Exemption clauses in contracts, which seek to limit or exclude liability, are often the subject of tense and protracted commercial negotiations. Invariably one party will want to widen its ability to recover losses in the event of a breach, whilst the other will seek to reduce its liability to a level commensurate with the risk it is taking on.

Such clauses may operate to exclude liability for particular types of losses, for example, indirect or consequential losses and/or to limit liability by applying financial caps on the maximum amount recoverable, for example, by reference to a fixed amount or a percentage of the contract value.

In such negotiations, it is usually agreed that a party wishing to rely upon such clauses should not benefit from them in circumstances where its conduct can be called into question. However, defining the nature of that conduct is easier said than done.

Frequently, parties will try to do so by using terms such as "wilful misconduct", "deliberate default" and "gross negligence". We will see from two recent cases that some of these terms are better understood under English law than others.

"Wilful misconduct" and "deliberate default"

In De Beers UK Limited v Atos Origin IT Services [2010] EWHC (TCC), De Beers entered into a software development and supply contract with Atos under a fixed price contract. The project did not progress as planned, resulting in significant delays and cost overruns which Atos alleged was a result of a lack of co-operation and increases in the scope of work from De Beers.

The contract was terminated with each party arguing that this was in response to a repudiatory breach by the other. The judge found Atos was liable for breach of the contract for suspending work, entitling De Beers to terminate and claim damages.

In assessing the amount of damages to be awarded, the judge considered the limitation of liability clause contained in the contract which was not to apply where there was "wilful misconduct" or "deliberate default".

The judge found that "wilful misconduct"' referred to conduct by a person who knows that he is committing, and intends to commit a breach of duty, or is reckless in the sense of not caring whether or not he commits a breach of duty. This was in contrast to "deliberate default" which meant a default that is deliberate, in that the person committing the relevant act knew that it was a default. The judge further found that "deliberate default" did not extend to recklessness and was, therefore, narrower than "wilful misconduct."

"Gross negligence"

The English courts have, over the years, grappled with the meaning of this phrase in a civil law context. One school of judicial thinking is that there are no shades of negligence with the other seeking to give "gross" some meaning.

In the case of Camarata Property Inc v Credit Suisse Securities (Europe) Limited [2011] EWHC 479, Camarata incurred significant losses as a result of investments made on the advice of the investment bank Credit Suisse. Camarata alleged that Credit Suisse was negligent in its advice and sought to recover its losses from it. Credit Suisse relied upon a limitation of liability clause in its contract with Camarata which provided that it would not be liable for any advice given unless that liability arose directly as a consequence of "gross negligence".

Camarata argued that under English law there is no relevant distinction between negligence and "gross" negligence. The judge rejected this concluding that the relevant question was not whether "gross negligence" was a familiar concept in English law, but rather what the parties meant by the expression "gross".

The judge commented that "gross" was clearly intended to represent something more fundamental than a failure to exercise proper skill and care constituting negligence. The judge found that as a matter of ordinary language, the concept of "gross negligence" was capable of embracing "not only conduct undertaken with actual appreciation of the risks involved, but also serious regard of or indifference to an obvious risk".

Therefore, the judge found that Camarata would have to show more than mere negligence on the part of Credit Suisse in order for the exclusion of liability not to apply. Although the judge considered "gross negligence" to be more than simple negligence, he stated that much will depend on the context in which the term is used.

What can we learn from these cases?

The cases underline the need to exercise caution when agreeing exemption clauses. Consideration must be given not only to the type and amount of damages to be excluded or limited, but also to the type of conduct which would prevent reliance on them.

Whilst the courts have opined on the meaning of the phrases "wilful misconduct", "deliberate breach" and "gross negligence", the better approach is fully to articulate in the contract the type of conduct which the parties intend will prevent reliance upon the limitation or exclusion.

By doing so, not only will the parties know precisely what is expected of them, but also clear guidance will be given to the judge, arbitrator or other decision maker in the event of a dispute.

Client Alert 2011-105