Part 2 – Wilful misconduct and deliberate breach

How to carve out wilful misconduct from a liability cap

Here we consider contractual provisions that purport to carve out wilful misconduct from liability caps, leaving unlimited liability for losses that arise from such wilful misconduct. 

Customers of outsourcing services, technology or transitional services arrangements will often demand that wilful misconduct is not behaviour for which a supplier is entitled to cap its liability, and many suppliers accept that position in the belief that the bar for wilful misconduct is extremely high and they are therefore not at risk of exposure to uncapped liability. 

At the time of negotiating an outsourcing or technology contract or transitional services agreement, careful consideration should be given to what can amount to wilful misconduct in the context of the particular contract, as it has long been clear that the concept of wilful misconduct (or the similar concept of “wilful default”) has no fixed meaning in English Law. Whether an action amounts to wilful misconduct will depend on the contract, clause and facts in question. 

However, the English High Court in De Beers UK Limited (Formerly: The Diamond Trading Company Limited) v Atos Origin It Services UK Limited [2010] EWHC 3276 (TCC) (De Beers) provides guidance as to what constitutes wilful misconduct, and how it is distinguishable from concepts like deliberate default.

In De Beers, the Court took the view that:

• Wilful misconduct refers to conduct by a person “who knows that he is committing, and intends to commit a breach of duty, or is reckless in the sense of not caring whether or not he commits a breach of duty”. 
• Deliberate default is a “default that is deliberate, in the sense that the person committing the relevant act knew that it was a default”. 
• Wilful misconduct as a concept is wider than deliberate default, as deliberate default does not extend to recklessness.

More recently, in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others [2022] EWHC 3275 (TCC), Pepperall J in the Technology and Construction Court considered the effect of a carve-out of ‘wilful default’ from a contactor’s aggregate liability cap (the contract did not define wilful default).  Citing De Beers with approval, Pepperell J considered that, to prove a ‘wilful default’ within the meaning of the clause, the employer would have to prove that the contractor was in breach of contract and that either the contractor intended to commit such breach or was recklessly indifferent as to whether its conduct was in breach of contract or not. Where some losses rose from wilful default and others did not, the losses that did not arise from wilful default were still subject to the aggregate cap (the carve-out would not apply to them).

In Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC) the Technology and Construction Court took the view that the words ‘howsoever arising’ in a liability clause are capable of excluding liability for wilful default, even though it is not expressly mentioned.  

We can take from this that, if parties expect wilful misconduct (or similar expressions) to be carved out of a liability cap, they must say that expressly.

Does an exclusion or limitation of liability clause apply to a deliberate breach?

Here we consider whether a supplier will have unlimited liability under an exclusion or limitation of liability clause in an outsourcing or technology contract or transitional services arrangement for its own deliberate breach. 

In examining this issue, it is useful first to have an appreciation of what deliberate breach is likely to mean. De Beers provides guidance in respect of the similar concept of “deliberate default”.  An issue that arose in that case was whether a deliberate default:

• Means the default was intentional (as opposed to arising by accident or oversight); or 
• Requires knowledge of the specific contractual provision with a decision to breach it. 

Edwards-Stuart J. was of the view that a deliberate default requires knowledge that there is a default: “Deliberate default means, in my view, a default that is deliberate, in the sense that the person committing the relevant act knew that it was a default (i.e., in this case a breach of contract).”

Parties may be tempted to argue that an exclusion clause does not apply to a deliberate breach of an outsourcing or technology contract or transitional services agreement, as was at issue in Internet Broadcasting Corp Ltd v MAR LLC [2009] EWHC 844 (Ch) (Marhedge). The English High Court in that case held that:

• There was a rebuttable presumption that a party in deliberate repudiatory breach of a contract (a deliberate breach which is serious enough to potentially deprive the other party of the full benefit of the contract and for which the non-breaching party may terminate the contract) cannot rely on an exclusion clause. 
• The presumption can only be displaced by strong express language, such as explicit reference to "losses flowing from deliberate repudiatory acts by the parties". 

However, the Marhedge decision was criticised in AstraZeneca UK Ltd v Albemarle International Corp [2011] EWHC 1574 (AstraZeneca). The English High Court in AstraZeneca:

• Considered the decision in Marhedge to be contrary to binding authority and an attempt to revive the doctrine of fundamental breach (which had previously been rejected by the House of Lords). 
• Held that, unless there is clear wording to the contrary, a broad exclusion or limitation of liability clause applied to all contractual beaches, unless to do so would have the effect of excluding all liability for all breaches, or would reduce one party's obligations to a mere declaration of intent. 
• Followed the House of Lords in rejecting any “artificial distinctions between different kinds or degrees of breach of contract”, and confirmed that construing exclusion or limitation of liability clauses is simply a matter of interpretation in each case.

The approach in AstraZeneca was also taken in the recent case of Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023] EWHC 2506 (TCC) (Pinewood). The English High Court in Pinewood rejected the existence of any general rule or special presumption that required explicit language for the exclusion of deliberate breaches (repudiatory or otherwise) from the scope of protection offered by a limitation or exclusion clause. It observed that it will be a question of construction in every case as to whether the limitation or exclusion clause covers the breach or loss in question, and that there was no requirement for the court to strain the language if it is clear.