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Fundamental breach resurrected?

  • Market Insight 1 April 2021 1 April 2021
  • UK & Europe

  • Insurance & Reinsurance

Are express words always needed in exclusion and limitation clauses to record an intention for less usual commercial outcomes?  Could new life be breathed into the extinct doctrine of ‘fundamental breach’? The TCC has emphatically answered these questions in the negative, in finding for the Claimant, Mott MacDonald Limited, in its successful summary judgment application against Trant Engineering Limited in HT-2020-000157, see Judgment [2021] EWHC 754 (TCC).

Background

The dispute arises from Mott MacDonald Limited (“MM”’s) design of the mechanical and electrical elements of a £55M power station at the UK’s permanent military base on the Falkland Islands. Trant Engineering Limited (“TEL”) was the main contractor, appointed by the DIO’s agent, to build the power station. MM and TEL were previously engaged in a dispute over the same project ([2017] EWHC 2061 (TCC) well known for being the first reported case arising out of the use of BIM) which settled in 2017.  The resolution was agreed in a ‘Settlement and Services Agreement’ (“SSA”), which also set out the scope and terms of engagement between the two parties going forward on the project. A further dispute between the parties has arisen.  MM claims c.£1.8m against TEL for breach(es) of the SSA in failing to pay for delivered designs.  TEL raised contractual defences as to why the sums claimed are not due, and made a substantial counterclaim for over £5M.

As is usual for engineering or design contracts, the SSA contains clauses excluding and limiting MM’s liability to TEL. It is helpful to focus on just one of them – the limitation clause.  It reads as follows: “Notwithstanding any other term to the contrary in the [SSA]…and whether the cause of action for any claim arises under or in connection with the [SSA] in contract or in tort, in negligence or for breach of statutory duty or otherwise, in relation to any and all causes of action…the total liability of [MM] in the aggregate for all claims shall be limited to £500,000” (the “Cap”). At first blush, one would think that the reference to “all claims” was fairly clear and all-encompassing. TEL disagreed however, and, in an attempt to evade the limits on MM’s liability incorporated into the SSA, pleaded that the Cap did not apply where MM had acted in “deliberate, wilful and fundamental” breach including, but not limited to, deliberately failing to provide competent designs.  Notwithstanding the vehement denial of deliberate conduct, MM applied for Summary Judgment to determine that TEL’s argument was wrong as a matter of law.

Summary Judgment

MM applied for Summary Judgment that the broadly worded Cap applied, irrespective of the alleged character of the breaches, and that TEL had no realistic prospect of proving otherwise at trial. If successful, TEL’s Counterclaim would be capped at £500,000. MM’s position was that there is no ambiguity in the wording of the Cap, a term negotiated by two commercial parties of equal or comparable bargaining status that would/should have enshrined expressly in the clause itself any intended exception of this sort from the Cap [Wood v Capita Insurance Services Ltd [2017] UKSC24]. The Cap was a clear agreement making good commercial sense with a defined allocation of risk and, to the extent TEL may have made a bad bargain, it was not for the Court to adopt an artificial construction so as to enable the Defendant to circumvent it. Wood v Capita encapsulates the modern approach to contractual construction, following Rainy Sky v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 and Arnold v Britton [2015] UKSC 36, [2015] AC 1619.

TEL contended that the Cap could not apply in circumstances where there were no express words to say that the Cap positively applied to deliberate conduct, and such express words were required particularly where a defaulting party’s breaches were so egregious that it could not possibly have been intended that the limitation clause would exclude such conduct. 

TEL’s starting point was Suisse Atlantique Societe d’Armement Maritime SA v N V Rotterdamsche Kolen Centrale [1967] 1 AC 361 (“Suisse Atlantique”) which held that an exemption for fundamental breach must be expressed in clear and unambiguous terms. In Suisse Atlantique, and subsequent cases, the courts developed a position in which they tended not to allow an exclusion clause to protect a party from liability for a “fundamental” (i.e. a repudiatory) breach of contract.  TEL further relied on the authority of Internet Broadcasting Corporation & Others v MAR LLC [2009] EWHC 844 (Ch) (“Marhedge”) in which the High Court took the view that there was a strong presumption against an exclusion clause operating to preclude liability for a deliberate repudiatory breach of contract, a presumption which could only be rebutted by strong language.

However, the doctrine of fundamental breach was firmly rejected by the House of Lords in Photo Production Limited v Securicor [1980] AC 827. There, a clause in Securicor’s standard terms excluded liability outright such that when one of Securicor’s guards lit a fire inside the factory, which burnt the factory down, (in rejecting the doctrine of fundamental breach) the House of Lords held that Securicor was entitled to rely on the exclusion, irrespective of the gravity of the act.  In considering TEL’s argument in the present case that, despite it being common ground that on a plain reading of the Cap it would apply to instances of deliberate conduct, “clear words are necessary to exclude certain breaches,” the Court recognised that this approach was tantamount to allowing fundamental breach in through the back door.

Judgment and Comment

In granting MM Summary Judgment the Court followed Astrazeneca UK Ltd v Albermarle International Corporation & another [2011] EWHC 1574 (Comm) where Flaux, J concluded that the exemption clause before him did apply to deliberate, repudiatory breaches as the clause was “sufficiently clearly worded to cover any breach…whether deliberate or otherwise.” Flaux, J analysed Marhedge (and the treatment therein of Suisse Atlantique) and described it as “wrong”, amounting to an (attempted) revival of the discredited fundamental breach doctrine, and “does not properly represent the current state of English law”.  The Court agreed with MM that the wording of the Cap was clear and unambiguous, that whilst it may have rendered an uncommercial result for TEL it did not reduce the SSA to a mere declaration of intent. As an aside, the Court noted that if TEL considered that MM had actually acted in repudiatory (i.e. “fundamental”) breach, it could have treated itself as being discharged from the contract, bringing its own obligations to an end. TEL did not do so.

The Judgment in MM’s favour is significant and will be welcome news for those drafting bespoke commercial contracts that an agreed broad cap on liability (and exclusion and limitation clauses more generally) cannot readily be circumvented by a claiming party phrasing its allegations to incorporate deliberate conduct.  If the parties desire such an outcome, such conduct should be expressly absented the ambit of a broad limitation clause.  Many standard forms exist for this purpose.  Looking at the bigger picture, the decision reinforces the desire for contract certainty, and that the modern approach to contractual interpretation that the Courts adopt, in line with the Supreme Court authorities discussed above, acknowledges that commercial parties are at liberty to agree whatever terms they wish. For those that routinely carve out from any limitation of liability deliberate or wilful breaches, this decision provides welcome affirmation (and support if such were required) of the prudence of such an approach, and serves as a salutary lesson to those that do not.

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