Deliberate wrongdoing and intentional violation
In the world of outsourcing and technology contracts, the concept of wilful misconduct is a crucial one. This term refers to an intentional act or deliberate failure to act that deviates from an expected standard of behavior, involving a conscious disregard of a known duty or a duty that should have been known.
To ensure that liability limits do not apply to such behavior, contracts often define wilful misconduct clearly as deliberate wrongdoing or intentional breach, not mere negligence or error. This helps to precisely exclude it from liability caps.
For instance, a contract might specify that liability caps do not apply in cases of wilful misconduct or gross negligence, thus carving out these acts from limitation or exclusion of liability provisions. The definition of wilful misconduct is often identified as a deliberate or intentional breach or wrongful act, often requiring proof of knowledge of the duty and conscious disregard thereof.
The English High Court in cases like Pinewood, Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation, Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others, and AstraZeneca have all provided insight into the interpretation and application of these clauses.
In the Pinewood case, the court 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. The court rejected the existence of any general rule or special presumption that requires explicit language for the exclusion of deliberate breaches from the scope of protection offered by a limitation or exclusion clause.
In the Innovate Pharmaceuticals Ltd case, the court ruled that the words 'howsoever arising' in a liability clause are capable of excluding liability for wilful default, even though it is not expressly mentioned.
In the Energy Works (Hull) Ltd case, the court considered that to prove 'wilful default', the employer would have to prove that the contractor was in breach of contract and either intended to commit such breach or was recklessly indifferent as to whether its conduct was in breach of contract or not.
The English High Court in AstraZeneca held that, unless there is clear wording to the contrary, a broad exclusion or limitation of liability clause applies to all contractual breaches. The court confirmed that construing exclusion or limitation of liability clauses is simply a matter of interpretation in each case.
The weight of current authority suggests that, where the drafting is clear and unambiguous, a limitation or exclusion clause will apply to a deliberate default (whether repudiatory or otherwise). However, parties must expressly specify if they expect wilful misconduct (or similar expressions) to be carved out of a liability cap to avoid uncertainty.
In the case of De Beers, deliberate default is defined as a default that a person knows they are committing. It is worth noting that wilful misconduct is wider than deliberate default as it includes recklessness.
In the case of Marhedge, a rebuttable presumption exists that a party in deliberate repudiatory breach cannot rely on an exclusion clause. Parties negotiating a limitation or exclusion of liability clause in an outsourcing or technology contract or transitional services agreement may not give much consideration to the possibility that one of them might later deliberately breach the contract. Therefore, it is essential to consider and address this possibility during negotiations to avoid potential disputes and uncertainties.
Given the potential seriousness and intentional nature of wilful misconduct, parties who stand to gain from demonstrating that the other party's behavior amounts to wilful misconduct may be incentivized to argue for wilful misconduct. This could potentially lead a supplier having to spend a significant amount of resources to defend its position.
In summary, a contract definition to exclude wilful misconduct from liability caps might read:
"Wilful Misconduct means any intentional act or omission, done with knowledge that it is wrongful or in conscious disregard of a known duty or standard of care imposed by this Agreement or applicable law, and excludes any act arising from negligence, mistake, or error in judgment. Liability limitations or caps under this Agreement shall not apply to damages or losses arising from wilful misconduct."
This approach aligns with standard legal interpretations used in jurisdictions like India, the UK, Australia, and the US, and courts have upheld the unenforceability of liability caps for wilful misconduct in tort.
- In the realm of outsourcing and technology contracts, a party may deliberately breach their obligations, which can be classified as wilful misconduct, distinct from mere negligence or error.
- When drafting a contract, it's advisable for parties to clearly define wilful misconduct as intentional wrongdoing, including acts done with knowledge that they are wrongful or in conscious disregard of a known duty, as this behavior should be excluded from any liability caps to avoid ambiguity.
