Part 1 – Gross Negligence And Reframing A Type Of Loss

The slippery concept of gross negligence – carving it out from a liability cap

In outsourcing, technology and transitional services agreements, a party (sometimes one whose home jurisdiction is not the UK) may push for a carve-out of gross negligence from the liability cap (that is to say, the liability cap will not apply in the case of gross negligence). This is sometimes seen in asset management outsourcing arrangements, and is becoming more common in cross border outsourcings and transitional service agreements.

Under English law:

• The defining characteristic of the tort of negligence is a failure to exercise reasonable care and skill.
• Gross negligence is not recognised as a separate tort from the tort of negligence.
• The courts typically recognise that, where the words "gross negligence" are used in a contract, they connote negligence which is different in degree or seriousness from ordinary negligence.

What should a party, when faced with a request to include the concept of gross negligence in an English law contract (whether as a carve-out to a liability cap or in another contract provision), do in such circumstances?

The case of Federal Republic of Nigeria v JP Morgan Chase [2022] EWHC 1447 (Comm) is instructive on how English courts recognise the differences between ordinary negligence and gross negligence when the wording is used in a contract.

In Federal Republic of Nigeria (Nigeria) v JP Morgan Chase (JPMC), Nigeria claimed that JPMC had breached a so-called Quincecare duty (that is, a bank must not execute a payment instruction given by an agent of its customer without making inquiries if the bank has reasonable grounds for believing that the agent is attempting to defraud the customer) by transferring a significant amount of money from Nigeria's depository account to another company in Nigeria.

JPMC argued that the terms of the depository agreement had modified the ordinary standard of negligence applicable to the Quincecare duty, meaning Nigeria had to prove gross negligence.

In its judgment, the English High Court dismissed Nigeria's claim based on the facts of the case. In respect of gross negligence, the Court:

• Observed that gross negligence "is a notoriously slippery concept: it requires something more than negligence, but it does not require dishonesty or bad faith and indeed does not have any subjective mental element of appreciation of risk."
• Referred to the leading case on gross negligence, The Hellespont Arden [1997] 2 Lloyd's Rep 547, in distinguishing the qualitative meaning of gross negligence from ordinary negligence: "It is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence. But, as a matter of ordinary language and general impression, the concept of gross negligence seems to me capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or indifference to an obvious risk".
• Decided that the test of gross negligence should be characterised by a form of "jaw-dropping" negligence, requiring a much higher standard than ordinary negligence.

Our observations

The Court's comments on gross negligence provide some indication of how a court might construe the words "gross negligence" when they appear in a contract. However, what they mean in a particular contract will depend on the facts and that particular contract.

This can lead to the parties wishing to define the term when it is used in their contract. While this may reduce uncertainty as to what gross negligence means, it can also present an opportunity for the party (usually the customer) most likely to benefit from the other party (usually the supplier) having uncapped liability if its actions meet the test for gross negligence.

This is because it can use the definition to lower the bar for gross negligence from the relatively high bar of "jaw dropping negligence" set by the courts, making it easier to recover uncapped damages.

If the parties choose to define the term, the following factors should be borne in mind:

• The type of contract that is being negotiated - e.g. is there a significant risk that the outsourced/technology/transitional services might involve conduct that could amount to gross negligence – if so, then that conduct could be explicitly set out in the definition.
• English courts distinguish gross negligence from ordinary negligence by emphasising the extremely high standard required for determining the former, meaning that the language used in defining the term should aim to capture that higher standard. If the definition sets the bar too low, a party wishing to rely on a liability cap may find its conduct amounts to gross negligence and, under the terms of the contract, they become subject to uncapped loss.

Potential pitfalls of attempting to avoid the exclusion of a loss by reframing it as something else

The exclusion of different types (or heads) of losses in an outsourcing, technology or transitional services agreement is often a contentious issue.

As suppliers are more likely to rely on such exclusions than customers, they may seek to include a comprehensive list of excluded losses to limit their liability. Two recent cases show that suppliers should, however, be aware that that courts may not be sympathetic to artificial attempts to reframe a loss to avoid an exclusion (or to come with in it, as the case may be).

