Select 2016 Keeping a Cap on Your Liability Nathan Searle, Counsel Helen Kimberley, Senior Associate 13 October 2016 Overview

Select 2016 Keeping a cap on your liability Nathan Searle, Counsel Helen Kimberley, Senior Associate 13 October 2016 Overview

• Where does your liability arise?

• What do the cases say?

• Recap on statutory rules for limiting liability: – UCTA – B2B – CRA – B2C

• Putting it into practice: – Interpreting common phrases when limiting liability – Practical tips

Hogan Lovells | 2 Where does liability arise and how is it controlled? CPA: Consumer Protection Act 1987 SOGA: Sale of Goods Act 1979 GOODS TORT: Civil liability for breach of obligations imposed by law THIRD CRA: Consumer Rights Act 2015 PARTY (Consumer)

B2C: CPA; Tort B2B: Tort

B2C: CRA; Contract; Tort B2B: SOGA; Contract; Tort

SELLER GOODS BUYER GOODS END USER

B2B: SOGA; Contract; Tort

Hogan Lovells | 4 CRA: Consumer Rights Act 2015 SGSA: Supply of Goods and Services Act 1982 SERVICES TORT: Civil liability for breach of obligations imposed by law

BtoC: CRA; Contract; Tort BtoB: SGSA; Contract; Tort

END SUPPLIER SERVICES CUSTOMER SERVICES CUSTOMER

BtoB: SGSA; Contract; Tort

Hogan Lovells | 5 Controls on excluding and limiting liability

Common Law

• Cannot exclude liability for fraud

• Exclusion of common law rights (including right to terminate contract for repudiatory breach), negligence and breach of contract/duty need to be clearly and unambiguously expressed .

• Presumption that parties to contracts do not intend to exclude all liability because if there is no consequence for breach then there is no legally binding contract.

• Normal rules apply – natural and ordinary meaning of the words in commercial context

• BUT any ambiguity construed against person trying to exclude/limit unless clause is mutual – "contra proferentem "

• Limitations probably more acceptable than exclusions

• Purposive interpretation will not help limitation or exclusion clauses!

Hogan Lovells | 6 Controls on excluding and limiting liability

Statute

• Unfair Contract Terms Act 1977 ("UCTA")

• CRA 2015

• Misrepresentation Act 1967

Hogan Lovells | 7 What do the cases say? Recent case law developments Transocean Drilling UK Ltd v Providence Resources Plc (CA)

"20 . CONSEQUENTIAL LOSS

For the purposes of this Clause 20 the expression "Consequential Loss" shall mean:

(i) any indirect or consequential loss or damages under English law, and/or

(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests whether or not such losses were foreseeable at the time of entering into the CONTRACT and, in respect of paragraph (ii) only, whether the same are direct or indirect. The expression "Consequential Loss" shall not include CONTRACTOR’S losses arising in connection with (1) failure by COMPANY to provide the letter of credit as required by Clause 3.13 of Section III or resulting termination of this CONTRACT or (2) any termination of this CONTRACT by reason of COMPANY’S repudiatory breach.

Subject to and without affecting the provisions of this CONTRACT regarding (a) the payment rights and obligations of the parties or (b) the risk of loss, or (c) release and indemnity rights and obligations of the parties but notwithstanding any other provision of the CONTRACT to the contrary the COMPANY shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the COMPANY GROUP’S own consequential loss and the CONTRACTORshall save, indemnify, defend and hold harmless the COMPANY GROUP from the CONTRACTORGROUP’S own consequential loss."

Hogan Lovells | 9 Hut Group Ltd v Nobahar-Cookson (CA)

Clause 5.1 of Schedule 5:

"The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far is practicable, the amount claimed in respect it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter ."

Hogan Lovells | 10 Arnold v Britten (Supreme Court)

Clause 3(2):

"To pay to the Lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent three year period or part thereof ."

Hogan Lovells | 11 Effective risk allocation clauses: are there limits?

• It is possible to exclude liability for fundamental breaches of contract - Photo Production Ltd v Securicor Transport [1980] AC 827

• Courts will respect risk allocation of parties - Smit v Mobius [2001] CLC 1545

• Possible limit to exclusions of liability when a party ceases to perform the contract - A Turtle Offshore SA v Superior Trading Inc [2008] EWHC 3034

Hogan Lovells | 12 You must be very clear to exclude common law rights

• Dalkia Utilities v Celtech [2006] 1 Lloyd's Rep. 599

• The terms of the contract:

– Clause 14.4 – "In the event of the Client being in material breach of its obligations to pay the charges the Company shall have the right to terminate this agreement immediately."

– The rest of clause 14 gave Dalkia rights of termination in various other events e.g. the construction of the mill not being completed by a particular date.

