I repudiate my liability

28/09/2011 in Corporate, Mergers & Acquisitions, Commercial

If you deliberately abandon your contractual obligations, you’d expect to be liable to compensate the other party to the contract for the loss caused. But what if the contract has a limitation of liability clause?

Two recent High Court judgments give different views on whether a limitation clause should apply to a deliberate, repudiatory breach. This article discusses the cases and our thoughts on what could be done in practice.

What is a repudiatory breach of contract?

This is a breach of contract by one party that is so serious that it entitles the other party to the contract to treat the contract as terminated with immediate effect and it may sue for damages for breach of contract.

NetTV (2009)

In the NetTV case, the High Court held that there is a rebuttable presumption that a limitation clause will not apply to a deliberate, repudiatory breach of the contract. In order to rebut this presumption, the limitation clause would need to use words which were very clear in the sense of using strong language such as "under no circumstances”. Only then would the defaulting party be able to rely on the limitation clause.

You can read the full judgment of the NetTV case - Internet Broadcasting Corporation Ltd (trading as NetTV) and NetTV Hedgefunds Limited (formerly MARHedge TV Ltd) v MAR LLC (trading as MARHedge) - here.

This was a controversial decision. It meant that the validity of a limitation clause depended on whether or not the breach of contract was deliberate. There was a general concern that contracts’ limitation clauses may not be adequate.

This was a controversial decision. It meant that the validity of a limitation clause depended on whether or not the breach of contract was deliberate. There was a general concern that contracts’ limitation clauses may not be adequate.

AstraZeneca (2011)

The view of the judge in the AstraZeneca case was that the NetTV decision was wrong. There should be no presumption that a limitation clause does not apply to a deliberate, repudiatory breach of the contract. The relevant clause should simply be construed in the normal way.

However his remarks were not part of his judgment in that case. He used the opportunity to give his views on the NetTV case, even though he didn’t have to. He had already decided that the breach in question was not very serious and was not deliberate. His remarks were therefore “obiter”.

“Obiter” comments are the legal equivalent of a judge saying “while I am on the subject, I would just like to add...”. They do not create legal precedent but can be persuasive in future legal arguments, particularly if made in a higher court such as the Court of Appeal or the Supreme Court.

You can read the full judgment of the AstraZeneca case - AstraZeneca UK Limited v Albemarle International Corporation and Albemarle Corporation – here

Both these decisions were in the High Court and would normally carry the same weight. However, since the comments in the AstraZeneca case were “obiter”, they carry less weight. It will need a decision of the Court of Appeal or the Supreme Court to clarify the law in this area.

So what should you do in practice?

While doubt remains as to the correct legal approach, if you wish the limitation on your liability under a contract to include instances where you deliberately cause a repudiatory breach, the safest thing to do is to make sure that you add wording to the clauses limiting liability to make that clear.

Conversely, if you don’t want a liability limitation clause to apply in the case of a deliberate, repudiatory breach, then make sure that the contract expressly says so.

For more information on these issues please contact Ian McDonald or your usual Lewis Silkin contact.