View source for Astrazeneca UK v Albemarle International

DMC/12/02

'''England''' 

'''ASTRAZENECA UK LIMITED v. ALBEMARLE INTERNATIONAL CORPORATION and ALBEMARLE CORPORATION

'''English High Court; Flaux J; [2011] EWHC 1574 (Comm); 21 June 2011'''

John Odgers and George McPherson (instructed by Reed Smith LLP) for the Claimants, Astrazeneca UK Limited

Sue Carr QC and Andrew Henshaw (instructed by Barlow, Lyde & Gilbert LLP) for the Defendants, Albermarle International Corporation and Albermarle Corporation

'''CONTRACT: CLAUSES GRANTING THE RIGHT OF FIRST REFUSAL: EXCLUSION CLAUSES AND DELIBERATE BREACH'''

'''Summary'''

Flaux J found Astrazeneca liable for breaching a clause granting Albemarle the right of first refusal over the supply of certain chemicals because Astrazeneca agreed to purchase those chemicals from a third party supplier without giving Albemarle a bona fide chance to match the offer. The judge discussed in detail the obligations imposed by such clauses. He held further that the interpretation of exclusion clauses is purely a matter of construction and there is no presumption that liability for deliberate breach of contract cannot be excluded.

This case note has been contributed by Justin Gan Boon Eng, LLB (Hons) (NUS), an advocate and solicitor of the Singapore Bar

'''Background'''

The Claimant, a pharmaceutical company, manufactured the active ingredient X of one of its products by distilling substance Y. It contracted to purchase at least 80% of its annual requirements of Y from the Defendant. In practice, it purchased its entire consumption from the Defendant. The contract contemplated that the Claimant might decide to purchase X direct instead of distilling it. If so, the Defendant was to have the right of first refusal for the supply of X.

The Claimant eventually decided to purchase X direct from a third party. To ensure an adequate supply of Y in the interregnum while switching suppliers, the Claimant demanded additional shipments of Y from the Defendant under a clause allowing for the advance supply of Y. The Defendant refused, and the Claimant sued alleging (inter alia) repudiatory breach of contract. The Defendant counterclaimed for the breach of the clause granting it the right of first refusal.

'''Judgment'''

Flaux J held that the Defendant was in breach of the clauses providing for an additional supply of Y on demand. However that breach was not repudiatory, and the Defendant’s liability was contractually limited. Flaux J further found the Claimant in breach of the first right of refusal clause and liable in damages amounting to the profits the Defendant would have earned by supplying X to the Claimant.

In the process Flaux J comprehensively set out the law on clauses granting the right of first refusal. That part of the judgment is not dealt with in this note, which focuses on the interpretation of the Limitation and Exclusion clauses below. 

Limitation and exclusion clauses

Clause M of the contract read “No claims by [the Claimant] of any kind, whether as to the products delivered or for non-delivery of the products… shall be greater in amount than the purchase price of the product in respect of which such damages are claimed… In no case shall [the Claimant or Defendant] be liable for loss of profits or incidental or consequential damages.” The first sentence purported to limit the Defendant’s liability for non-delivery. The second sentence purported to exclude the named types of loss altogether.

The issues were whether (i) the first sentence limited the Defendant’s liability for deliberately failing to supply the additional quantity of Y requested, and (ii) the second sentence excluded the Defendant’s counterclaim for the Claimant’s breach of the clause granting a right of first refusal. Flaux J found for the Defendant on both points, and stated three propositions of law.

First, in contracts for the supply of goods or services, clauses limiting liability to the contract price are neither unusual nor unreasonable. This is because the limit under such clauses is actually the value the goods would have had if the seller had not breached any statutory or common law warranty (e.g. as to quality or merchantability).

Second, no special wording is required to exclude liability for deliberate repudiatory breaches of contract. The Defendant could rely on Clause M to exclude liability even if (i) it had deliberately refused to supply additional Y, and (ii) that refusal constituted a repudiatory breach. This was because to hold otherwise would be to revive the proposition that certain breaches of contract were so severe that the parties could not have intended to exclude liability for such breaches. More generally, to hold otherwise would also revive the discarded doctrine of fundamental breach (by which certain breaches of contract were regarded as so serious as to disentitle the contract-breaker from relying on exclusion and limitation clauses that might otherwise have been available to him).

With regard to the second proposition, the Claimant had argued that exclusion clauses would not normally exclude liability for deliberate and repudiatory breach of contract (as opposed to negligent or inadvertent breach). The Claimant cited Internet Broadcasting Corporation v. MAR LLC [2009] EWHC 744 (Ch) in support. In that case, Moss QC (sitting as a deputy judge of the English High Court) recognised that the Suisse Atlantique [1967] AC 361 and Photo Production [1980] AC 827 cases had rejected the notion that there were breaches so fundamental that they could not be covered by exclusion or limitation clauses. Instead, the question whether a breach was covered was simply one of construction of the clause in question. However, Moss QC proceeded to find that when construing exclusion clauses there is a strong presumption against deliberate repudiatory breaches being covered unless there are express words to that effect. He further stated that this applied with especial force if the breach constituted personal wrongdoing (as opposed to vicarious liability). In so concluding, Moss QC had regard to the fact that exclusion clauses help allocate insurable risks between the contracting parties and that insurance for the consequences of deliberate wrongful conduct is likely to be almost non-existent.

Flaux J rejected the judgment in the Internet Broadcasting case. The concept of fundamental breach had been abolished. He explained, citing Photo Production, that the effect of an exclusion clause is entirely a matter of construction. Further, he noted that even the previously special cases of deviation and deck carriage were slowly being absorbed into ordinary contract law (citing The Kapitan Petko Voivoda [2003] 2 Lloyds Rep 1). For these reasons, Flaux J concluded that there was no presumption against exclusion clauses covering deliberate and repudiatory breach and that the Internet Broadcasting case had been wrongly decided.

Third, exclusion clauses should be construed strictly against the party relying on them. In particular, in the absence of express wording, they should not be construed in a manner rendering the breaching party’s contractual obligation a mere statement of intent. On the facts, if Clause M excluded all loss of profits and consequential losses, there would be little incentive for the Claimant to honour the Defendant’s right of first refusal. As it was possible to read Clause M as referring only to the sale and purchase of Y and not the breach of the first refusal clause, Flaux J construed Clause M against the Claimant.

'''Comment'''

In Astrazeneca v. Albemarle, Flaux J rightfully rejected the presumption that deliberate and repudiatory breaches were not covered by exclusion clauses. However it is submitted that as a matter of pure construction, a judge having regard to the parties’ common intent when contracting and the use of exclusion clauses as risk allocation mechanisms would more often than not decide that the exclusion clause did not cover the deliberate and repudiatory breach in question. The exclusion clause in Astrazeneca v. Albemarle expressly covered the precise breach alleged by the Claimant: “No claims… of any kind… for non-delivery of the products”. It is unclear whether a less precisely worded clause would have sufficed. In short, notwithstanding Astrazeneca v. Albemarle, when drafting exclusion clauses, parties would be well-advised to continue using wording which is as explicit as negotiations will allow.