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How Explicit Does Your Liability Clause Need To Be in Dealing with Deliberate Breach?

on Thursday, 15 April 2021.

The liability clause is key in any commercial contract. That's what the parties scrutinise if they fall out. They usually minimise risk by limiting liability to a cap or excluding some types of liability altogether.

There was a series of cases around 10 years ago which came to different conclusions about how explicit people needed to be if they wanted to excuse themselves for a deliberate repudiatory breach - ie something serious that a party deliberately did wrong. In one case in 2009, the High Court ruled that there was a presumption against someone being able to exclude or limit liability for their deliberate repudiatory breach; and that presumption could only be displaced by very strong language. A case two years later profoundly disagreed with that earlier case.

Now 10 years on, the High Court has ruled on the matter again.

The Latest Decision on Deliberate Breach in Liability Clauses

In the recent case of Mott MacDonald Ltd v Trant Engineering Ltd, a dispute arose around the claimant's services. Trant claimed that Mott MacDonald had fundamentally, deliberately, and wilfully breached its obligations, and that accordingly Mott MacDonald was not entitled to rely on the contractual cap on liability of £500,000 and the other exclusions of liability - Trant argued that, instead, there should be liability of £5m.

Mott MacDonald did not accept that it had been in breach nor that anything had been done fundamentally, deliberately or wilfully. Notwithstanding that, it sought a summary judgment on the preliminary point that even if found to have been in breach and fundamentally, deliberately, and wilfully, in any event the liability cap and exclusions in the contract would continue to apply.

When the parties got into dispute, the parties agreed that contracts in general should be interpreted according to the following rules based on the 2015 Supreme Court case of Arnold v Britton. Courts will construe the relevant words of a contract in their documentary, factual and commercial context, assessed in the light of:

  • the natural and ordinary meaning of the provision being construed
  • any other relevant provisions of the contract being construed
  • the overall purpose of the provision being construed and the contract or order in which it is contained
  • the facts and circumstances known or assumed by the parties at the time that the document was executed
  • commercial common sense, but disregarding subjective evidence of any party's intentions.

What the parties disagreed on and therefore needed a ruling was whether those general contractual interpretation rules should apply to limitation and exclusion of liability clauses.

Siding with Mott MacDonald, the High Court decided that the correct approach to determining a clause excluding liability for a deliberate repudiatory breach is "simply one of construing the clause, albeit strictly, but without any presumption". Exemption clauses including those purporting to exclude or limit liability for deliberate and repudiatory breaches are to be construed by reference to the normal principles of contractual construction without the imposition of a presumption and without requiring any particular form of words or level of language to achieve the effect of excluding liability. A limitation of liability can be regarded as reflecting an agreed allocation of risk between the parties and should be respected as such, provided that it cannot be read as reducing a party's obligations to a mere declaration of intent. There is no presumption against the exclusion of liability and no requirement to use any particular form of words or level of language. This is so regardless of the nature of the breach for which liability is being excluded and regardless of whether it is deliberate or repudiatory.

On all the facts here including the general words used, the clauses in question were to be construed as applicable to any breach by the claimant of the agreement, including breaches which were fundamental, deliberate, or wilful.

The High Court awarded Mott MacDonald summary judgment - ruling that Trant did not have any realistic prospect of success if the point went to a full trial.

What Does This Ruling Mean for You?

For years, there was the rule of contra proferentem, where the slightest ambiguity in a liability clause would have been interpreted against the party looking to rely on the clause. More recently, the English courts have adopted the usual rules of interpretation in liability clauses. This case follows that trend.

This means that parties should continue to be clear about what they mean, and ambiguity can be costly. However, they do not need to exercise linguistic gymnastics to try to absolutely hammer home a point if it is otherwise clear and unambiguous. The courts will generally look to give effect to the parties' agreement. They will not try to re-write a bargain for the parties if it appears clear what was intended.

On the other hand, if a party does not want the other party to be able to limit or exclude its liability for deliberate or wilful default or breach, then this needs to be expressly stated as a clear exception in the limitation of liability clause.

If you would like specialist legal advice on the critical liability clause in your commercial contracts, please contact Paul Gershlick in our Commercial Contracts team on 07795 570072, or complete the form below.

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