In the recent case of Internet Broadcasting Corporation Ltd (t/a Nettv) & anor v Mar LLC (t/a MarHedge) [2009] the High Court held that perhaps, despite what the parties had agreed in words, an exclusion clause that excluded all claims to loss of profit would not be effective in circumstances where the party relying on it had inexcusably terminated the agreement early. This article sets out a short refresher on how the Court will approach the construction of exclusion clauses and then goes on to summarise Internet Broadcastingand whether, in light of it, parties may need to reconsider what they agree to exclude and how they say it.
Construction: a refresher
When interpreting contracts the English court will generally look at the words used by the parties and give them their natural and ordinary meaning. The working assumption is that the parties will generally manage to put in writing what they have agreed and that the words used in any written contract will express their intentions. The courts, therefore, are not easily persuaded that the language has gone wrong and they should put a spin on the words, or add wording to arrive at the parties’ intentions.
That said, if there is evidence to suggest a mix up with the language or perhaps some less-tight, late-night drafting the court will not force on the parties an intention they clearly did not have. Where there is evidence that the parties have not said what was really meant, the court will look at the context of the agreement and if the natural and ordinary meaning of the words would attribute to the parties an intention that they did not have it will look outside the express words to see what was really agreed. Business common sense will therefore be relevant.
Exclusion clauses and construction
When it comes to exclusion clauses, however, the courts have been willing at times to seriously interfere with express wording used by the parties. This is no doubt to ensure that a party is not able to get away with bad behaviour scot free. As a result the court’s approach does mean that parties should bear in mind that what is written in their contract may not ultimately be what the court will read into it.
The problems and lack of certainty in this area in part stem from the fact that, unless the agreement is covered by statute, the court has no general power to strike out an exclusion clause for being unreasonable.1 As long as the clause does not purport to exclude liability for fraud or otherwise offend public policy it will be valid, meaning that absent any other reason it is up to the parties to decide whether or not they allow one another to exclude themselves from liability and/or damages.
In such a relatively laissez-faire world, there is a potential for abuse. The courts have addressed this by implementing several rules of construction to protect perceived weaker parties. Broadly speaking:
- a party wishing to rely on an exclusion clause must show it was incorporated as a term of the contract – in bespoke negotiated contracts this may not be too much of a hurdle, but in unequal bargaining power situations it may be more of an issue;
- an exclusion clause will be construed strictly against the party relying on it (the contra proferentem rule);
- if the clause limits damages rather than liability it will still be construed contra proferentem, but will not be construed as harshly as a clause excluding liability per se;2
- if the parties want to exclude liability for negligence then the clause has to be clear that this is the intention of the parties – the court will consider it unlikely in the absence of clear language that a party would intentionally absolve another for its negligent acts;
- whether a clause is an exclusion clause (subject to the particular rules of construction) is a matter of substance and effect of that clause;
- a third party cannot hide behind an exclusion clause unless there are clear words and evidence that such third party was a party to the contract and the clause was intended to protect him (on the flip side, the burden of an exclusion clause will not generally be imposed on such party); and
- the clause will only be effective to exclude liability if it in fact covers the breach or loss that occurred.
All the above rules give the court a certain amount of latitude to stretch and shrink the effect of any given exclusion clause to achieve the result required, usually to protect the non-breaching party and ensure an unmeritorious defendant does not avoid liability to the detriment of the other party.
Internet Broadcasting
In Internet Broadcasting, the first claimant (Nettv) developed and produced interactive internet television platforms. The defendant (MarHedge) was a US corporation that, as part of its business, provided information to hedge funds and arranged conferences for the hedge-fund industry.
In 2005 NETTV entered into a written agreement with MARHedge under which NETTV agreed to set up and run an internet television channel that would broadcast programmes agreed with MARHedge, including coverage of MARHedge’s conferences. The agreement was initially to run for three years and could only be terminated earlier for material breach.
In addition to the three-year term, the agreement contained an exclusion clause, at clause 17 of the agreement that stated:
‘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.’
It was contemplated under the agreement that the income would be generated from subscription fees charged to viewers of the channel. After a few months, it became clear that the subscriptions formula was not a winner. It was subsequently agreed between the parties that instead of collecting subscriptions NETTV would establish a subsidiary company (NET Hedge) that would in turn sell opportunities to appear on the channel to hedge funds and similar organisations.
Between August 2005 and May 2006 NET Hedge successfully managed to achieve significant sales to a variety of hedge funds, remitting 10% of all money back to MARHedge as royalties.
