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.

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