26.11.2021

Exclusion of liability for deliberate breaches of contract 

In Mott Macdonald Ltd v Trant Engineering Ltd [2021] EWHC 754 (TCC) the English High Court considered a summary judgment application on the applicability of a limitation of liability clause to an allegation of deliberate or wilful breach of contract.  The Court confirmed that limitation (and exclusion) clauses will be given effect on their plain and ordinary meaning.  If any limitation or exclusion is not intended to apply to a deliberate or wilful action, clear wording to that effect is required. 

Facts

In November 2017, Mott Macdonald Ltd (Mott Macdonald) and Trant Engineering Ltd (Trant) entered a contract for Mott Macdonald to provide engineering consultancy services to Trant for the upgrade of a military base in the Falkland Islands (Contract).

In respect of Mott Macdonald’s liability for claims commenced against it by Trant, the Contract provided (among other matters):

The total liability of the Consultant in aggregate for all claims shall be limited to £500,000 (Limitation Clause)

Liability was further excluded for any indirect, special, or consequential loss.

The relationship between parties deteriorated and a dispute arose in respect of the works.  Mott Macdonald contended that it was owed approximately £1.8m for works carried out.

By way of defence and counterclaim, Trant asserted that Mott Macdonald breached the Contract by refusing to: complete design deliverables, provide native data files and calculations, and carry out independent reviews of its design. Trant counterclaimed losses of approximately £5m (ie the cost of having to re-do the majority of the design work).  Trant contended that these breaches were an intentional attempt by Mott Macdonald to “exert improper commercial pressure in relation to its demand for payments of invoices to which it was not entitled”.[1]  

Mott Macdonald denied breaching the Contract, deliberately or otherwise.  In any event, Mott Macdonald argued that Trant’s counterclaim would be subject to the Limitation Clause and its maximum liability if the alleged breaches were established was limited to £500,000.

Mott Macdonald applied for summary judgment to determine whether the Trant’s claims fell within the scope of the Limitation Clause. 

Decision

The key issue the Court was asked to determine whether the Limitation Clause applied to a deliberate breach of contract.

As a starting point, the Court considered that the correct approach was to interpret a limitation clause according to normal principles of contractual interpretation; that is to construe the terms of the contract giving effect to the parties’ intentions as disclosed by the language, read in context, at the time of contracting.  

While the Court accepted that exemption clauses are to be construed strictly against the party seeking to rely on the clause, there is no presumption that a limitation clause requires any specific words to achieve the effect of limiting a party’s liability.  For instance, the contract does not have to go so far as to say the limitation “applies in the event of a deliberate repudiatory breach” or similar wording. Instead, all that is required is unequivocal wording evidencing the parties’ intention(s).  The Court also commented that this same test for limitation clauses is applicable to exclusion clauses.

The Court addressed Trant’s argument that to give effect to the Limitation Clause would result in Trant being liable to pay Mott Macdonald where there had been a deliberate breach, even in circumstances where a third party has been employed to complete the work.  However, the Court ultimately considered the level of the Limitation Clause and its applicability reflected a commercial balance and negotiation between the parties.  The Court would not intervene simply because one party has made a bad bargain.

Ultimately, when looking at the wording used here, the Court concluded that the natural meaning of the words made plain that the Limitation Clause was intended to operate as an aggregate cap for all claims – including a deliberate breach of contract. Summary judgment was therefore granted in favour of Mott Macdonald.

Comment

Construction contracts, and commercial contracts more generally, typically include limitation on liability and other exclusions as part of the overall risk allocation within a contract.  Parties need to consider the way such risk allocation is recorded carefully.

The decision illustrates the Court’s reluctance to interfere with commercial contracts, including limitation clauses between sophisticated commercial parties.  Where contracts contain a clear cap on liability, the Courts will give effect to that.  The text of the contract will assume primary importance, rather than the circumstances of the particular claim being advanced.

For contract drafters, this case illustrates the necessity of unambiguous wording in a limitation (or exclusion) clause to ensure both parties understand the true nature of their obligations.  If the parties intend to exclude the application of limitation clauses in the case of fundamental or deliberate breaches (or for other specific circumstances), express language is required.  Careful legal advice prior to contracting is always advisable –”it is not the function of a court when interpreting an agreement to relieve a party from a bad bargain” (Sir Geoffrey Vos, in Lamesa Investments Ltd v Cynergy Bank).

We note that, while this is a United Kingdom decision, we expect a similar stance would likely to be taken by the New Zealand Courts.

If you have any questions about exclusion or liability clauses please get in touch with our Construction Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

[1] At [17].

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