UK: Construing Exclusion Clauses: Do They Cover A Deliberate Repudiatory Breach Of Contract?

Last Updated: 15 November 2011
Article by Jamila Khan and Reema Shour

Astrazeneca UK Limited v. Albemarle International Corporation and another [2011] EWHC 1574 (Comm)

Where a contract becomes unworkable or unprofitable because economic or other conditions have changed, one or other party may not fulfil some of its obligations under the contract or may even try to walk away from the contract entirely. This puts that party in breach of the contract, for which its innocent counter-party may be able to recover damages. Where the breach is sufficiently serious as to entitle the counter-party to treat the contract as terminated with immediate effect and sue for damages as well, this is known as a repudiatory breach of contract. A party will be in repudiatory breach if it demonstrates, either by something it says or does, an intention not to be bound by its obligations under the contract or to deliberately walk away from it. If the contract contains a limitation or exclusion clause, the issue is then whether that clause is effective to cap the defaulting party's liability at a certain amount or to rule out the recovery of damages entirely.

Limitation / exclusion clauses

Limitation or exclusion clauses are widely used to allocate risk within commercial contracts, so that the parties know from the outset what the financial consequences will be if either party defaults on any of its contractual obligations. Problems arise, however, when the clause is drafted in such a way that its wording is open to more than one interpretation. There are certain basic principles that the English courts will apply in interpreting limitation or exclusion clauses. These can be summarised as follows:

  1. If there is any ambiguity or uncertainty as to the meaning of such a clause, it should be construed strictly against the party relying on it (known as the contra preferentem rule).
  2. Although an exclusion clause is construed strictly against the party relying on it, the clause in question still needs to be considered carefully to establish whether it covers the breach in question.
  3. Express words are required to exclude liability for negligence.
  4. Where the parties have expressly incorporated a clause in their contract, the court will give the clause commercial effect and will not interpret it in such a way that it would deprive one of the parties of any meaningful remedy for its claims because if that were the true meaning of the clause, then there would be no real incentive for the performing party to comply with its contractual obligations.

Deliberate repudiatory breach

One contentious issue which has arisen is whether a limitation or exclusion clause will apply to a deliberate repudiatory breach of contract. In two House of Lords cases, Suisse Atlantique Societe d'Armament Maritime v. NV Rotterdam Kolen Centrale in 1967 and Photo Production v Securicor in 1980, the idea that different rules should apply to deliberate repudiatory breaches as compared to other breaches was dismissed. The reasoning was that a deliberate breach could be serious or it could be minor. If it was only minor, then it could be remedied by an award of damages without giving the innocent party the right to terminate the contract. If it was sufficiently serious, then it could entitle the innocent party not to perform its own obligations under the contract and to bring the contract to an end, in addition to claiming damages. Either way, it will be a question of construing the clause being relied on as to whether it covers a particular breach, whether deliberate or not.

The NETTV case

In 2010, however, a first instance judge in Internet Broadcasting Corporation(NETTV) v MAR LLC (Marhedge) held that there was a rebuttable presumption that an exclusion clause should not apply to a deliberate repudiatory breach of contract and that very clear and strong language would need to be used in such a clause if it was intended to cover a deliberate, repudiatory breach. The judge also said that a literal interpretation of an exclusion clause should be rejected where that would defeat the main purpose of the contract because it would allow a party to deliberately breach its contractual obligations with impunity.

That decision suggested that if a party decided not to fulfil its contractual obligations for whatever reason, the exclusion clause would be ineffective to limit or exclude the consequent claim for damages. It therefore caused some concern because few parties, at the outset of a contract, would wish to release their counterparty from liability for deliberate breach.

AstraZeneca v Albemarle

In a 2011 case, AstraZeneca UK Ltd v. Albermarle International Corporation and another, the issue of deliberate repudiatory breach came up once again. In essence, the facts were as follows: Albemarle supplied AstraZeneca with a pharmaceutical product called DIP which was used to produce a sleeping pill called propofol. Under the supply agreement, if AstraZeneca decided to buy propofol ready-made, it was obliged to give Albemarle first refusal on supplying it with the propofol. AstraZeneca subsequently entered into an agreement with a third party for the supply of propofol even though Albemarle had matched the third party's offer. In the meantime, Albemarle had not supplied AstraZeneca with one of its orders for DIP under the supply agreement. Each party accused the other of repudiatory breach of contract.

The court had among other things to consider the limitation clause in the supply agreement, which stated as follows:

Claims: No claims by BUYER of any kind, whether as to the products 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 BUYER or SELLER be liable for loss of profits or incidental or consequential damages."

In respect of AstraZeneca's claims against Albemarle, the judge held that Albemarle were in breach of the supply agreement for failing to supply an order of DIP but that the failure to supply one or two orders under a minimum three year contract was not a repudiatory (or sufficiently serious) breach that justified AstraZeneca's purported termination of the agreement. AstraZeneca could be adequately compensated for this breach by an award of damages alone. He also said that Albemarle's breach was not deliberate because they had honestly but mistakenly believed they were acting within their contractual rights on the (wrong) advice of their lawyers. The judge then concluded that the limitation provision was effective to cap Albemarle's liability to AstraZeneca for this breach to "the purchase price of the product in respect of which damages are claimed", in other words to the contract price of the DIP as opposed to the much higher price of replacement DIP.

Although he had decided that Albemarle's breach was not deliberate, the judge nevertheless considered what the position might have been under the exclusion clause even if there had been a deliberate breach. He disagreed with the view put forward in NETTV that there was a rebuttable presumption that an exclusion clause would not apply to such a breach. Rather, he said, the normal rules of construing such clauses applied, in other words that they were construed strictly against the party relying on them and that each clause had to be reviewed to establish whether it covered the breach in question, irrespective of whether the breach was minor or serious. He added that the wording of this particular clause ("of any kind") was in fact wide enough to cover a deliberate breach by Albemarle had there been one, and limit their liability.

Turning to Albemarle's claims against AstraZeneca, he held that AstraZeneca had breached the contractual obligation to give Albemarle the right of first refusal for the supply of propofol and that Albermarle had been entitled to terminate the supply agreement as a result of this repudiatory breach. AstraZeneca argued that the exclusion clause meant they were not liable for Albemarle's "loss of profits". The judge, however, agreed with Albemarle that those words had to be read in the context of the previous sentence in the clause, meaning that loss of profits was only excluded in relation to the supply or non-supply of DIP (being what was meant by "product") and did not extend to loss of profits that Albemarle would have earned in supplying AstraZeneca with the propofol. The judge commented that AstraZeneca's interpretation would strip the right of first refusal of any commercial effect.

Comment

Although the views of the judge in AstraZeneca v Albemarle were obiter and not therefore strictly binding, they are persuasive and it remains to be seen which way future decisions on this issue will go. In the meantime, parties should consider the wording of the limitation and exclusion clauses in their contracts very carefully and, where necessary, seek legal advice on how to draft them to achieve the required result. Where it is intended that a deliberate repudiatory breach should be covered by the clause, then it is recommended that the clause say so expressly in unambiguous terms.

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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