Faced with the current economic downturn, and internal pressures to reduce their costs, some organisations may be tempted to "walk away" from uneconomic or burdensome contracts on the assumption that contract exclusion or financial limitation clauses will ringfence their exposure. A recent High Court case however, illustrates there is a presumption that exclusion of liability clauses in a contract should not protect a party that deliberately decided to walk away from the contract, rather than perform, unless there are clear words to the contrary.

The claimant (NETTV) and the defendant MARHedge (MAR) entered into an agreement under which MAR provided material on hedge funds to be broadcast through NETTV's internet based TV channel. However, a year later and without any contractual basis, MAR gave notice to terminate the agreement immediately and refused to provide any further content for the channel. NETTV claimed that MAR had wrongfully and deliberately committed a repudiatory breach of the agreement (a breach of a condition or a fundamental breach which entitles the innocent party to terminate the contract) and thus sue for damages.

MAR admitted it had wrongfully repudiated the agreement, but sought to rely on the exclusion of liability clause that said neither party could be liable for a number of different heads of loss, including loss of profits (NETTV's main claim). Read literally, the exclusion clause appeared to exclude either party from liability for the innocent party's loss of profit.

However, the judge held that there was a presumption that an exclusion clause would not cover a deliberate, repudiatory breach of a contract. His reasoning was that words, which in a literal sense would cover a deliberate, repudiatory breach would not be construed in a way that would lead to commercial absurdity and defeat the main object of the contract (in this case a joint venture to make mutual profit). The judge went on to say that the proper function of exclusion clauses is to allocate insurable risk. As a consequence an exclusion clause should not normally be construed to cover an uninsurable risk, or one very unlikely to be insurable, such as deliberate wrongdoing by a party to the contract itself.

The ruling drew a distinction between a deliberate "personal" repudiatory breach by a party itself, and a deliberate repudiatory breach by that party's agents or employees, for which it is vicariously liable. Here, the repudiation was "personal" as it was taken by MAR's president, who was deemed to be the "controlling mind" of the company. The judge suggests that exclusion clauses should be construed more strictly for deliberate "personal" repudiatory breaches, but it is unclear if the same principles will apply to deliberate repudiatory breaches by a company generally.

The judge stated that if the parties intended an exclusion clause to cover a deliberate personal repudiatory act, very clear and strong drafting would be required - for example, "including deliberate repudiatory acts by the parties to the contract themselves…" would need to be used. Though the judge did note that it would be very difficult to persuade another party to agree to such a clause.

Organisations should also note that if they seek to include such a clause in their own standard terms, as opposed to individually negotiating the contract between the parties, it would be subject to the Unfair Contract Terms Act, and could fail if it was ever relied upon to excuse performance.

Whilst the likely scope of the ruling is not 100% certain, it is clear that organisations (and their directors) should always carefully consider the implications of deciding to walk away from contractual commitments, Never assume for example, that hiding behind the exclusion clause in the contract will limit your financial exposure.

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