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The 29th Conference of Parties (COP 29) will be held in Baku, Azerbaijan between 11 and 22 November 2024.
United Kingdom | Publication | July 2024
In outsourcing, technology and transitional services agreements, a party (sometimes one whose home jurisdiction is not the UK) may push for a carve-out of gross negligence from the liability cap (that is to say, the liability cap will not apply in the case of gross negligence). This is sometimes seen in asset management outsourcing arrangements, and is becoming more common in cross border outsourcings and transitional service agreements.
Under English law:
What should a party, when faced with a request to include the concept of gross negligence in an English law contract (whether as a carve-out to a liability cap or in another contract provision), do in such circumstances?
The case of Federal Republic of Nigeria v JP Morgan Chase [2022] EWHC 1447 (Comm) is instructive on how English courts recognise the differences between ordinary negligence and gross negligence when the wording is used in a contract.
In Federal Republic of Nigeria (Nigeria) v JP Morgan Chase (JPMC), Nigeria claimed that JPMC had breached a so-called Quincecare duty (that is, a bank must not execute a payment instruction given by an agent of its customer without making inquiries if the bank has reasonable grounds for believing that the agent is attempting to defraud the customer) by transferring a significant amount of money from Nigeria’s depository account to another company in Nigeria.
JPMC argued that the terms of the depository agreement had modified the ordinary standard of negligence applicable to the Quincecare duty, meaning Nigeria had to prove gross negligence.
In its judgment, the English High Court dismissed Nigeria’s claim based on the facts of the case. In respect of gross negligence, the Court:
Our observations
The Court’s comments on gross negligence provide some indication of how a court might construe the words “gross negligence” when they appear in a contract. However, what they mean in a particular contract will depend on the facts and that particular contract. This can lead to the parties wishing to define the term when it is used in their contract. While this may reduce uncertainty as to what gross negligence 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 gross negligence. This is because it can use the definition to lower the bar for gross negligence from the relatively high bar of “jaw dropping negligence” set by the courts, making it easier to recover uncapped damages. If the parties choose to define the term, the following factors should be borne in mind:
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The exclusion of different types (or heads) of losses in an outsourcing, technology or transitional services agreement is often a contentious issue.
As suppliers are more likely to rely on such exclusions than customers, they may seek to include a comprehensive list of excluded losses to limit their liability. Two recent cases show that suppliers should, however, be aware that that courts may not be sympathetic to artificial attempts to reframe a loss to avoid an exclusion (or to come with in it, as the case may be).
The English High Court decision in EE Limited v Virgin Mobile Telecoms Ltd [2023] EWHC 1989 (TCC) illustrates this point. EE Limited (EE) and Virgin Mobile Telecoms Ltd (VMT) entered into a telecommunications supply agreement (TSA) in 2013. EE later brought a claim against VMT on the basis that VMT had breached the exclusivity clause in the TSA, and estimated its damages to be £24,635,684 for loss of revenue.
VMT considered that it had not breached the exclusivity provision and argued that the damages claimed fell within the excluded head of loss, “anticipated profits”, and so were not recoverable by EE. VMT applied for reverse summary judgment and/or strike out of the claim, which the High Court granted.
EE argued that:
The Court found that EE was claiming lost revenue as losses, and in doing so, were required to give credit for any costs it would have incurred in earning that revenue. This reduced the claim in substance to one for loss of profit.
Having concluded that the claim was for loss of profits, the Court had to decide whether loss of profits fell within the excluded loss of “anticipated profits”, as used in the TSA. The Court:
Finally, the Court rejected EE’s argument that such a construction would leave EE without any remedies for breach of contract. This was not a case “in which it could possibly be suggested that the effect of [the exclusion of anticipated profits] would be to relieve VTM of all liability for breach of any of its obligations under the TSA.” Accordingly, the Court considered that there was no need to look for an alternative construction.
A case that concerned an artificial attempt to characterise a loss in the claim so as to take the benefit of an excluded head of loss is Soteria Insurance Limited v IBM United Kingdom Ltd [2022] EWCA Civ 440. At issue was whether or not the losses in question fell within an exclusion of loss of profits. The losses were found by the Court of Appeal to be wasted expenditure.
Our observations Both the cases above underscore the need to:
These cases raise considerations in relation to other types of claims under outsourcing, technology and transitional services agreements. For example, a loss of data under such contracts may be framed in various ways. It could be argued that it is a breach of the:
These various provisions may be covered by different liability caps in the contract, and it will be tempting for each party to frame the claim in such a way so as to take advantage of the lowest cap (the supplier) or the highest cap or uncapped (the customer), as the case may be. It may be preferable in such cases to deal with the issue at the outset by having a separate cap that deals with all data-related claims, whatever provision is breached. |
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The 29th Conference of Parties (COP 29) will be held in Baku, Azerbaijan between 11 and 22 November 2024.
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