The Internet Broadcasting Corporation Ltd (NETTV) is in the business of constructing and providing interactive internet television platforms. The now defunct MAR LLC (MAR) provided information and services to hedge funds, and organised conferences for the hedge fund industry. The company’s president was Gary Lynch, who the court determined to be the ‘controlling mind’ of MAR. NETTV and MAR entered into a joint venture agreement in which NETTV agreed to set up and operate an internet television channel broadcasting conferences organised by MAR. The agreement could not be terminated for three years, save for material breaches of contract not remedied in a cure period, following service of a default notice. The agreement also contained a clause seeking to exclude liability for certain types of losses, in particular loss of profits. The channel was subscription only, and the agreement stated that NETTV and MAR would share revenue in agreed proportions. The channel was successful and gained substantial monthly increases in sales.
On 26 May 2006 MAR gave notice that it was terminating the agreement with immediate effect and failed to provide any content for the channel from that point on. MAR’s reasons for terminating the contract have not been established and NETTV brought proceedings against MAR for damages, asserting that the termination was a wrongful repudiatory breach of contract. Such a breach of contract entitles the innocent party to treat the agreement as ended and seek damages. MAR accepted liability shortly before trial, relying on an exemption clause in the contract to protect it from NETTV’s claim for loss of profits. That claim represented the bulk of the damages sought. As a preliminary issue, the court decided the true construction of the exemption clause.
Decision
There were two important issues in Internet Broadcasting Corporation Ltd (t/a NETTV) v MAR LLC (t/a MARHedge) [2009]. First, whether the clause was ‘repugnant’ and secondly, if it was not, whether it covered losses resulting from a deliberate and wrongful termination of the agreement. There is a legal principle that if the effect of an exclusion clause confers a liberty to ignore contractual obligations with impunity, the exclusion may be held to be repugnant to the contract and of no effect.1 Here, the Court held that the exemption clause was not repugnant, as on a literal reading there was some scope for recovery of damages, for example in respect of start-up costs, despite the width of the exemption clause. On the second question, the judge noted that, at first impression, it was odd that a party who deliberately and wrongfully terminates a contract should at the same time be able to rely on a clause excluding the losses that flow from its actions. The normal expectation of contracting parties is that a party who wrongfully terminates should be liable to pay the losses that arise.
In a past ruling on this issue, Lord Denning cited a rule of law preventing exemption clauses from applying to a fundamental breach of contract, such as wrongful termination, basing his judgment on the argument that a party may not profitfrom its own wrongdoing. However, that approach had subsequently been rejected by the House of Lords.2 The question is simply one of construction of the clause in question. Nevertheless, the fact that a breach of contract is deliberate and repudiatory is a relevant consideration in deciding whether an exemption clause applies. In Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale[1967], Lord Wilberforce stated:
‘Some deliberate breaches… may be, on construction, within an [exemption clause] (for example, a deliberate delay for one day in loading). That is not to say that “deliberateness” may not be a relevant factor. Depending on what the party in breach deliberately intended to do, it may be possible to say that the parties never contemplated that such a breach would be excused or limited.’
In Photo Production Ltd v Securicor Transport Ltd[1980], as the judge noted, parts of the judgment suggest there is a presumption against an exemption clause being interpreted so as to cover a repudiatory breach. Here, the judge adopted that approach. However, that is only a presumption, and can be rebutted if the words of the exclusion clause are ‘clear and fairly susceptible of one meaning only’. Such a condition is open to interpretation and, in reviewing relevant statements on the issue, the judge in Internet Broadcasting Corporation Ltd concluded that clarity of language was to be equated with strength of language. He stated that the more radical the breach, the stronger the language required and only strong language would prevent liability for a repudiatory breach. In addition to this, the judge decided that a still stricter approach should be taken where the wrongful repudiatory breach was personal to the wrongdoer, ie where the wrongdoing was committed personally by the defendant contracting party. In relation to companies, this principle would apply where those that represented the controlling mind of the company had committed the repudiatory breach. The judge concluded that this principle applied to Internet Broadcasting Corporation Ltd and that Lynch had taken the decision to terminate the contract as the ‘controlling mind’ of MAR.
