What? The recent case of AstraZeneca UK Limited v Albemarle International Corporation [2011] has cast doubt on the presumption that an exclusion clause should not apply to a deliberate personal breach of contract.
So what? In light of the continuing uncertainty on whether or not exclusion clauses apply to deliberate breaches, it is a good idea to draft such a clause so as to make it clear whether or not it does apply.
Exclusion clauses and deliberate personal breach
In the case of Internet Broadcasting Corporation (trading as NetTV) v MAR LLC (trading as MARHedge) [2009] ('the NetTV case'), a deputy High Court judge held that there is a rebuttable presumption that an exclusion clause should not apply to a deliberate personal breach of contract and very clear and strong drafting would be required to persuade a court that the parties intended an exclusion clause to cover such a breach.
However, in the AstraZeneca case, a High Court judge has indicated (obiter) that he would decline to follow the finding in the NetTV case. He said that the question of whether liability for a deliberate repudiatory breach was limited by a clause would be one of construing the clause, strictly, but without any presumption.
Right of first refusal
The dispute concerned a contract under which Albemarle supplied a chemical (DIP) to AstraZeneca, which AstraZeneca used to manufacture a drug (propofol). The right of first refusal clause was very brief and merely stated that, if AstraZeneca decided to purchase propofol ready made, AstraZeneca:
"will so notify SELLER (Albemarle) and will give SELLER the first opportunity and right of first refusal to supply propofol to BUYER (AstraZeneca) under mutually acceptable terms and conditions".
The judge quoted that the meaning of 'right of first refusal' will depend on its context. He considered that in light of the relevant case law:
- The right of first refusal did have legal effect. That the new supply agreement would be on mutually acceptable terms and conditions did not make it too uncertain. As long as the essential terms were clear, the more detailed terms could be resolved through subsequent negotiations. Certainty was provided by the competing offer from a third party supplier.
- The party who has granted the right was under an obligation to disclose to the other contract party full details of a third party offer once it (the grantor) was 'minded to accept' the third party offer.
- The right of first refusal confers a right to be given an opportunity to match any third party offer which the grantor of the right might be otherwise minded to accept, and, in the event that the grantee matches the offer, to be awarded the business to which the offer relates.
It would be a breach of contract to award the new supply agreement to a third party supplier, even if Albemarle matched that third party's offer. The judge decided that, as a matter of construction, AstraZeneca's liability was not limited by the exclusion clause (which excluded liability for loss of profit) because the clause related only to the supply of DIP, not the right of first refusal to supply propofol. This narrow construction was justified because excluding Albemarle's right to recover profits would leave it without a remedy and turn the right of first refusal into little more than a statement of intent.
Conclusion
Whilst this decision is interesting and backs up the view held by many commentators and practitioners about the NetTV case, please note that:
- the judge in the AstraZeneca case has no authority to overrule the NetTV decision, which remains good law
- the judge's comments in the AstraZeneca case were obiter.
The case does indicate that:
- care needs to be taken when including right of first refusal clauses in a contract and the rights and obligations of each party should be set out clearly
- in light of the continuing uncertainty on whether or not exclusion clauses apply to deliberate breaches, it is a good idea to draft such a clause so as to make it clear whether or not it does apply.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.