Liability - Sally Mewies - ThinkHouse September 2015

Michael Luckman: I'm joined by Sally Mewies, one of our IT and Outsourcing partners who's going to be talking about how do we exclude and limit liability in contracts. We use the phrase indemnity and indemnify in our contracts, but is that legal a term and will it protected us from claims?

Sally Mewies: No contrary to popular belief Michael the word indemnity or indemnify doesn't have a legal meaning, it just has a normal natural English language meaning and people make a mistake in thinking that just by using the word indemnify or indemnity they are creating greater obligation than there actually is. So when you use that word because it only means to compensate or pay you do need to be very clear in your clause what you are covering and you need to use very clear drafting.

Michael: What is a knock-for-knock indemnity clause and how does it affect claims?

Sally: A knock-for-knock indemnity is a very common structure that's used in the oil and gas sector to protect individual parties from the complexities that can arise when somebody's injured or is killed in those hazardous working conditions and the idea behind that is that party A indemnifies party B against any liability that party B may have for death or personal injury to party A's employees. And why that might be a problem is because in the English law you're not allowed to exclude liability for death or personal injury under UCTA and there has been some debate in the past as to whether that indemnity in fact defends that rule. Perceived wisdom is that it's an ok and it's an acceptable apportionment of risk.

Michael: What is an insurance style indemnity clause and how does this contrast with other indemnity clauses?

Sally: There are essentially two types of indemnity mechanisms that you can use in your contract. One is an insurance style indemnity and that is where you are indemnifying the other party against a specific event, for example an intellectual property infringement or a specific amount of money that you may be liable to be paid, so it is what it is, it's confined to a specific issue. When you start to use an indemnity mechanism in relation to breach of contract then that's a completely different mechanism and that creates a lot of difficulties around interpretation in terms of what you might mean by using that indemnity for a breach of contract.

Michael: How do exclusions apply in terms of deliberate breach and wilful default?

Sally: If you try to exclude your liability for a deliberate breach or a wilful default then that will work. There's nothing in English law that inherently means that you can't do that. There were some cases a few years ago that called that into question but everybody's clear now that those sorts of breaches will fall within a properly drafted exclusion clause. So actually if you do want liability for wilful default or deliberate breach to sit outside the cap, you need to be really clear about that in your drafting.

Michael: Can a loss of profit be both direct and indirect?

Sally: Yes it can Michael and in fact for many years for some reason the common belief was that actually a loss of profit could only be an indirect loss and that is not the case, a loss of profit can be both a direct and indirect loss and the authority for that is the British Sugar case.

Michael: Is there any way of excluding all liability?

Sally: Well no there isn't because there are certain things which the Unfair Contract Terms Act say you can't exclude, death, personal injury, and there's also fraud and fraudulent misrepresentation which you can't exclude and that's based on a case of Thomas Witter from a few years ago. The risk of course is if you try to exclude liability completely a court won't think that's what you can possibly have intended if it's in a contractual sense so will use the interpretation rules to rail against that, so it's actually quite difficult unless you had very special circumstances to completely exclude liability.

Michael: What about reciprocal liabilities, how do they work?

Sally: Quite often what you find in a contract is that there are reciprocal exclusions of loss so you might find a clause that says both parties exclude liability for loss of profit for example or loss of use, and that is quite a common mechanism and what it means is that each party's then excluded from bringing a claim for those sorts of losses. There is a danger and a bit of a bear trap in that in the sense that when you do that in a reciprocal way it doesn't always create a common ground between the parties because in fact if you exclude liability for loss of profit for a supplier you might find that they have no remedy, and there's been some cases on that and that's clearly not a good place to be.

Michael: What is meant by charges paid and/or payable?

Sally: Well that's a very interesting question Michael and it's not entirely clear I have to be honest with you. It's the mechanism that we use very often in commercial contracts for capping both parties liability to the other and quite typically it would be a percentage of the charges that are paid or payable in a year over the life of the agreement. The difficulty with using that mechanism that, there can be some uncertainty about how much was paid in a particular period and then when you turn to the word payable does that mean amounts that have been invoiced and are payable at that time or does it mean the amounts that are payable over the life of the agreement. It's not really clear and therefore when you're using that mechanism to cap liability you should always make sure that you have a figure in there, so what I mean by that is the greater of X million or a percentage of charges paid or payable in a period.

Michael: What are the key points for general counsel when drafting limitation of liability clauses?

Sally: Well as we're sitting here in 2015 I would say use really clear language. We know that the courts are adopting a purposive and interpretive approach to limitation of liability clauses so you need to be really clear what you mean in the drafting if you want to avoid a court taking a completely different view of what it meant. I think you also need where you are excluding types of loss if you're excluding profit data use and you want to exclude those both directly and indirectly you need to use those words and better to bullet point them through the clause so they're really standout and standalone and are clear. And finally I think in the light of the Fujitsu and IBM case particularly you need to have one eye on what the other side can recover if there's a breach of contract by you because if you've created a contractual situation where the other side has no remedy, then that could be a problem because you may find a court will say well that can't possibly have been the intention and they'll ignore that exclusion and then the other side would have obviously an unlimited claim against you.

Michael: Thank you Sally that was fascinating.

Sally: Thank you very much Michael.