– Clause 15.7 – "The consequences of termination set out in this clause represent the full extent of the parties' respective rights and remedies arising out of any termination save for those rights remedies and liabilities which arise prior to termination."

Hogan Lovells | 13 Recap on statutory rules UCTA B2B: exclusions defined

"[ a term: • excluding or restricting any liability; or] • making the liability or its enforcement subject to restrictive or onerous condition; • excluding or restricting any right or remedy in respect of the liability; or • subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; • excluding or restricting rules of evidence or procedure." UCTA; s13

"claim[ing] to be entitled to render a contractual performance substantially different from that… reasonably expected of him, or… no performance at all "

UCTA; s3

Hogan Lovells | 15 UCTA overview: now only B2B

TYPE OF LIMITATION/EXCLUSION B2B

Section 2: Excluding/limiting liability to a person for death or personal injury cause by Prohibited negligence

Section 6: Excluding/limiting implied undertakings of title Prohibited

Section 6: Excluding/limiting implied undertakings of conformity with description, sample or quality

Section 2: Excluding/limiting other negligence Has to be reasonable Section 3: Excluding/limiting breach of contract in standard terms (where not otherwise covered)

Any other exclusion or limitation for breach of contract No controls

Hogan Lovells | 16 UCTA: what are "standard terms"?

• Section 3 UCTA: (1) This section applies as between contracting parties where one of them deals … on the other's written standard terms of business. (2) As against that party, the other cannot by reference to any contract term — (a) when himself in breach of contract, exclude or restrict any liability of his….

• In Yuanda (UK) Co Ltd v WW Gear Construction Ltd (2010) c ontract was based on standard JCT + Gear's standard amendments schedule - which was itself materially amended and negotiated • Court held these were not written standard terms of business – account must be taken of extent of negotiation – written standard terms would usually be used unamended in all or most of the relevant parties' contracts – "If there is any significant difference between the terms proffered and the terms of the contract actually made, then the contract will not have been made on one party's written standard terms of business." (Paragraph 26, Yuanda v WW Gear.)

• Note case law also suggests that standard terms do not need to be incorporated in their entirety to be viewed as "standard terms". • In practice …if terms are subject to material negotiation/amendment they are unlikely to be "standard" even if using "standard terms" as a starting point

Hogan Lovells | 17 UCTA - reasonableness

• UCTA section 11(1):

Reasonableness: – Burden of proof on party seeking to exclude ;

…fair and reasonable – Relevant factors include : [clause] having regard to the circumstances – bargaining positions; which were, or ought – inducement to agree to the term; reasonably to have – extent of the customer’s knowledge of the existence and extent of the term; been, known to or in – non-compliance with a trigger condition; the contemplation of – special order of the customer the parties when the (UCTA sched 2) contract was made. – means (inc insurance) available to cover liability (UCTA Section 11(4 ))

Hogan Lovells | 18 Recap on statutory rules CRA CRA: Key features

TIMING Came into force on 1 October 2015 (mostly)

APPLICATION Goods, Digital Content & Services

SCOPE Consumer Contracts & Consumer Notices

KEY EFFECTS • Reforms, enhances & consolidates existing consumer rights and remedies for goods and services and introduces new rules for digital content

• Reforms & enhances the rules on unfair terms in consumer contracts & consumer notices

• Reforms enforcement by public enforcers and consumer collective actions for anti- competitive behaviour

• IMPLIES STATUTORY TERMS INTO CONSUMER CONTRACTS

Hogan Lovells | 20 Consumer? Excludes corporates & LLPs i.e. a natural person including sole traders & home-workers

A trader claiming that an individual was not acting for purposes wholly or mainly outside the an INDIVIDUAL acting individual's trade, business, craft or for purposes which are profession must prove it WHOLLY OR MAINLY outside that individual's trade, business, craft or Includes mixed profession private & business use, provided that Wider than the definition the use is mainly used in other EU states private

Hogan Lovells | 21 Goods – statutory rights examples

• Goods must: • Right to compensation up to the price if supplier is in breach of the implied term that certain required pre-contract ß Be of satisfactory quality information is included in the contract ß Be fit for a particular purpose • ß Be as described Changes to required pre-contract information have to be agreed by the ß Be correctly installed consumer ß Match a sample ß Match a model seen or examined • Implied term that the supplier has the right to supply the goods

• Cancellation rights – online sales

Hogan Lovells | 22 Services – statutory rights examples

• Trader must perform a service:

ß with reasonable care and skill ß in accordance with information provided by the trader about the trader or the service

• Traders must:

ß charge a reasonable price if the price is not expressly agreed and ß perform within a reasonable time if time of performance is not expressly agreed .

