Excluding Liability for Deliberate Breaches
INTERNET BROADCASTING CORPORATION (t/a NETTV) v MAR LLC [2009]
In this case, it was held that there is a presumption that a clause excluding liability for loss of profit should not cover liability arising from a deliberate decision to breach a contract (in this case a purported termination of a contract mid way through its term without cause) unless there was very clear and specific wording to show this was the parties’ intention.
facts:
NETTV and MAR had entered into an agreement for a minimum term of 3 years which MAR’s president then purported to terminate contrary to its terms. NETTV sued for damages (most of which was for lost profits – the contract having been profitable for both parties) and MAR admitted it had wrongfully ended the contract but tried to rely on the exclusion clause which stated it would not be liable “...for loss of profit, anticipated profit or business opportunity”.
decision:
- The Judge clearly felt minded to follow earlier judgments in finding that an exclusion clause could not apply in respect of a fundamental breach (which this ‘repudiatory’ breach certainly was). However, the Judge was bound by clear precedent in this respect which has long since established that exemption clauses can, in principle, apply to fundamental breaches.
- Faced with that obstacle, it had to be decided whether, as a matter of interpretation, the clause in question covered the breach that had in fact occurred. In this respect it was said that the fact that the breach was seemingly quite deliberate was relevant to the question of interpretation.
- The Court dismissed MAR’s argument that its exclusion clause gave it protection as there had been a deliberate fundamental breach by MAR’s president, liability for which was held to be not specifically covered by the wording of the clause in question.
- The Court deduced some key principles relevant to clauses excluding losses
arising from wrongful repudiatory breach:
- there is a very strong presumption against an exemption clause being construed to cover a deliberate repudiatory breach;
- words sufficient to cover such a breach should be very clear and strong. The example quoted by the Judge was ‘under no circumstances…’;
- as a matter of construction, an exemption clause will never normally be interpreted as extending to a situation which would defeat the main object of the contract or create commercial absurdity;
- a very strict approach is needed where the wrongful repudiatory breach was a decision to breach taken by the ‘controlling mind’ of a company such as, in this case, its president, as opposed to circumstances where the breach is caused by the acts or omissions of a less senior employee;
- where the damages resulting from a breach either cannot, or are unlikely to, be covered by insurance, this should be a factor in interpreting the clause restrictively. The Judge suspected that insurance would not be available in respect of the deliberate repudiation of a contract by a party (although query whether he is right on that point?).
points to note:
- Deliberate, repudiatory breaches are not likely to be covered by an exclusion clause. Very clear, strong words to the contrary would be required to rebut that presumption. It has to be said that this is not a particularly surprising conclusion given that this was a very extreme case.
- That is especially the case where the decision to commit a breach is taken by the 'controlling mind' of the business although query why the position should be different depending upon who takes the decision in question is unclear. It is surely arguable that the position should be the same whichever person takes the decision provided that they are acting within the scope of their authority and not ‘off on a frolic of their own’.
- A clause limiting or excluding liability in standard terms of business may well not pass the required reasonableness test under the Unfair Contract Terms Act 1977 (UCTA). UCTA was apparently acknowledged to be not applicable in this case although given that the exclusion arguably covered liability for negligence, that conclusion has to be doubtful as the UCTA reasonableness test applies to limitations or exclusions in respect of failures to use reasonable skill and care.
- The Judge commented that the purpose of an exclusion clause is to allocate ‘insurable risks’. This may be doubtful reasoning since exclusion clauses do not distinguish between insurable and non-insurable risks. The fact that insurance may not be available should, at least under UCTA, be a factor in assessing the reasonableness of the clause and could, perhaps be a factor in construing the clause, but to say that they do not address uninsurable risks probably goes too far in our view.
- The Judge took account of the fact that if the wording had been given its literal and natural meaning the claimant would effectively have been deprived of its only substantive remedy given that lost profits were its only real, substantial loss. The reality is that in certain circumstances the Courts do have discretion to interpret words and phrases otherwise than in accordance with their ordinary and natural meaning and this was a prime example of just that.