By all accounts, after its shaky start the joint venture appeared to be going well until, in May 2006, Gary Lynch, the president of MARHedge, abruptly and without explanation purported to terminate the agreement.
NETTV and NET Hedge subsequently issued proceedings claiming damages for wrongful repudiatory termination of the agreement. No doubt appreciating it was on a bit of a sticky wicket, MARHedge accepted in the proceedings that it had no contractual justification entitling it to terminate the agreement. It argued, however, that the claimants were not entitled to any lost profit by virtue of the exclusion clause that expressly excluded such profits from any claim. The parties accepted that no legislation applied to the agreement.
Court’s Decision
Rules of construction
As a starting point, while noting it was odd that a party could seek to rely on an exclusion clause to avoid liability when it was in fundamental breach, the judge, Mr Moss QC, considered himself to be bound by the decisions of the House of Lords in Suisse Atlantique [1967] and Photo Production Ltd v Securicor Transport Ltd[1980] in which the idea that there was a rule of law that prevented exemption clauses applying to a fundamental breach had been rejected. It was not therefore open to the court to simply strike out the clause and the question before it was, whether on a true construction, clause 17 of the agreement was sufficient to exonerate MARHedge from any payment of damages for lost profit.
The relevance of MARHedge’s breach being deliberate and repudiatory went, in the judge’s view, to the question of whether the exemption clause on its true interpretation covered the breach.
‘Personal’ wrongdoing
As a result of Suisse Atlantique and Photo Production, the judge was seemingly constricted in his ability to make sure that MARHedge did not financially get away with its admitted breach. However, where exclusion clauses are concerned the court has pretty consistently demonstrated its ability to get the result it wants and the behaviour of the defendant in Internet Broadcasting was ripe for some creative thinking.
The Court considered that the authorities to date (for example Suisse Atlantique and Photo Production) made plain that the more drastic the breach by any party seeking to exclude its own liability, the stronger the language required in the clause to ensure such a breach would be covered by it.
Turning to the behaviour of MARHedge, in particular that of its president Mr Lynch, the court considered that a strict approach to the construction of the clause would be needed where the wrongdoing was ‘personal’. This novel concept essentially meant that if the controlling mind of the company had been instrumental in the decision to repudiate the contract, then this would be a relevant factor affecting how the court should construe the exclusion clause as against the breach in question. A ‘personal’ wrongdoing, such as Mr Lynch’s, was different to a non-personal one, such as where an employee or agent had acted to bring the agreement to an end that could not be attributed up to the controlling mind. While a fairly new approach, the judge found indirect support for a stricter approach of construction in circumstances of ‘personal’ breach, in the privy council case of Port Swettenham Authority v T.W. Wu and Co[1979].
Express wording
On a second point of construction, despite the usual rule that words be given their natural and ordinary meaning, when it comes to exclusion clauses the judge considered that the court should be cautious in giving words their literal meaning if this would mean the clause would not make commercial sense in its context. Such approach to construction was, the judge considered, now a regular feature of the approach of the House of Lords in construing commercial agreements.3
On a similar point, the judge also considered that an exemption clause would not usually be capable of excluding liability that would have the effect of defeating the main object of the agreement.
Insurance
On a more practical level, exemption clauses were often inserted by parties to allocate risk in the event that matters do not turn out as originally envisaged. On signing up to an agreement, a party will be likely to obtain insurance to protect itself if the worst happened and the contract was breached and damages sustained.
In Internet Broadcasting, the judge suspected (but appeared to have no evidence before him) that insurance would be non-existent or very difficult to get hold of to cover personal deliberate wrongful conduct by one contractual party repudiating the contract entirely. As a result the fact that the type of breach could not normally be capable of being covered by insurance must, in the judge’s view, be a relevant factor in construing the width and breadth of the clause in question.
Indeed, the judge considered this factor alone supported his view that a different approach by the court was justified in cases of the deliberate personal repudiatory conduct by a party as opposed to cases where the breach had occurred as a result of employee or agents’ actions: the former would be uninsurable and the latter is likely to be insurable.
