8 December 2011 | Lorna Kelly

What wording is necessary to exclude liability?

The case

Albemarle supplied a chemical to AstraZeneca, which AstraZeneca distilled into propofol (used in the production of anaesthetic).

AstraZeneca sued Albemarle for failing to fulfil orders under a supply agreement. Albemarle claimed it did so because AstraZeneca had breached a separate clause in the agreement, which gave Albemarle “the first opportunity and right of refusal” to supply propofol to AstraZeneca in the event that AstraZeneca decided to stop distilling it and purchase propofol from a supplier instead.

Albemarle argued AstraZeneca was in breach of its obligation to provide a right of first refusal to Albemarle. In response, AstraZeneca claimed Albemarle’s rationing of the chemical amounted to deliberate repudiatory breach of contract, which entitled AstraZeneca to terminate the supply agreement and claim damages.

The supply agreement contained an exclusion of liability clause, which stated “in no case shall the buyer or the seller be liable for loss of profits or incidental or consequential damages”. AstraZeneca argued Albemarle could not rely on the exclusion clause because Albemarle was in deliberate repudiatory breach, following the decision in the Net TV case (Law update, 6 January 2011)

The court held that, among other things, Albemarle’s failure to fulfil the orders was not a deliberate repudiatory breach of contract. Further, there was nothing in the supply agreement to say the exclusion clause did not apply in the event of repudiatory breach, so the exclusion clause would have been effective.

What this means

The critical issue in this case is the court’s ruling on the validity of the exclusion clause.

The case suggests that, if you want to exclude liability in cases of deliberate repudiatory breach, specific wording is unnecessary and an exclusion of liability clause will be effective (unless stated otherwise) even if a party is in repudiatory breach.

However, as this is contrary to the decision in the Net TV case, it is likely that debate on this point will follow.

☛ Lorna Kelly is a senior associate at Dundas & Wilson.