Published in Dechert's Commercial Matters March 2012
Contracts often contain exclusion clauses which seek to exclude or limit liability. It is common for the benefit of exclusion clauses to be removed if the circumstances are such that the conduct of the party claiming benefit of the clause can be called into question – such as "no liability .... other than for .... gross negligence".
There is uncertainty in the UK as to exactly what amounts to 'gross negligence', in particular whether as a matter of law "gross negligence" is any different from ordinary "negligence". The Camarata case below highlights the need for clarity when using the term 'gross negligence', particularly in the context of an exclusion clause.
Camarata Property v Credit Suisse Securities
Camarata Property (Camarata) invested in a five-year note (the Note) issued by Lehman Brothers for US$12 million which was purchased based on the advice of Credit Suisse Securities (Europe) (CSSE). After Lehman Brothers collapsed in September 2008, Camarata lost its investment.
Camarata claimed that CSSE had been grossly negligent, and failing that, negligent, under the investment advisory service agreement (Agreement) between the two parties. Camarata alleged that in investing in the Note they received negligent advice from CSSE, in breach of the Agreement.
The Agreement excluded CSSE's liability for Camarata's loss stemming from their advice, unless the loss was caused by gross negligence. Thus, the court addressed the distinction between "negligence" and "gross negligence".
With regard to the meaning of "gross negligence" Camarata argued that previous case law had not distinguished (or had found it difficult to distinguish) 'simple' and 'gross' negligence – and that, therefore, there is no relevant distinction. Indeed, recent case law suggested that gross negligence was not a distinct concept. However, the court concluded that it was not so much a question of an English legal concept, but rather the meaning of the term in the Agreement. The specific language used in the Agreement referred both to "negligence" and "gross negligence". As a result, the court concluded that the parties' intention was for gross negligence to have a separate meaning in the Agreement. Acknowledging that it was not easy to define or describe with any precision, the court's view was that gross negligence was intended to represent "something more fundamental than failure to exercise proper skill and/or care" (constituting negligence). It embraces "any conduct undertaken with actual appreciation of the risks involved, but also serious regard or indifference to an obvious risk".
On the facts, the Court held that CSSE was not negligent (or grossly negligent) since the advice sought by Camarata was not sufficiently focused. It did not specifically ask whether or not Camarata's investments were safe from the risk of counterparty default. The Court agreed that CSSE did not have grounds to investigate Lehman Brothers' creditworthiness. Although it was agreed that, had Camarata received information from CSSE about Lehman Brothers' default, they would have sold the Note, CSSE could not have predicted the collapse of Lehman Brothers and so were not negligent.
Comment
The case suggests that a distinction can be made between gross negligence and negligence. However, the distinction is one "of degree" and not "of kind" suggesting that gross negligence is not entirely independent from ordinary negligence. It is also likely that, given the inherent difficulty in defining gross negligence on a generic basis, the term will need to be considered on a contextual basis, depending on the facts and the contract of each particular case.
Not surprisingly, the case of Camarata does not give us a clear, all encompassing definition of 'gross negligence'. If the term gross negligence is used in a commercial contract, the parties should be aware that it implies a greater degree of culpability than simple negligence and, if at all possible, affix a clear meaning to the term identifying the sort of action / inaction which will prevent the party in question from relying on its exclusion or limitation of liability.
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