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NETTV v MARHedge [2009] EWHC 844 (Ch)
It is common for commercial parties to a contract to try to limit their exposure to liability through the use of an exemption clause. Can a party rely on such a clause, however, when it is in deliberate repudiatory breach of contract?
In a claim for loss of profit under an internet broadcasting joint venture agreement, Mr Gabriel Moss QC, sitting as a deputy High Court judge, has reaffirmed that there is a strong, albeit rebuttable, presumption that exemption clauses do not cover deliberate repudiatory breaches of contract unless the contract contains clear, strong language to that effect. There is a particular need to use clear strong language where the breach is likely to be uninsurable. The deputy judge also advocated a “stricter approach” to construing exemption clauses in cases where the wrongdoing is personal to the party in breach.
Background
The claimant, NETTV, constructed interactive internet television platforms. In May 2005 it entered into an agreement with the defendant, MARHedge, an information services company in the hedge fund industry, under which NETTV undertook to set up and provide an internet television channel located at www.marhedge.tv on which would be broadcast material agreed with MARHedge. MARHedge agreed, amongst other things, that it would support and publicise the services of NETTV, provide it with promotional material from MARHedge’s existing print media and promote any financial services companies that agreed to pay NETTV for a channel and place that channel on MARHedge TV. The agreement could not be terminated for three years other than in response to a material breach which was not remedied within 30 days of a notice requiring such a cure.
After some tinkering with the business model, the venture became profitable. In May 2006, however, MARHedge gave notice purporting to terminate the agreement with immediate effect and stopped providing content for the channel. NETTV sued for loss of profits. MARHedge admitted that it had committed a repudiatory breach of the agreement and had no contractual justification for doing so. It sought, however, to rely on the agreement’s exemption clause which read as follows:
… 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 (emphasis added).
The High Court considered as a preliminary issue whether the exemption clause in this case applied to MARHedge’s admitted repudiatory breach of contract.
The law
Gabriel Moss QC reviewed the authorities on deliberate repudiatory breach (in particular Suisse Atlantique [1967] 1 AC 361 and Photo Productions v Securicor [1980] 1 AC 827) and deduced the following principles:
- There is no rule of law applicable which prevents exemption clauses applying to cases of fundamental breach and the question is one of construction of the particular clause in question.
- There is, however, a presumption, which appears to be a strong presumption, against the exemption clause being construed so as to cover deliberate, repudiatory breach.
- This presumption is rebuttable, but the words needed to rebut the presumption need to be very “clear” in the sense of using “strong” language such as “under no circumstances….” The more radical the breach, the stronger the language needed to exclude liability.
- There is also a particular need to use “clear”, in the sense of “strong”, language where the exemption clause is intended to cover deliberate wrongdoing by a party in respect of a breach which cannot, or is unlikely to be, covered by insurance. Language such as “including deliberate repudiatory acts by [the parties to the contract] themselves…” would need to be used in such a case.
- Words which, in a literal sense, cover a deliberate repudiatory breach will not be construed so as to do so if that would defeat the “main object” of the contract or create commercial absurdity.
- The proper function between commercial parties at arm’s length and with equal bargaining power of an exemption clause is to allocate insurable risk, so that an exemption clause should not normally be construed so as to cover an uninsurable risk or one very unlikely to be capable of being insured. Although insurance would generally be available for non-deliberate acts and for vicarious liability for servants or agents of a party to a contract, the deputy judge suspected that it would be non-existent or very rare in the case of deliberate wrongdoing by the party to the contract itself.
- Words which in a literal sense cover a deliberate repudiatory breach cannot be relied upon if they are “repugnant”, effectively meaning that a party can breach its obligations with impunity.
The deputy judge considered in particular that a stricter approach to construction should be taken where the wrongdoing is personal to the party who is the wrongdoer as opposed, for example, to cases where the repudiation is by reason of vicarious liability. He quoted as “indirect support” for the “stricter approach”, the Privy Council case of Port Swettenham v TW Wu and Co (M) Sdn. Bhd. [1979] AC 580 which distinguished between loss occurring with the actual fault or privity of the defendants, which would include “anyone who could properly be described as the alter ego of the defendants, for example, their managing director”, and that of its servants.
