A recent case has shown that the more serious a breach of contract, the less likely it is that a court will accept an exclusion of liability clause

It is a general principle in English contract law that commercial parties may make, within broad parameters, whatever agreement they wish. They are masters of their own contractual fate, as one famous judge once put it.

That means they may change, prohibit, exclude or limit their obligations from one contract to another and frequently do this by using exclusion of liability clauses. The rules of interpretation under common law state that exclusion clauses must be clearly expressed and unambiguous, or they will be ineffective. A measure of statutory control exists in the form of the Unfair Contract Terms Act 1977 (UCTA), which regulates such clauses. Outside of this act, the question as to whether an exclusion clause effectively limits a party’s liability is a question of interpretation of the contract.

Given one is seeing in this credit crunch more cases in which contracts are being brought to an end, the recent decision in Internet Broadcasting Corporation (trading as NETTV) vs MAR LLC (trading as MARHedge) is well timed, as the court had to decide whether an exclusion of liability clause applied to a deliberate, personal repudiatory breach of contract.

The parties entered into a joint venture agreement under which the contractor agreed to construct and provide an internet TV channel to broadcast hedge fund information and services.

Gary Lynch exclusively controlled the broadcaster, MARHedge. The term of the joint venture was three years, but included a right to terminate in the event of a material breach of contract. After one year, the broadcaster summarily terminated the agreement, although later accepted that it had no contractual justification for doing so. The contractor sued for loss of profits, asserting that the broadcaster had wrongfully and deliberately committed a repudiatory breach of the agreement.

The court had to address whether the exclusion clause barred the contractor’s claim to loss of profit in circumstances in which the loss arose from the broadcaster’s deliberate breach.

The exclusion clause stated: “17. 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 court considered whether there was a presumption that the exclusion clause did not apply to a deliberate repudiatory breach. The court accepted it was a matter of construction of the contract whether or not an exclusion clause applied and observed that the more grave the breach, the stricter the clause should be construed.

The court held that words that in a literal sense appeared to cover a deliberate repudiatory breach were not to be given their literal meaning if they were repugnant

The court held that there was a rebuttable presumption that the clause did not have an effect in relation to a deliberate repudiatory breach. It held that clear and strong language was needed.

In cases where a personal and deliberate repudiatory breach was the issue, words such as “including deliberate repudiatory acts by the [parties to the contract] themselves” would be required. As there was no such wording in this case, the presumption was not discharged and a strict approach should be taken in deciding whether or not the exclusion clause applied to such a breach.

The court held that words that in a literal sense appeared to cover a deliberate repudiatory breach were not to be given their literal meaning if they were repugnant or if that reading would defeat the purpose of the joint venture.

Here, the main purpose of the agreement was a joint venture in internet broadcasting for mutual profit for an agreed period. On the facts, the only substantial claim the contractor had was one for loss of profits. A literal reading of the exclusion clause would deprive the agreement of “any real meaning” from the contractor’s standpoint. Accordingly, the literal meaning of the clause should not be followed.

For the above reasons, the court held that the exclusion clause was not effective and the broadcaster was liable for the loss of profits suffered by the contractor.

The case shows that whether a clause excludes or limits liability for a fundamental breach depends on what the court thinks to be the meaning and legal effect of the clause. The more serious the breach, or the consequences of the breach, the less likely the court is to find an exclusion clause effective.

The case also establishes that a higher, stricter test should be applied in cases in which there has been a deliberate, personal repudiatory breach. In such situations, there is a presumption that the exclusion clause is not intended to cover such a breach.