United Kingdom | Publication | July 2024
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:
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.
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Our observations Given the wide scope of wilful misconduct, there is a degree of uncertainty as to when it applies. Take the obligation of a supplier to maintain IT security by way of example:
As determining whether an action amounts to wilful misconduct is always a matter of interpretation, the parties could consider defining the term when wishing to exclude it from the liability caps. While this may reduce uncertainty as to what wilful misconduct means, it can also present an opportunity for the party (usually the customer) most likely to benefit from the other party (usually the supplier) having uncapped liability if its actions meet the test for wilful misconduct. This is because it can use the definition to lower the bar for wilful misconduct from the bar set by the courts, making it easier to recover uncapped damages. If the parties decide to define wilful misconduct, the principles set out in De Beers may be used as guidance when drafting such definitions – for example: "Wilful misconduct" means an intentional act or omission that constitutes a breach of this Agreement, where such party knows, or is reckless as to whether, such act or omission constitutes a 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:
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:
However, the Marhedge decision was criticised in AstraZeneca UK Ltd v Albemarle International Corp [2011] EWHC 1574 (AstraZeneca). The English High Court in AstraZeneca:
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.
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Our observations Although the claimant in the Pinewood case has applied to appeal in the Court of Appeal, 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). At the time of negotiating a limitation or exclusion of liability clause in an outsourcing or technology contract or transitional services agreement, the parties may not give much consideration to the possibility that one of them might later deliberately breach the contract. However, for various reasons, that may happen, and a party wishing to ensure that the other party is not exonerated from liability for its own deliberate breach should therefore consider including express wording to the effect that the limitations and exclusions of liability do not apply in respect of that party’s own deliberate breach. |
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