Any lawyer in the technology sector is likely to have scratched their head at some point on whether or not "special damages" are something they should be worried about. The weighty presence of US companies in the technology market means that UK technology lawyers – and in fact anyone downloading a piece of software from the US – are likely to come across contracts which are either governed by US law, or have been adapted from US contracts. Often these are filled with slightly unfamiliar terminology, and may contain terms which would never stand up in a UK negotiation, let alone a UK court.
With this in mind, we've joined forces with Garry Berger, a technology-focussed attorney based in Connecticut with Berger Legal, to explore some of the similarities and differences in the way that key legal issues in IT contracting take shape here and in the US. These will obviously differ from one state to the next and so the following is to be read through that lens, but nonetheless the following observations appear to have some level of general applicability.
- B2B exclusions and limitations of liability are pretty much always enforceable in the US, regardless of whether one company has far more bargaining power than the other or whether the contract is on standard terms. In other words there is no UCTA-type protection in terms of limitations of liability having to be reasonable, meaning that, for instance, a company could receive no service at all for the money it had paid and still be barred by the contract from claiming any damages at all. One possible exception is in the area of damages arising from wilful misconduct or similar egregious conduct, which in some states may not be disclaimed.
- In relation to consumers, different states have different consumer protection laws which would intervene on e.g. limitations of liability, with the result that such swingeing exclusions of liability will sometimes not be enforceable.
- The term "indemnity" is often understood to imply an indemnity against third party claims, rather than a UK-style indemnity for all losses between the two contracting parties. As such, what appears to a UK lawyer to be a clause giving far-reaching and onerous indemnity recovery may in fact only provide such recovery for third party claims, and may therefore be more acceptable – however it will always be worth asking for and drafting in clarification that only third party claims are in scope.
- "Special" losses, which often appear in US indemnities and limitation of liability contract clauses, are really the same as indirect or consequential losses, but are habitually thrown into such clauses for good measure – they are not a separate and far-reaching category of damages, as many UK lawyers might suppose.
- Punitive damages on the other hand, which often appear in the same clauses next to "special losses", are a particular class of damages designed to punish one party for its breach. However, even in the absence of a disclaimer, punitive damages are very unusual in breach of contract cases. Punitive damages are more typically found in tort cases.
- The rule on mitigation of losses is effectively the same as in the UK, i.e. under a normal damages claim a party may only claim to the extent that it can demonstrate that it has taken reasonable steps to mitigate its losses.
- "Gross negligence" is in many states almost the same as wilful misconduct, i.e. it requires an egregious act, rather than just being a large-scale form of negligence.
- On interpretation, the US courts typically look to the "4 corners" of the contract to derive the parties' intent and enforce it. In some cases the court will re-write a contract, but this is very unusual – instead they will normally strive to interpret the contract to give meaning to all of the words agreed upon.
- The position on "penalties" (as opposed to liquidated damages, or price adjustments in the form of service credits) is roughly the same as it is in the UK i.e. they are not enforceable per se and can be challenged in the courts. Much as in the UK, lawyers avoid the word "penalties" and instead use terms like "service credits" or "liquidated damages", which the parties may recite as having been carefully determined to reflect a fair measurement of (i) the actual loss sustained or (ii) a justified price reduction to reflect a loss in service quality.
- There are a few implied terms - which are implied into contracts by a mixture of common law and statute, depending on the type of transaction and to some extent the parties involved. Terms that may apply include merchantability, title and non-infringement, an implied "covenant of good faith and fair dealing", and a "fit for purpose" warranty that applies if the seller knows that the goods or services purchased are to be used for a particular purpose. These work much the same as in the UK, i.e. where such terms do apply, they are implied into the contract, but are often explicitly excluded and replaced by express warranties.
- On data privacy, there are a few statutes and bodies which protect data privacy in particular industries, most notably the Gramm Leach Bliley Act ("GLB") for financial services and the Health Insurance Portability and Accountability Act ("HIPAA") for healthcare. However, there is no overall legislation such as the Data Protection Act covering the protection of personal data generally. The US Safe Harbor scheme provides some level of comfort in relation to the protection of personal data being provided from Europe – as it was specifically designed by the US Department of Commerce in conjunction with the European Commission to do exactly that – but it is entirely voluntary for US companies and excludes certain types of companies such as telecommunications common carriers and financial institutions. There are various common law rights to "privacy" and there is talk of a national law obliging companies to notify certain types of major data breach, but there is currently nothing in force or anticipated which affords anything like the scope of protection of the DPA.
Whilst there are further similarities and differences which go well beyond the scope of this article, we hope this is useful in outlining the meaning and legal impact of some of the frequently encountered terms – even if they can't be negotiated away.
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.