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Exclusion clauses

15 July 2009

A recent important decision is worth knowing about as it has the potential to significantly affect the enforceability of exclusion clauses. In the light of the decision, you may wish to take advice on your terms of business with a view to clarifying your intentions with existing business partners, if necessary.

 

The Case

The case, Internet Broadcasting Corporation Ltd (t/a NETTV) v MAR LLC (t/a MARHedge), has clarified the extent to which exclusion clauses can be relied on to avoid paying damages for deliberate breaches of contract.

 

Exclusion clauses:
The purpose of these is to absolve a party from some or all
liability arising under a contract. This may be done by capping
the defaulting party’s liability to a fixed amount (eg the cost
of any initial investment). It may also be done by excluding
that party’s liability for certain types of damage altogether
(eg liability for the innocent party’s loss of profits).

Repudiatory breach of contract:
This is a breach that is sufficiently serious to allow the
innocent party to treat itself as discharged from further
liabilities under the contract and to sue for damages.

 

Comments

The parties in the case entered into an agreement whereby NETTV would provide interactive internet TV services to MARHedge, a provider of services to the hedge fund sector. The agreement, which had an initial term of at least three years, stated that they would share the proceeds.  The agreement contained an exclusion clause that said:“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.”

A year down the line, MARHedge suddenly terminated the agreement without giving a reason and with no contractual justification. In other words, through no fault of NETTV, MARHedge simply turned its back on the joint venture. As a result, NETTV lost their set-up investments and the profits they had expected to make over the full 3-year term.  MARHedge’s action amounted to a deliberate repudiatory breach of the agreement. Yet at trial, they tried to rely on the exclusion clause to limit their liability to NETTV.

The court rejected their argument and found for NETTV. A key factor was that MARHedge’s decision to terminate was “personal”. By this the court meant that the decision was taken by MARHedge and had not been brought about by anything anyone else had done, or not done.

Implications

What this judgment means in practice is that, in certain circumstances, exclusion clauses may not have the effect the parties think they do.

If one party to a contract thinks they can walk away and rely on an exclusion clause to dodge their liabilities, they can probably think again following this judgment.

As a general principle, the court confirmed its dislike of exclusion clauses that would defeat the main purpose of a contract and potentially leave an innocent party with no real redress.

If there is a persuasive reason for wanting to exclude liability for deliberate personal wrongdoings in a contract—and in some circumstances there may be—then the exclusion clause needs to be very, very carefully drafted.

Partner Paul Gordon worked for a number of London firms and joined us from the City office of a top Scottish law firm. As a specialist litigator, Paul has acted for major clients including Kohler Mira, American Express, Morgan Stanley, GE Capital, and PizzaExpress. He has wide experience in financial services and banking disputes as well as shareholder and partnership matters, commercial supply, agency distribution and franchise contracts. He frequently acts in construction disputes and advises on intellectual property issues.  paul.gordon@willans.co.uk

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