Decision The deputy judge found in favour of NETTV, holding that although the exemption clause was not invalid, on the basis of the above principles it did not apply in relation to a deliberate and wrongful breach. The deliberate, personal repudiation of the agreement by Mr Lynch (the President of MARHedge) as the relevant mind of the company was either uninsurable or very unlikely to be insurable. The words in the agreement’s exemption clause contained no strong language and no clear statement that deliberate wrongdoing was intended to be covered, let alone deliberate, personal and repudiatory wrongdoing, and the deputy judge could not imagine that any reasonable businessman would understand the words to cover such a situation.
The deputy judge further found that to interpret the exemption clause literally would defeat the main object of the agreement, enabling either party deliberately and personally to repudiate it at any time without any consequences as to lost profit, even though loss of profit was likely to be the only very serious consequence for either party of repudiation.
The deputy judge rejected MARHedge’s argument that the exemption clause allowed NETTV to claim for direct losses such as its set up costs and as such it did not allow MARHedge to commit a deliberate breach of its obligations with impunity, and was therefore not repugnant and was capable of being construed in its literal terms. NETTV’s set up costs were likely to be modest compared to the potential profit if the venture were successful. Having to pay set up costs was therefore unlikely to be a serious deterrent to a deliberate and personal repudiatory breach. Moreover, if this argument was correct but the situation were reversed, a repudiatory breach of the agreement by NETTV would have been free of any meaningful cost to NETTV, as MARHedge was unlikely to have significant (if any) set up costs. To view the exemption clause in this way would effectively deprive NETTV of any realistic remedy.
Comment
This case confirms the already established principle that a party cannot rely on an exemption clause to exclude liability for a deliberate, repudiatory breach of contract unless the clause contains clear, strong language to that effect. The deputy judge’s “stricter approach” to construing deliberate, repudiatory contractual breaches that are personal, however, creates a distinction between types of breach that might not always be easy to apply. The deputy judge noted that the breach was personal in that it was caused by the “controlling mind” of MARHedge, who happened to be its President. He distinguished this from a case where a contractual party is vicariously liable for a breach committed by another. It is difficult to see how a person with the power to commit a deliberate repudiatory breach of contract, whether a director, employee or an agent of the breaching party, would ever not be regarded as being the “controlling mind” of that party. In addition, would a repudiatory breach caused by the decision of a large board of directors be personal? To not regard it as such would surely sit uneasily with the present case, particularly if the other elements in the factual matrix, looked at in the context of the principles set out by the deputy judge, were the same. Whether the breach is personal and the “stricter approach” comes into play or not, the fact remains that in either case, the presumption against an exemption clause covering deliberate, repudiatory breach is “strong”.
A major factor in the deputy judge’s decision was his determination to ensure that NETTV was not deprived of a sensible remedy. If his first “straightforward” approach did not produce the right result, he was prepared to construe the words “loss of profit” as being limited by the words preceding them in the exemption clause, so that recovery under that head would only be excluded in respect of “damage to software or damage to or loss of data”.
The presumption against excluding uninsurable risks that runs throughout the case law may seem surprising as between commercial parties of equal bargaining power. Do reasonable businessmen really view the proper function of an exemption clause to allocate “insurable risk”, or is it rather to allocate all types of risk? The availability of insurance would certainly be an important factor had the parties signed up to standard terms, as this is one of the factors to be considered when assessing whether an exemption clause is reasonable under the Unfair Contract Terms Act 1977 (UCTA). In the present case the parties signed a bespoke agreement and therefore UCTA considerations did not apply.
In any event, contracting parties would be wise to re-examine exemption clauses in their agreements in the light of this judgment and to provide expressly in clear and strong language that such clause covers a deliberate repudiatory breach by one or either party personally if that really is their intention.
Nicole Globe
Article to be published in the Entertainment Law Review. Reproduced here with the permission of Sweet & Maxwell.
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