Legally Bound

Jordan ... no perfect definition of gross negligence or wilful misconduct.

Jordan ... no perfect definition of gross negligence or wilful misconduct.

Is it bad or very bad?

April 2018

Not every contractual breach or other wrongdoing is punished. Construction contracts often contain limitations of liability – overall liability caps and exclusions of certain types of loss which may be claimed. Sometimes, there are also mutual indemnities and waivers of liability – where each party typically agrees, regardless of fault or negligence, to bear the loss and damage to its own property and liabilities arising, for instance, from pollution.

Equally common are the exceptions to these “free pass” provisions. This is the exceptionally bad behaviour described as “wilful misconduct” and “gross negligence”. If you are guilty of these, you can usually expect no protection in the form of liability caps or indemnities and waivers from your counterparty.

These terms are so familiar that parties tend to assume them to be terms of art, not requiring definition in the contract. But without a definition, a judge or an arbitrator would need to decide – on an uncertain basis – whether certain actions have amounted to gross negligence or wilful misconduct.

We can look at whether Middle Eastern law or common law approaches can provide the most certainty: Unfortunately there is not much certainty in common law courts’ attempts to pin these terms down. To illustrate the point, here are some extracts from existing court judgements:

 

Wilful Misconduct

In Forder v Great Western Railway Company (1905), the (English) court said that wilful misconduct involves a “knowingly wrongful action or a failure to act or acting with reckless carelessness, not caring what the results of the carelessness may be”.

In TNT Global v Denfleet International (2007), the Court of Appeal said that wilful misconduct is “either an intention to do something, which the actor knows to be wrong or a reckless act in a sense that the actor is aware that loss may result from this act and yet does not care whether loss will result or not”. We can see that the meaning is expanded beyond deliberate misconduct.

In De Beers (UK) v ATOS Origin IT Services (2010), the court agreed that wilful misconduct is wider than deliberate default, adding that it amounted to “conduct by a person who knows that he is committing and intends to commit a breach of duty or is reckless in the sense of not caring whether or not he commits that breach”.

From these short extracts, we are nowhere near to a clear definition of wilful misconduct, beyond a sense that it involves knowing or not caring that the act is wrong under the contract.

 

Gross Negligence

There is even less certainty with gross negligence. In fact, it is not easy to see whether this term is recognised at all, as distinct from simple negligence. Further English decisions:

The court in Camatra Property v Credit Suisse Securities (2011) described gross negligence as “more negligent than ordinary negligence”. This is a kind of “you know it when you see it” approach.

In the Hellespont Ardent (1997), the court decided that gross negligence might include things which were done deliberately. We thought that was wilful misconduct!

These decisions clearly do not provide reliable definitions of these terms – and may not even distinguish clearly between them.

In Gulf jurisdictions, the Sharia-implied duty of good faith indicates less tolerance of bad behaviour, even if those actions are in accordance with the express terms of the contract. This might indicate a greater willingness here to recognise certain actions as gross negligence or wilful misconduct. I stress that this is just a suggestion, and not something I have yet encountered.

 

Defining the terms

This should be a practical exercise, where the following basic questions are considered:

• Does the proscribed conduct have to be a breach of the contract or otherwise a wrongful act?

• Does the relevant party need to have an appreciation as to whether it is right or wrong under the contract?

• Does the relevant party need to have an appreciation of the seriousness and/or the likelihood (that is, the risk) of the consequences of that conduct?

Other questions come in, notably whether the definition should describe the actions and intent of an individual (as opposed to a party to the contract) and if so, whether he or she must have a certain level of seniority within a contracting organisation in order for the action or intent to be attributed to that contracting party.

There is no perfect definition of gross negligence or wilful misconduct. The main benefit is in defining them, so allowing both parties to consider the sort of breach that they agree should not have the protections of liability caps or indemnities and waivers. n

 

* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading interna-tional law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.




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