Legal update on exclusions and limitations of contractual liability

A recent High Court case has provided reassurance that the courts will continue to respect and enforce clearly drafted exclusion and limitation of liability clauses, even very broad ones, unless to do so would have the effect of excluding all liability for all breach or would reduce one party’s obligations to a mere declaration of intent. 

On 30 March 2021, in Mott MacDonald Ltd v Trant Engineering Ltd, the High Court held that an exclusion or limitation of liability clause should be construed by reference to the normal principles of contractual construction, even where it purports to exclude or limit liability for deliberate and repudiatory breaches.  Furthermore, there should be no presumption that a party cannot rely on such a clause in respect of deliberate or repudiatory breaches.  It also held that no particular form of words or level of language is required to exclude or limit liability for such breaches; the wording just has to be clear.

Background

Trant Engineering Ltd ("Trant") engaged Mott MacDonald Ltd ("Mott") to provide engineering and consultancy services in connection with a project to build a power station in the Falkland Islands, and issued proceedings after a dispute arose between them regarding the scope of works and payment.
Eventually, the parties entered into a settlement and services agreement (the "SSA"), both to resolve the proceedings and to establish the parties’ obligations in respect of the project moving forward. It set out the future services to be provided by Mott and the payments to be made by Trant. It also contained three clauses, which limited or excluded Mott's liability in the event of a breach: an exclusions clause, a net contribution clause and a cap on Mott's "total liability".

When Trant failed to make certain payments due under the SSA, Mott initiated proceedings. Trant counterclaimed, alleging that Mott had "fundamentally, deliberately and wilfully" breached the SSA. Mott denied that it had breached the terms of the SSA but, nevertheless, sought summary judgment on whether breaches committed fundamentally, wilfully, or deliberately fell within the scope of the limitation of liability clauses.

Judgement

The High Court granted summary judgment in favour of Mott.

It reviewed the authorities on the construction of exclusion and limitation clauses and determined that the correct starting point for determining the issue was the 1980 House of Lords' ruling in the case of Photo Production Ltd v Securicor Transport Ltd.  In this case, the House of Lords held that exclusion clauses should be construed by reference to the generally applicable rules of contractual construction, and expressly rejected the then current doctrine that such clauses did not apply where the party seeking to rely on them had been guilty of a fundamental breach.

The High Court also noted that there were two recent but conflicting High Court authorities on whether special rules of interpretation applied to clauses excluding or limiting liability for deliberate repudiatory breach of contract:

• the 2009 case of Internet Broadcasting Corp Ltd v MAR LLC, in which a deputy judge took the view that there was a strong presumption that a party in deliberate repudiatory breach of a contract cannot rely on an exclusion clause, and that such presumption could only be displaced by "strong" language; and
• the 2011 case of AstraZeneca UK Ltd v Albemarle International Corp, in which Flaux J rejected the approach taken in the Internet Broadcasting case, stating that it did not properly represent the current state of English law and so should not be followed. Flaux J asserted that the correct approach to determining whether a clause excluded liability for a deliberate repudiatory breach was that set out in the Photo Production case. 

After considering the parties' arguments and the various authorities on the issue, the High Court sided in favour of Flaux J.It held that the correct approach when construing exclusion or limitation of liability clauses, even those purporting to exclude or limit liability for deliberate and repudiatory breaches, was to do so by reference to the normal principles of contractual construction, and without any presumption against the exclusion of liability for such breaches.
 
The High Court also asserted that no particular form of words or level of language was required in order to exclude liability for deliberate or fundamental breaches.  It accepted that clear wording was needed to exclude liability for such breaches, but asserted that this did not meant that they had to be referred to specifically.  The court did, however, hold that an exclusion or limitation of liability would not be read as operating to reduce a party’s obligations to the level of a mere declaration of intent.

Applying this approach to the exclusion and limitation of liability clauses in the SSA, the High Court determined that they were to be construed as applicable to any breach of the SSA by Mott, even if those breaches were fundamental, deliberate, or wilful. The clauses were expressed in clear terms and, when read naturally, were capable of applying to all such breaches; to exclude their application to them would amount to implying exceptions and restrictions to the clear terms of the clauses, something for which there was no basis in law.
In reaching its conclusion, the High Court noted that:

• the exclusion and limitation of liability clauses formed part of a bespoke and comprehensive agreement between two commercial entities intended to resolve a dispute between them and to regulate their future dealings; and
• any imperfections in their drafting did not come close to demonstrating that the clauses were illogical, incoherent or unclear such that it was required to examine the factual circumstances surrounding the SSA rather than the language of the SSA itself.  Whilst the clauses might have had the potential to be wide-ranging, none reduced Mott's obligations to a mere declaration of intent; breach of its obligations under the SSA would still have had adverse consequences for Mott. 

Comment

Whilst this High Court case does not take precedence over either of the other two recent High Court cases, it is important because it restates and confirms long-standing authority regarding the correct approach to interpreting and applying exclusion and limitation clauses. It reaffirms that there is no rule of law that such clauses do not apply where the party seeking to rely on them is guilty of a deliberate or fundamental breach, neither is there any presumption that the clauses should be interpreted narrowly so as not to apply in such cases.

This case highlights and reaffirms the importance of precise wording when drafting commercial contracts, such as franchise agreements, distribution and supply agreements and agency agreements.  Parties must ensure their respective rights, obligations and liabilities, as agreed, are clearly stated in plain language.  Unless there is clear wording to the contrary, a broad exclusion or limitation of liability clause (such as a cap on "total liability") will be held to apply to all contractual beaches, even those that are fundamental, wilful or deliberate, unless to do so would have the effect of excluding all liability for all breach or would reduce one party’s obligations to a mere declaration of intent.