MAR asserted that the exemption clause should be given its literal meaning and that it covered a claim arising from a deliberate repudiatory breach of contract. Central to MAR’s case was the argument that the Court should take this approach where the exemption clause enabled the innocent party to sue for some kind of substantial loss. MAR went on to argue that NETTV would be entitled to recover its start-up costs, which were modest in comparison to the profits that it was estimated to have lost. The court rejected MAR’s argument, however, on the basis that it was insufficient to interpret the exemption clause only in terms of its literal meaning. The words used in the exemption clause contained no strong language and no clear statement that deliberate wrongdoing was meant to be covered, let alone deliberate, personal and repudiatory wrongdoing. A literal interpretation also conflicted with commercial common sense. The judge could not hold that the clause would cover such wrongdoing in any established approach to construction of a contract. He said that MAR’s interpretation of the contract would cause the exemption clause to be read as follows:
‘Neither party will be liable to the other for [loss of profit] even if caused deliberately by the personal act of the controlling mind of that party in a way which deliberately repudiates the contract between them.’
The judge went on to say that he could not imagine for a moment that any reasonable businessman on either side would have agreed to such a clause.
Interestingly, the judge also considered whether the risk of a deliberate personal repudiatory breach would have been insurable under a contract held to such a literal interpretation, given that the normal function of exemption clauses is to allocate risk between the contracting parties. The judge’s view was that insurance wasnon-existent or rare for deliberate and wrongful termination of a contract. He stated that any reasonable businessman assessing the allocation of insurable risk would view the words of the clause as not excluding risks which were uninsurable or very likely to be uninsurable. This would include losses resulting from a deliberate, personal and repudiatory breaches. A literal interpretation would also defeat the main purpose of the contract: to protect a joint venture in internet broadcasting for mutual profit over an agreed period. Following MAR’s interpretation of the contract would mean that a party could deliberately terminate the agreement at any time and for any reason, without fear of having to pay significant damages as a result.
Conclusion
The judge deduced the following principles relevant to the applicability of exclusion clauses to losses flowing from wrongful repudiatory breach involving personal wrongdoing:
- there is no rule of law preventing an exemption clause from applying tosuch losses, and the court must construe the words of the clause to determine its scope;3
- there is a strong presumption against an exemption clause being construed to cover deliberate repudiatory breach;
- the words needed to cover such a breach needed to be very clear in the sense of using strong language such as ‘under no circumstances’;
- the proper function of an exemption clause between commercial parties with equal bargaining power is to allocate insurable risk;
- there is a particular need to use clear, strong language where the exemption clause covers deliberate wrongdoing in respect of a breach that cannot, or is unlikely to, be covered by insurance; language such as ‘including deliberate repudiatory acts’ would need to be used;
- an even stricter approach should be taken where the wrongful repudiatory breach is personal to the wrongdoer, that is where the wrongdoing was committed personally by the defendant contracting party (eg the decision to breach was taken by the ‘controlling mind’ of a company, as opposed to a company being vicariously liable for the decisions of those that do not represent its controlling mind);
- words which, in a literal sense, cover a deliberate repudiatory breach will not be construed to do so if this would defeat the ‘main object’ of a contract; and
- words that in a literal sense cover a deliberate repudiatory breach cannot be relied upon if they are ‘repugnant’, that is confer liberty to ignore contractual obligations with impunity.
The judge in Internet Broadcasting Corporation Ltd took a very restrictive approach indeed to the interpretation of the exclusion clause. The strictness of his approach is unlikely to be taken by all courts. However, deliberate repudiatory breach carries a significant risk that losses will not be constrained by a contractual exclusion clause, unless the wording of that clause is very clear indeed.
By James Maton, partner, Edwards Angell Palmer & Dodge UK LLP.
E-mail: jmaton@eapdlaw.com.
At-a-glance guide
- There is a strong presumption against an exemption clause being construed to cover a deliberate breach of a contract that is sufficiently serious to permit the innocent party terminating the contract.
- The scope of an exemption clause is a matter of construction.
- The proper function of an exemption clause, between commercial parties at arm’s length and with equal bargaining power, is to allocate insurable risk.
- An exemption clause should not normally be construed to cover an uninsurable risk or one very unlikely to be capable of being insured, in particular deliberate wrongdoing.
- Words that in a literal sense cover a deliberate repudiatory breach cannot be relied on if they are ‘repugnant’.
1) See for example euNetworks Fiber UK Limited v Abovenet Communications [2007] EWHC 3099.
2) Applying Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] AC 361 HL and Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 HL.
3) Save for statutory regulation under the Unfair Contract Terms Act 1977 applies, and the Unfair Terms in Consumer Contracts Regulations 1999 (as amended).
