Gross Negligence Revisited

The recent decision of Tottle J in the Supreme Court of Western Australia in GR Engineering Services Ltd v Investmet Ltd¹ reactivated the debate as to the meaning of the expression “gross negligence” where used as a carve out from a no liability clause.

Tottle J usefully identified the principal Australian case law on the subject.

The expression “gross negligence” is problematic and presents legal advisors with the practical difficulty of characterising particular conduct.

Importantly, Tottle J noted that the Australian courts in considering the common law meaning of “gross negligence” in the context of exclusion and indemnity clauses followed the approach of Mance J in The Hellespont Ardent² in which his Lordship said:

'Gross' negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence. But, as a matter of ordinary language and general impression, the concept of gross negligence seems to me to be capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or an indifference to an obvious risk.

In the earlier decision of the English Court of Appeal in Armitage v Nurse³, Millett LJ noted at 713:

But while we regard the difference between fraud on the one hand and mere negligence, however gross, on the other as a difference in kind, we regard the difference between negligence and gross negligence as merely one of degree. English lawyers have always had a healthy disrespect for the latter distinction.

One of the most instructive Australian decisions referred to by Tottle J was the recent judgment of Ball J in DIF III – Global Co-Investment Fund LP v Babcock & Brown International Pty Limited⁴.

The case involved an investment management agreement, which relevantly, contained the following provisions:

The Manager must:

(a) invest and manage the Portfolio for and on behalf of the Partnership in accordance with this Agreement;
…
(g) exercise all due diligence and vigilance in carrying out its functions, powers and duties under this Agreement.

The agreement also contained the following exculpatory clause wrongly identified as an indemnity:

5.1 (a) Neither the Manager nor any of its related bodies corporate, directors, officers, employees, shareholders and other agents (each, an Indemnified Party), shall be liable to the Partnership or to the Limited Partners for any Loss arising from any act performed or omitted by such parties arising out of or in connection with the performance by the Manager (and/or its related bodies corporate) of its services under this Agreement or arising out of the Partnership’s business or affairs, except to the extent that any such Loss are primarily attributable to the gross negligence or wilful misconduct of such Indemnified Party.

Turning to the facts.

Babcock & Brown was approached by Deutsche Bank concerning the possibility of acquiring the shares in Coinmach Services Corporation, a publicly listed Delaware corporation. Deutsche Bank was one of the financial advisors to Coinmach. The Coinmach share acquisition proceeded but resulted in major losses for the investors in the fund managed by the Manager. It was alleged that the Manager breached a duty of care and was liable in damages to the investors. The Manager relied upon clause 5.1(a) by way of defence.

In dealing with the meaning of “gross negligence” Ball J noted⁵:

The effect of that clause is that the Manager will not be liable unless it has at least been grossly negligent. “Gross negligence” is not a term with a precise meaning; and its meaning is to be ascertained from the context in which it is used. In some cases, it has been held to encompass more than mere negligence… However, any distinction between gross negligence and mere negligence is one of degree and not of kind: Armitage v Nurse [1998] Ch 241 at 254 per Millett LJ. In other cases, the word “gross” has been found to add no additional meaning in the circumstances: see Sucden Financial v Fluxo-Cane Overseas Ltd [2010] EWHC 2133 (Comm) at [54] per Blair J.

In deciding that the manager had acted with gross negligence, his Honour continued⁶:

In the present case, in my opinion the phrase “gross negligence” encompasses more than mere negligence, but it would at least include a deliberate decision not to undertake enquiries or investigations required by the contract.

His Honour’s key conclusion was as follows⁷:

The PI Insurers do not rely on cl 5.1(a) of the Management Agreement; and it was for them to plead it if they intended to rely on it. In any event, in my opinion, the Manager’s conceded breach amounts to more than mere negligence. It must have reflected a deliberate decision on the part of the Manager to rely on the work of the Coinmach Deal Team rather than to undertake any substantive enquiries of its own in relation to the investment. In taking that deliberate decision in breach of its contractual obligations, it was at least grossly negligent, with the result that the exclusion in cl 5.1(a) did not apply.

It is also interesting to note that Ball J included within the concept of “gross negligence” a deliberate decision not to do something. Obviously, negligence as a tort is concerned with inadvertent conduct and not intentional wrongdoing. It, therefore, has to be assumed that his Honour was not addressing deliberateness in the sense of conscious wrongdoing but rather the making of a decision which not only involved a breach of a duty of care but also a serious disregard or indifference to obvious risk to the investors.

In James Thane Pty Ltd v Conrad International Hotels Corp⁸, the Queensland Court of Appeal examined the nature of gross negligence in the context of an indemnity in a management agreement between Jupiters Limited (the owner of a casino complex on the Gold Coast) and Conrad International Hotels. Williams J (with the agreement of the other members of the court) noted as follows [73] – [75]:

A reading of clause 12.4.1 of the Management Agreement, convinces me that what must be established for Conrad to lose its right of indemnification is that direct gross negligence on its part caused the liability in question. Vicarious liability for an act of gross negligence by hotel employees would not of itself be sufficient.

It is not necessary to consider in depth the meaning of "gross negligence" in the subject clause. Clearly more than mere negligence is involved and I would favour an approach along the lines of that adopted by Mance J in Red Sea Tankers Ltd v Papachostidis.

Key messages

1. Gross negligence is not a separate tort and does not have a precise meaning at common law.
2. The difference between negligence and gross negligence is one of degree and not of kind.
3. The concept is more fundamental than failure to exercise proper care but that additional dimension can only be determined by context.
4. Ultimately, the question whether conduct constitutes gross negligence will turn upon the impression of a court. Thus, in Babcock & Brown the relevant conduct involved a deliberate decision not to undertake an investigation or an analysis of the proposed investment in flagrant breach of a contractual obligation to exercise due diligence and vigilance. In this case the conduct “crossed the line” and attracted the pejorative “gross”.
5. It is always open to the parties to introduce a definition of gross negligence for the purposes of their contract. However, because the definition concerns a type of conduct any resolution will be highly fact sensitive and, therefore, necessarily involving some measure of uncertainty.
6. Overall, a party seeking to establish that the conduct of a counterparty constitutes gross negligence faces a high bar.