The English High Court decision in EE Limited v Virgin Mobile Telecoms Ltd [2023] EWHC 1989 (TCC) illustrates this point. EE Limited (EE) and Virgin Mobile Telecoms Ltd (VMT) entered into a telecommunications supply agreement (TSA) in 2013. EE later brought a claim against VMT on the basis that VMT had breached the exclusivity clause in the TSA, and estimated its damages to be £24,635,684 for loss of revenue.

VMT considered that it had not breached the exclusivity provision and argued that the damages claimed fell within the excluded head of loss, "anticipated profits", and so were not recoverable by EE. VMT applied for reverse summary judgment and/or strike out of the claim, which the High Court granted.

EE argued that:

• Its claim was not for loss of profits, but for loss of revenue, and so was not caught by the exclusion.
• VMT's construction would leave EE "without the fundamental consideration that it required for entering into the contract" and would leave it without any remedies for VMT's breach of contract.

The Court found that EE was claiming lost revenue as losses, and in doing so, were required to give credit for any costs it would have incurred in earning that revenue. This reduced the claim in substance to one for loss of profit.

Having concluded that the claim was for loss of profits, the Court had to decide whether loss of profits fell within the excluded loss of "anticipated profits", as used in the TSA. The Court:

• Held that the damages claim fell within the clear and natural meaning of "anticipated profits".
• Drew no distinction between "loss of profits" and "anticipated profits". It said that "the starting presumption is that neither party intends to abandon any remedies arising by operation of law" but that the clear and natural meaning of the words rebutted any presumption that EE had not intended to abandon its claims for damages for any foreseeable loss of profits, howsoever arising.

Finally, the Court rejected EE's argument that such a construction would leave EE without any remedies for breach of contract. This was not a case "in which it could possibly be suggested that the effect of [the exclusion of anticipated profits] would be to relieve VTM of all liability for breach of any of its obligations under the TSA." Accordingly, the Court considered that there was no need to look for an alternative construction.

A case that concerned an artificial attempt to characterise a loss in the claim so as to take the benefit of an excluded head of loss is Soteria Insurance Limited v IBM United Kingdom Ltd [2022] EWCA Civ 440. At issue was whether or not the losses in question fell within an exclusion of loss of profits. The losses were found by the Court of Appeal to be wasted expenditure.

The Court found that, as there was no explicit reference to wasted expenditure in the exclusionary language used ("loss of profit, revenue, savings"), claims for wasted expenditure were not excluded.

It rejected the High Court's conflation of "loss of profit, revenue, savings" with wasted expenditure, stating that the list of specific exclusions agreed in the contract must take their literal meaning and be supported only by a restrictive, strict interpretation based on the context.

Our observations

Both the cases above underscore the need to:

• Accurately characterise a claim when considering whether it falls inside or outside an excluded head of loss. Artificial attempts to reframe a loss so as to avoid an exclusion (or to come with in it, as the case may be) are unlikely to be accepted. This is especially so in the case of artificial attempts to bring a loss within scope of an exclusion that has the effect of leaving a party with no remedies for breach of contract.
• Ensure that all the heads of loss a party wishes to exclude are covered by the clause (for example, in the Soteria case, wasted expenditure was not mentioned in the exclusion clause; and conversely in the EE case, although the exclusion referred to 'anticipated profits', the Court took that view that this captured revenue less the cost of generating it, which was in substance profits).

These cases raise considerations in relation to other types of claims under outsourcing, technology and transitional services agreements. For example, a loss of data under such contracts may be framed in various ways. It could be argued that it is a breach of the:

• Confidentiality provisions.
• The data protection provisions.
• The cyber security provisions.
• The provisions dealing with the customer's own customers' data.
• The obligation to use reasonable skill and care.

These various provisions may be covered by different liability caps in the contract, and it will be tempting for each party to frame the claim in such a way so as to take advantage of the lowest cap (the supplier) or the highest cap or uncapped (the customer), as the case may be.

It may be preferable in such cases to deal with the issue at the outset by having a separate cap that deals with all data-related claims, whatever provision is breached.

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.