Court’s summary of construction of exclusion clauses
Looking at the many authorities on exclusion clauses, the judge summarised the current position as follows:
- there is no rule of English law that an exclusion clause cannot apply to a deliberate repudiatory breach;
- the question of whether the exclusion clause applies to the particular circumstances of a case is one of construction and not law;
- there is a strong presumption that an exemption clause will not cover a deliberate, repudiatory breach;
- if following a deliberate and repudiatory breach a party seeks to rely on an exclusion clause then the wording of the clause needed to be very ‘clear’ in the sense of using ‘strong’ language such as ‘under no circumstances…’;
- if the exemption clause is intended to cover deliberate wrongdoing by a party that cannot, or is unlikely to be, covered by insurance then the wording of the clause must be stronger still. Language such as ‘including deliberate repudiatory acts by [the parties to the contract] themselves’ would be along the lines needed and weaker wording would risk not being sufficient;
- even if the words on the face of them could be capable of covering a deliberate repudiatory breach the court would not construe them as allowing the breaching party to avoid liability if this would defeat the main object of the contract; and
- the function of an exemption clause on a negotiated contract is to allocate insurable risk – an exemption clause should not normally be construed in such cases so as to cover an uninsurable risk.
Clause 17
Looking at clause 17 of the agreement between the parties, the judge (unsurprisingly) decided that MARHedge’s Mr Lynch as its controlling mind had committed a deliberate repudiatory breach.
Clause 17, did not contain strong language at all but was a fairly generic clause purporting to exclude several losses including loss of profit. It contained no clear statement that losses as a result of ‘deliberate wrongdoing’ were intended to be covered, let alone deliberate, personal and repudiatory wrongdoing. In the court’s opinion, a reasonable businessman would not consider that the generic terms of clause 17 would be sufficient to cover circumstances whereby a party simply decided to end the contract without excuse or reason.
Moreover, while on a literal reading clause 17 could perhaps exclude MARHedge’s liability for loss of profits, if such a construction was given to the clause it would have the effect of defeating the main object of the contract, namely, a joint venture for mutual profit over an agreed period of time (three years). A literal reading was capable of enabling either party to exit the joint venture at any time without any real consequence as to lost profit, even though loss of profit was likely to be the only very serious consequence for either party of repudiation.
This was a case where the behaviour of Mr Lynch would have meant that the claimants were unlikely to have been insured against the early termination. If the exclusion clause was allowed to cover the situation the claimants could be without any meaningful remedy.
In light of the above, the judge was clear that clause 17 could not be construed to cover MARHedge’s termination without cause.
Effect of the Decision
The decision in Internet Broadcasting, is perhaps not surprising. The defendant made no attempt to justify its early exit from a joint venture and had the exclusion clause been effective the claimants would have in all likelihood been left high and dry. This fact was plainly on the judge’s mind and the case therefore appears to reflect the court’s general unwillingness to leave an ‘innocent’ party without remedy.
There are, however, wider implications arising from the decision as it seems to introduce a new rule of construction, namely that there is a rebuttable presumption that an exclusion clause will not be effective to exclude liability for personal deliberate repudiatory breach. Accordingly, unless the parties clearly spell out the fact that they intend a clause to cover such a breach the clause will be ineffective. In Internet Broadcasting the judge considered using words as explicit as ‘deliberate repudiatory breach’ in an exclusion clause would be required to make the position clear.
At a drafting level this may cause its own difficulties. ‘Deliberate repudiatory breach’ is not a term of art and may capture several scenarios not all of which the parties may want to (or not) exclude. Internet Broadcastingwas relatively unusual in that the defendant accepted it had no right to terminate and simply sought to rely on the exclusion clause. The reality is that those types of cases are rare. In the more common scenario the question of who is (or is not) in repudiatory breach may end up being a question for the court and the parties could find themselves getting into further argument as to whether any repudiation was deliberate or not: which seems to be getting suspiciously close to some requirement of good faith – absent clear words.
Internet Broadcastingis a useful case to remind parties that the courts do not like to see parties getting away with it. When it comes to exclusion clauses, the more a party wants to exclude its liability, particularly if such liability is caused by its own deliberate behaviour the stronger the language required within the clause. The court will not be willing to allow a defendant to avoid liability on the back of an exemption clause, particularly if this gives the claimant no redress, unless the clause in question makes this absolutely clear.
By Hannah Parry, associate, SJ Berwin LLP. E-mail: hannah.parry@sjberwin.com.
Notes
1) Unfair Contract Terms Act 1999 or the Unfair Terms in Consumer Contracts Regulations 1994 SI 194/3159.
2)Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd[1981] UKHL 12.
3)Sirius International Insurance Co v FAI General Insurance Ltd & ors [2004] UKHL 54.
