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. There is no presumption in English law that exemption clauses do not apply to fundamental breaches. Nor is there a requirement for any particular form of words or level of language to exclude liability.
What is an exemption clause?
It is very common in commercial services contracts of all kinds to find an exemption (or exclusion) clause that seeks to exclude or restrict the liability of one party, which would otherwise attach to a breach of contract. It modifies an obligation that would otherwise arise under the contract by implication of law. Parties are generally free to agree to any and all types of exclusions or modifications within the limits of their agreement, so long as these would not constitute a ‘penalty’ (as there is an equitable rule in English law against penalty clauses).
Mott MacDonald Ltd v. Trant Engineering Ltd  EWHC 754 (TCC)
- Trant Engineering Ltd (Trant) was the engineering contractor responsible for upgrading the facilities at RAF Mount Pleasant (Falkland Islands) and Mott MacDonald Ltd (Mott) was the engineering consultancy contracted by Trant to provide design consultancy services.
- A dispute arose under the Settlement and Services Agreement (SSA) and Mott commenced proceedings against Trant for unpaid payments amounting to approximately £1.7 million. Trant countered that Mott had “fundamentally, deliberately, and wilfully breached its obligations under the SSA” because Mott had refused to complete the required design deliverables. Trant asserted that because of Mott’s breaches Trant had to “redo virtually the entire scope of work under the SSA”.
- Trant alleged that, as a consequence, it had suffered a loss of approximately £5 million. Mott argued that even if the breaches were to be established and were found to have been fundamental, wilful, or deliberate, the exclusion and limitation clauses in the SSA would nonetheless operate to exclude or limit its liability. The relevant part of the relevant clause in the SSA reads as follows:
“Notwithstanding any other term to the contrary in the Agreement or any related document and whether the cause of action for any claim arises under or in connection with the Agreement in contract or in tort, in negligence or for breach of statutory duty or otherwise, in relation to any and all causes of action as aforesaid… the total liability of [Mott] in the aggregate for all claims shall be limited to £500,000…”
Mott sought summary judgment as to the applicability of the exclusion clauses in the SSA. The application was heard before HH Judge Eyre QC, who determined that Mott’s application was successful, i.e., that the exclusion and limitation clauses of the SSA applied to breaches which were fundamental, deliberate, or wilful.
Analysis of case law and correct approach to be taken
- As to the approach to the construction of exemption clauses, Eyre J was clear that the starting point was the decision in Photo Productions Ltd v. Securicor Transport Ltd  AC 827. The House of Lords in that case rejected the former doctrine that an exclusion clause did not operate to prevent liability where a contract had been brought to an end by a fundamental breach by the party seeking to rely on such a clause (the ‘fundamental breach’ doctrine). The Lords in that case set out the correct approach to the construction of exclusion clauses and, in doing so, they explained that such clauses were to be construed by reference to the generally applicable rules of contractual construction.
- Photo Productions was preceded by the earlier decision of Suisse Atlantique Societe d’Armement Maritime SA v. N V Rotterdamsche Kolen Centrale  1 AC 63. That case also involved the House of Lords rejecting the former fundamental breach doctrine and firmly stating that the question is one of construction, not merely of the exclusion clause alone, but of the whole contract.
- Trant sought to rely upon select speeches of some of the Lords from Suisse Atlantique (such as that of Lord Upjohn, who said that there was a “strong though rebuttable presumption” that exclusion clauses did not apply to fundamental breaches; and Lord Hodgson, who indicated that exclusion clauses should not normally be construed as applying to fundamental breaches and that “very clear words” were needed if that result were to be achieved). But Eyre J re-affirmed that although Suisse Atlantique remains good law, it is to be read and applied as it was interpreted by the House of Lords in the Photo Productions.
- Eyre J’s judgment also addressed the later (controversial) decision of Internet Broadcasting Corporation Ltd & others v. MAR LLC  EWHC 844 (Marhedge). Contrary to the precedent of Suisse Atlantique and Photo Productions, the judge in Marhedge found inter alia that:
- there was a presumption, which appears to be a strong presumption, against the exemption clause being construed so as to cover deliberate, repudiatory breach; and
- the words needed to cover a deliberate, repudiatory breach need to be very “clear” in the sense of using “strong” language such as “under no circumstances”.
- Short shrift was given to the Marhedge decision and Eyre J agreed with the judge in the subsequent decision of AstraZeneca UK Ltd v. Albemarle International Corporation & another  EWHC 1574 (Comm), who held that the propositions stated by the judge in Marhedge were wrong. The correct approach to determining whether the clause excluded liability for a deliberate repudiatory breach was “simply one of construing the clause, albeit strictly, but without any presumption.”
So what are the normal principles of contractual construction?
- The court is to construe the contract so as to give effect to the parties’ intention as disclosed by the language read in context (Arnold v. Britton  UKSC 36  AC 1619).
- In that exercise, the court is to be conscious that the exclusion of liability which would otherwise and ordinarily arise is to that extent a departure from the norm.
- That has the consequence that it will be less likely that a clause was intended to operate to exclude liability unless it is clear from the language (when properly interpreted in context) that it has that effect.
- In the absence of clear words, the court is unlikely to conclude that a clause should properly be construed as excluding liability because in those circumstances a departure of this kind from the norm is unlikely to have been intended.
- The nature of the term under consideration will be relevant in considering the parties’ intentions. Therefore a limitation of liability can be regarded as reflecting an agreed allocation of risk and as being a lesser departure from the norm than a total exclusion of liability would be, with the consequence that the court is more likely to conclude that a limitation of liability was intended than it would a total exclusion.
- There is no presumption against the exclusion of liability and no requirement for any particular form of words or level of language. This is so regardless of whether it is a deliberate or repudiatory breach, but subject to the proviso that an exclusion or limitation of liability will not be read as operating to reduce a party’s obligations to the level of a mere declaration of intent.
- Where the parties have used unambiguous language, the court must apply it (Rainy Sky SA v. Kookmin Bank  UKSC 50  1 WLR 2900).
- If more than one meaning is properly possible then the court is to engage in the iterative process of construction (Wood v. Capita Insurance Services Ltd  UKSC 24,  AC 1173).
Application of normal principles of contractual construction
Eyre J was satisfied that when properly construed the clauses in question were applicable to any breach by Mott of the SSA, including breaches which were fundamental, deliberate, or wilful. He held that: “…the clauses with which I am concerned are set out in clear language capable of covering breaches such as those alleged by [Trant] and are in a bespoke agreement avowedly intended to be a comprehensive regulation of the parties’ future dealings.” He further stated that “[t]o adopt [Trant’s] contentions would amount to the implication of exceptions to the clear terms of those clauses. There is no basis for such a construction which would have the effect of restricting the clear scope of these clauses.”
It is noteworthy that this decision resulted from an application by the claimant for summary judgment. It is a reminder that contracts are to be interpreted within the context that existed at the time the agreement was made.
“…the current issue is not whether there were breaches of the kind alleged but whether if there were such breaches they are nonetheless subject to the exclusions and limitations set out in clause 1.4.1. That clause is to be construed by reference to the context at the time it was agreed and I am to consider whether there is a real prospect of a conclusion that the words used did not operate to exclude or limit liability for the breaches currently alleged.”
Although an early determination will not necessarily avoid the factual matters that will need to be determined at trial, clarification as to whether any potential liability is in fact subject to a financial limit could help the parties to shift their focus from continuing with legal proceedings to commercially resolving their dispute.