In a decision helpful to both special purpose vehicles (SPVs) and service providers utilising SPVs, the Irish Supreme Court has given effect to a gross negligence carve-out to a general (and standard-form) limitation of liability clause (Clause) in an Irish-law commercial licence. The case also highlights the dangers of taking for granted the protections such clauses purport to provide, in particular where key terms such as gross negligence and wilful default are not defined.
Findings
In GCC Foundation FI-LLC v European Computer Driving Licence
Foundation Ltd [2012] IESC 55, a licensor sought to rely on
the Clause to cap its liability in respect of a lower court finding
that it had breached the licence. The Clause did not apply where
there was gross negligence, but the term 'gross negligence'
was not defined in the licence.
The Court had no difficulty giving effect to the Clause, but on
the facts found that the licensor's behaviour leading to the
breach constituted gross negligence. Accordingly, the carve-out
applied, and the licensor faced an uncapped liability
exposure.
In applying the carve-out, the Court endorsed the lower
court's approach which "assumed that the parties intended
the clause to have meaning and, indeed, a meaning which would have
business efficacy".
The Court found it significant that the parties had agreed to a
standard of gross negligence as opposed to negligence only. It
found that the appropriate meaning of 'gross negligence'
(in the context of the Clause) to be 'a degree of negligence
where whatever duty of care may be invovled has not been met by a
significant margin'.
Applying this 'significant margin' test, it found that the
carve-out would apply when alleged breach of contract could be said
to have resulted from the conduct of the offending party which was,
with regard to the party's obligations arising under the
contract, significantly careless.
Impact
The case is helpful in that the Court recognised that undefined
'gross negligence' terminology in commercial contracts can
and should be given effect to provide business efficacy to the
agreed terms.
However, the standard of gross negligence endorsed appears to
represent a significantly lower level of culpability than what is
generally considered to be the best in the UK (that is, the obiter
Hellespont Ardent standard), and the UK practitioners should be
aware of this formal Irish departure from their position (for
example, when dealing with Irish asset-holding or debt-issuing
SPVs).
Secondly, the Court appeared to rely on failure to observe
extra-contractual commercial good faith obligations in part as
justifying its findings of gross negligence. Such an approach may
obviously add to commercial uncertainty, rather than limit
it.
UK practitioners may find the dissenting judgment to be more
useful on these issues. The dissent cautioned against ascribing
overly broad meanings to undefined carve-out terms, arguing that to
do so would result in an inversion of the fundamental logic and
purposes of limitation clauses. Such an interpretation would mean
that the "exception almost swallows the general
limitation".
The dissent also endorsed the Hellespont Ardent formulation of gross negligence, and further argued that the Court erred in appearing to ascribe obligations to the licensor beyond those expressly found in the licence itself, declaring that it is the "contract which defines the conduct which is expected from each party".
Mitigation strategies
General limitation clauses (and indemnity provisions) and standard carve-outs are often lightly negotiated as largely-settled boilerplate provisions. Corporate service providers with no underlying economic interest in a structure often assume that they are protected from liability is precise.
Commercial and risk certainty can be achieved through a number
of strategies. For example, explicitly and strictly limiting
on's duty of care to the other party to expressly assumed
obligations, introducing monetary caps for carve-outs in addition
to those that apply generally, and most simply, by defining what is
meant by gross negligence (and other carve-out terms).
The Irish Supreme Court decision is to be welcomed as confirmation
from the final appellate court that sophisticated contractual
parties should be free to limit liability for defective performance
involving negligence.
Care should be taken to define the threshold standard of care that
will results in no liability, however, as language that admits a
range of meanings may not produce the intended result.
This article was first published in the February edition of the International Financial Law Review, March 2013
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.