Grossing Up Your Exclusion Clause: The Devil In The Detail

Gross or mere negligence? Many a debate has been had arguing whether to permit the supposedly "lesser" obligations of mere negligence.

As lawyers, the primary objective in negotiating any deal is to achieve the best commercial objective for your client, mindful of any potential pitfalls.

Often, your client may be entering into a deal as a non-primary party (ie, neither as borrower or financier), and would accordingly seek to have their liability limited in all circumstances except in the event of fraud, default or negligence.

In the rush of having the deal completed, it is understandable that a not great deal of thought is given to such enforcement terms beyond ensuring that they are present in the documents that your client enters into.

Attention will focus to whether it is preferable to draft the exclusion clause so it refers to "gross negligence" (the higher term) rather than "mere" negligence.

Unlike civil law and North American tort law, it has generally been accepted that common law does not distinguish between categories of care, therefore there is no discernible difference between the higher term and "mere negligence".

This becomes the first point of contention when dealing with foreign counsel as the common law drafter will seek to have any limitation exclude only gross negligence. Often, when dealing in cross-border arrangements the arguments can become quite heated.

The higher term is used widely in common law judgments, but more so in criminal, rather than in a commercial context. However they do exist, and we suspect, will be considered more often as common law drafters leave the term in for the Court to determine what it means.¹

The common law has accepted the validity of exclusion clauses drafted to limit liability to the higher term as seen in the United Kingdom.

Furthermore, the gravity of the higher term has been considered in the United Kingdom High Court decision of Red Sea Tankers Ltd and Others v Papchristidis [1997] 2 Lloyds Rep 547 (the Hellespont Ardent).

In this case, the agreement was expressed to be subject to the laws of New York (which made it perfectly normal to include the higher term in the exclusion clause). Justice Mance took the opportunity to examine how such a clause could be treated in English common law and made the following points:

• it is a matter of construction to find the objective intentions of the parties at the time of contracting;

• since parties have chosen words to form their contractual relationship, these words must be given meaning in light of the nature of the commercial relationship;

• therefore in this decision, the higher term was equated with:

Application to Australian contracts

Based upon the decision in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, it is apparent that Courts will decide the operation of an exclusion clause on the presumed intention of the parties at the time of contracting.

Therefore, if the higher term is inserted into the exclusion clause, there is a possibility that the Court may reduce liability flowing from the alleged contravening conduct given the existence of common law commentary such as Hellespont Ardent.

This may save your client from a higher threshold of liability some years down the track.

In the end, a commercial decision will have to be made. One can stick to the traditional common law view that there is no difference between the higher term and mere negligence and it would be perfectly reasonable to settle for this.

However, given Justice Mance’s dicta in Hellespont Ardent and the Courts’ willingness to look towards the presumed intention of the parties in deciding the operation of the exclusion clause, you may wish to seek your client’s instructions or as a client you may instruct your lawyer to negotiate for the higher term.

Where US interests are included as part of the deal, it would generally be advisable negotiate for the higher term exclusion clause given that it is defined to be of a higher threshold under US law.

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.