Hogan Lovells | 23 Liability

• Goods: Liability for breach of statutory rights can't be excluded or restricted

• Digital Content: Liability for breach of statutory rights can't be excluded or restricted (unless it is section 46 liability)

• Services: Less certain. Liability for breach of statutory rights can't be excluded or restricted but…

Hogan Lovells | 24 • Section 57(1) and (2): Liability for breach of statutory rights can't be excluded

• Section 57(3) (i.e. can restrict liability) :

− Caps on liability can't be lower than the price; and − Caps on liability which exceed the price are still subject to fairness assessment!

Section 57(4):

"That also means that a term of a contract to supply services is not binding on the consumer to the extent that it would —

(a) exclude or restrict a right or remedy in respect of a liability under any of sections 49 to 52, (b) make such a right or remedy or its enforcement subject to a restrictive or onerous condition, (c) allow a trader to put a person at a disadvantage as a result of pursuing such a right or remedy, or (d) exclude or restrict rules of evidence or procedure ."

Hogan Lovells | 25 Fairness: red• If aflags term purports to exclude a non-excludable liability it will not be enforceable even in respect of an An unenforceable excludable liability term is unenforceable for • all purposes Example: any clause which could limit liability for data loss is potentially unenforceable for all purposes (e.g. to limit liability for loss of property)

• Under UCTA the prohibition on exclusion of personal injury or death was explicitly where it was due Tightly drafted to the trader's negligence exclusions of personal injury • Language under CRA is less clear and could potentially expand to any attempt to limit liability of may no longer be third parties enforceable • This means any exclusion which stuck tightly to the UCTA language might now be unenforceable

• The CRA expressly provides that any term open to a range of interpretations will be construed Ambiguous terms against the trader will be construed • This is effectively extends contra proferentum to all terms not simply exclusions and limitations against a business • Unlike the previous law this now includes oral as well as written contracts

Hogan Lovells | 26 Putting it into practice Common phrases Common expressions

• Consequential loss • Loss of use

• Direct/indirect loss • Gross negligence – no legal definition under English law

• Loss of profits • Wilful default = recklessness

Hogan Lovells | 28 Hadley v Baxendale

Two limbs of Hadley v Baxendale test:

(1) Damages that might fairly and reasonably be considered as arising naturally from the breach; and

(2) Damages that might reasonably be supposed to have been in the contemplation of the parties at the time the contract was made.

Hogan Lovells | 29 "Loss of profits" example • Example A:

Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profit, loss of business, depletion of goodwill and like loss) howsoever caused (including as a result of negligence) under this Agreement.

• Example B:

Neither party will be liable to the other for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage.

Hogan Lovells | 30 Putting it into practice Practical tips What is risk allocation about?

Allocating Filling a hole responsibility

Practical Compensating problem for failure handling

Efficient Incentivising insurance performance

Hogan Lovells | 32 5 key questions

Getting key responsibilities right is much more What underlying obligations exist? important than "liability clauses"

Consider risks in the round not just the "legal" What risks exist? ones

What legal liabilities would normally "Normal" liabilities are the starting point for all arise? limitations and indemnities

Limitations and indemnities restrict or extend How are those liabilities varied? underlying liabilities

Always consider practical steps, insurance or Are there alternative risk mitigations? other mechanisms

Hogan Lovells | 33 If you do decide to limit or exclude your liability …

Clear and separate Conduct of claims limitations – time limits?

Should it cover Financial caps – non-contractual per claim or liabilities? aggregate?

Carve outs e.g. Direct or indirect? certain indemnities?

Hogan Lovells | 34 Speakers

Nathan Searle Counsel, London +020 7296 5233 [email protected] T

As Counsel in our International Arbitration practice, Nathan has extensive experience in African related disputes along with experience in other emerging markets including India and Eastern Europe. As an active member of the firm's cross-practice Africa Group he attended the African Legal Awards 2015 in which Hogan Lovells won three awards. Nathan also acts for large multinationals in complex and high-value international arbitrations and cross-border disputes. He has extensive knowledge of advising clients on risks associated with potential disputes and strategies to avoid or resolve disputes at an early stage. This includes advising on disputes in the context of joint ventures, supply agreements, license agreements and other commercial contracts. Nathan has Higher Rights of Audience in the English courts and regularly appears as an advocate in international arbitrations.

HelenName Kimberley Senior Associate, London T+20 7296 5306 [email protected]

As a Senior Associate in our Commercial and Regulatory team, Helen helps clients manage their businesses. She is experienced in advising on and documenting complex commercial arrangements such as strategic alliances and transitional arrangements. She also deals with everyday arrangements that keep businesses running from supply and distribution to endorsement agreements and standard terms and conditions. Helen's practice focuses on life sciences, communications, food and retail industries. She understands the regulated environment in which her clients operate and is able to advise on both business to business and business to consumer arrangements. Hogan Lovells | 35 www.hoganlovells.com

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