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.

1 comment:

Renu Gupta said...

Very interesting post.
Does the aspect of a fundamental breach, not recognised under English law, have any other consequence on the rights available to a party?