle to resolve an important question of law. Although there is no certainty as to whether this appeal will be heard, and if so, when, the question of law highlighted by the Court of Appeal is one of great significance for drafting contracts governed by English law. The question is- Is there any distinction between deliberate repudiatory breaches of contract and other types of contractual breaches when considering the application of exemption clauses?

Before delving into the issue itself, it is important to remind oneself that (unlike civilian systems) English law rejects the concept of fundamental breach. After the House of Lords decisions in Suisse Atlantique and Photo Production v Securicor, the settled position is that English law treats all breaches of contract equally, and there is no difference between a ‘serious’ or ‘fundamental’ breach of contract and an ‘ordinary’ or ‘non-fundamental’ breach of contract. Therefore, there is no rule of law that an exemption clause does not exclude liability for some types of contractual breaches- the scope of each exemption clause is to be determined on a case-by-case basis by the process of ordinary contractual interpretation. This process of contractual interpretation would involve objectively determining the meaning of the clause in light of the parties’ intentions and the context. However, what these cases do not conclusively decide is whether the nature of the breach is a factor a Court can consider in this process of interpretation, and it is this ambiguity which forms the basis of conflict between two relatively recent High Court decisions.

In NetTV v MARHedge, the High Court was faced with a slightly peculiar fact situation where there was an admittedly deliberate repudiatory breach of contract by the defendant, and the only question before the Court was whether the exemption clause in the contract excluded the defendant’s liability for the claimant’s lost profits. The relevant clause of the contract provided- “Subject to clause 16 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”.

The defendant contended that this was a widely drafted limitation of liability clause, and would exclude liability for lost profits irrespective of how this loss was caused. However, Moss QC (sitting at Deputy High Court Judge) rejected this argument. He accepted (albeit with some regret) that he was bound by the decisions of the House of Lords in Suisse Atlantique and Securicor and that there was no rule of law which prevented an exemption clause from excluding liability for deliberate repudiatory breaches of contract. He also accepted that the scope of an exemption clause had to be determined by a process of contractual interpretation. However, since this process of contractual interpretation required an examination of the intention of the parties, he concluded that the deliberateness of the breach is a relevant factor at this stage of the inquiry. Relying on quotes from the speeches in Suisse Atlantique and Securiror, he held that there is a strong presumption that parties do not intend an exemption clause to apply to deliberate repudiatory breaches. This presumption can, however, be rebutted if the parties use clear language to include such deliberate repudiatory breaches within the scope of the exemption clause. An example of such clear language would be the inclusion of “under no circumstances” or the specification of deliberate repudiatory breach as one of the scenarios to which the exemption clause applies.

It is important to note the decision in euNetworks Fiber UK Limited v Abovenet Communications UK Limited, where Briggs J had held that notwithstanding the decisions in Suisse Atlantique and Securicor, "if the effect of an exclusion clause is to deprive the agreement of the legal characteristics of a contract, by conferring on one party to the liberty to ignore his obligations with impunity, the exclusion may be held to be repugnant to the contract and of no effect". However, Moss QC specifically discusses this exception and observes that this is different from the rule he was applying in this case. He observes that the repugnance exception is relevant only in cases where prima facie the exemption clause applies to a particular breach. In cases where there is a deliberate repudiatory breach, the exemption clause does not apply at all, and the repugnance exception is not attracted.

On this basis, Moss QC held on facts that the exemption clause in this case, though widely drafted, was not to be interpreted literally and did not exclude liability for loss of profits caused by a deliberate repudiatory breach. In construing the scope of an exemption clause (as when interpreting any contractual term), the intention of parties is relevant. Parties would not ordinarily be expected to exclude liability for deliberate repudiatory breaches and therefore unless the exemption clause expressly applied to such breaches, it was inapplicable even if widely drafted.

In a subsequent decision, however, Flaux J has severely criticised this line of reasoning; ultimately leading to the recognition of this issue by the Court of Appeal in Shared Network Services. Flaux J’s reasoning, the recent developments in the Court of Appeal and analysis of the two stances will follow in a subsequent post.