UK: Liability For Deliberate Repudiatory Breach Can Be Excluded In The Normal Way

Last Updated: 20 July 2011
Article by Mark Alsop

Astrazeneca UK Limited v Albemarle International Corp [2001] EWHC (Comm)

AZ and Albemarle had an agreement under which Albemarle (a US company) supplied a product known as DIP. AZ distilled DIP in order to produce propofol. There was a provision in the supply agreement that if AZ wished to buy propofol, rather than distil it from DIP, "[AZ] shall notify [Albemarle] and will give [Albemarle] the first opportunity and right of first refusal to supply propofol to AZ". There was also a provision in the contract which stated that if either party terminated the supply agreement, AZ committed to purchase all remaining DIP in stock.

The exclusion clause stated: "No claims by [AZ] of any kind, whether as to the product delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product in respect of which such damages are claimed...In no case shall [AZ] or [Albemarle] be liable for loss of profits or incidental or consequential damages".

In the event, AZ decided to buy propofol, but was rather late in giving Albemarle the right of first refusal. As a result, and under advice of US lawyers, Albemarle refused to supply two shipments of DIP. There were many issues in dispute.

The High Court (Mr Justice Flaux) found in favour of Albemarle. In particular, he decided the following points of relevance for the purposes of this bulletin.

Albemarle's breach, i.e. refusal to deliver:

  • Albemarle was not in repudiatory breach of contract in failing to deliver DIP in accordance with the purchase orders. This was a long term agreement: breach of the delivery obligation in respect of a DIP shipment was not a condition under the terms of the agreement and non-delivery of one purchase order (and possibly even two) could not be categorised as a repudiatory breach, in the sense of depriving AZ of substantially the whole benefit of the contract. [note that the seriousness of breach is assessed by its effect in the context of the contract as a whole.]
  • Albemarle's breach of contract in refusing to deliver was not deliberate, in that Albemarle refused to deliver on the advice, albeit mistaken, of its US lawyers. It believed that it was acting within its contractual rights, so there was no intention deliberately to breach the agreement. [i.e. it's the motive behind the breach which counts, not the actual behaviour.]
  • Although the Judge did not have to decide the point, even if Albemarle's breach had been deliberate and repudiatory, liability would have been excluded by the exclusion clause. In the NetTV decision (also referred to as Marhedge) , it was said that there was a strong presumption against an exclusion clause covering deliberate repudiatory breach. Mr Justice Flaux thought this was wrong. He considered that the decision effectively sought to revive the doctrine of fundamental breach (which was discredited in the Suisse Atlantique and Photoshop v Securicor decisions).

    The judge had misquoted passages from those decisions and the judgment was "heterodox and aggressive and does not properly represent the current state of English law". The question instead was simply one of construing the clause, albeit strictly, but without any presumption. He considered that the first sentence of the exclusion clause was sufficiently clearly worded to cover any breach of the obligations, whether deliberate or otherwise. [Note that exclusion clauses should be reviewed. If this decision is correct, a standard all-encompassing exclusion clause is likely to exclude liability for deliberate repudiatory breach, whereas if NetTV is correct, deliberate repudiatory breach would not be covered by a standard exclusion clause unless explicitly included.]

Obligation on Albemarle to supply following termination:

  • The obligation on AZ to purchase all remaining DIP on termination did not place a corresponding obligation on Albemarle to sell the DIP to AZ. The judge could see no justification for the implication of an obligation upon Albemarle to sell the DIP on termination. AZ had protection of supply as a result of the long notice period. If AZ had wanted such an obligation, it should have inserted one. [Note need to draft carefully and not make assumptions about mutuality.]

Application of exclusion clause to AZ's failure to offer right of first refusal:

  • The exclusion clause did not exclude liability of AZ for loss of profit incurred by Albemarle as a result of AZ's failure to offer a right of first refusal. Even though the first part of the clause was an exclusion in favour of Albemarle only and the second part was in favour of both parties, the second part had to be read subject to the first, i.e. the clause applied only to claims in relation to products delivered or not delivered and not to Albemarle's loss from AZ's failure to give Albemarle its contracted right of first refusal. If the second sentence were to apply to the right of first refusal, it would leave Albemarle with no effective remedy for AZ's breach of the clause. That would make the clause little more than a statement of intent and would give little incentive for AZ to comply with its obligation. Generally, a court will strain against a construction which renders a party's obligation no more than a statement of intent and will not reach that conclusion unless no other conclusion is possible. [Again, note need to draft carefully and, especially, divide up exclusion clauses into separate clauses.]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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