Summary

Recently, McDougall J of the New South Wales Supreme Court considered whether an exclusion clause was sufficient to exclude liability for a claim of damages arising from the repudiation of a contract.

In the case, his Honour held that:

• exclusion clauses in contracts should be construed according to the principles laid down by the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500.
• an exclusion clause “could not apply to defeat the main object of the contract unless it were clearly and unambiguously expressed to do so”: Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] 1 VR 538.
• exclusion clauses, to the extent specified, may only exclude liability that arises “in connection” with the performance of the contract. They cannot exclude liability for losses arising from “activities outside the scope of performance (or nonperformance or malperformance) of the contract” (at [34]; See also Sydney Corporation v West (1965) 114 CLR 481), and
• exclusion clauses cannot exclude or limit liability for losses suffered by a party as a result of the other party repudiating the contract, because repudiation is an abandonment of a party’s performance obligations and is outside the scope of performance.

For his Honour’s separate but related decision on the related limitation clause 14.5, see our separate case note on Lime Telecom Pty Ltd v PowerTel Ltd [No.2][2008] NSWSC 362 (unreported) BC200802752.

Background

From about September 2004 to 29 May 2007, PowerTel Ltd (PowerTel) supplied telecommunication services to Lime Telecom Pty Ltd (Lime). There was an umbrella “Standard Form of Agreement for the Supply of Services” (Standard Form Agreement) which governed more than 20 separate agreements (the agreements), each for a particular service, between the parties.

PowerTel caused invoices to issue to Lime on a monthly basis, each payable within 30 days from the date invoiced. Lime rarely complied with the monthly payment regime. On 1 May 2007, PowerTel issued an invoice claiming $73,667.09. Payment for this invoice was due on 30 May 2007.

On 21 May 2007, PowerTel claimed to have issued a notice in a form permitted by the Standard Form Agreement to Lime, demanding payment. PowerTel claimed Lime failed to comply with the notice. On 29 May 2007, PowerTel proceeded to terminate all the agreements between itself and Lime, save one which was irrelevant to the present proceedings.

Lime contended that the notice of 21 May 2007 was never received and the Court accepted this on their evidence. It follows that PowerTel was not entitled to terminate the agreements and by that act, had wrongfully repudiated the agreements between itself and Lime.

The Application

On 30 November 2007, prior to the present decision, the Court had held that (1) PowerTel was, under the Standard Form Agreement, not entitled to terminate the agreements with Lime; (2) PowerTel breached clause 1.1 of the Standard Form Agreement; and (3) PowerTel had breached the Standard Form Agreements up until 7 September 2007.

In this case, the Court was asked to decide on the following questions:

• “Is clause 14 of the Standard Form Agreements effective to exclude [PowerTel’s] liability for damages in these proceedings?” (at [11]), and
• “If the answer to [the Question above] is “yes”, to what extent does clause 14 limit [PowerTel’s] liability for damages?” (at [11])

Clause 14.4 and 14.5 were relevant to the issues before the Court:

PowerTel conceded that they breached each of the agreements, but submitted that their conduct was excused by clause 14.4. Lime submitted that nothing in clause 14.4 enabled PowerTel to deliberately breach the contracts and deprive Lime of their entire benefit, but yet allow them to escape liability.

Held

McDougall J dealt with the following issues:

PowerTel’s Repudiatory Conduct

In accordance with the Standard Form Agreement, PowerTel had a right to terminate the agreements if Lime failed to make payment within 5 business days of its receipt of the notice of 21 May 2007. On the evidence, his Honour did not find such a notice to have issued.

However, his Honour considered that even if the notice was in fact issued, PowerTel would have terminated the agreements before they had an accrued right to do so. The Standard Form Agreement stipulated that notices were “taken to be received on the third business day after they are posted” and if 5 business days were added to that, it would follow that PowerTel’s termination on 29 May 2007 was done prior to the accrual of their rights to do so.

McDougall J held that PowerTel’s conduct, in denying Lime the right to pay and receive performance, was repudiatory.

Construction of exclusion clauses

His Honour held that exclusion clauses should be construed in accordance with the principles laid down in Darlington Futures, where the High Court said:

“that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferenti.”

Exclusion clause not to defeat main objects of contract

His Honour noted that the High Court had held that an exclusion clause cannot be applied such that it defeats the main aim of the contract and if on a literal reading, it does defeat the aims of the contract or leads to an absurdity, it must, to the extent that it does, be read down (at [28]: H & E Van Der Sterren v Cibernetics (Holdings) Pty Ltd (1970) 44 ALJR 157 at 158, Per Walsh J, Barwick CJ and Kitto J agreeing).

The operation of clause 14.4

Mc Dougall J held that clause 14.4 worked to exclude liability for the specified losses, “in connection with this agreement”, whether the losses arose from breach of contract, negligence or some other tortious cause or statutory wrong.

In applying the Darlington principles of construction, the Court found that clause 14.4 could not operate to exclude liability for losses arising from activities outside the scope of performance or non-performance of the contract.

Since PowerTel was found to have repudiated the contract, an act which is not “in connection with the agreement” and hence outside the scope of contractual performance, it followed that they could not benefit from the protection of clause 14.4 against Lime’s claim for repudiatory damages.

His Honour refused to give clause 14.4 a construction that would bar Lime’s claims and defeat the objects of the contract, because doing so would mean that PowerTel could unilaterally terminate the agreements, “wrongfully and without any shred of contractual justification”, but yet “escape scot free” (at [34]).

Clause 14.5

McDougall J did not consider clause 14.5 because in his view it operated against the background of clause 14.4 and the latter clause had already been found to be inapplicable in the circumstances.

Conclusion

Repudiatory damage cannot be excluded by exclusion clauses because it would defeat the main objects of the contract and will allow the party the clause benefits to unilaterally terminate a contract without consequence or contractual justification.

The Court examines clause 14.5 in Lime Telecom Pty Ltd v PowerTel Ltd [No.2] [2008] NSWSC 362 (unreported)(BC200802752).