In the July newsletter - Effective Dispute Resolution Strategies - I discussed briefly standard form clauses in commercial contracts. One of the clauses was a limitation of liability clause.
During a recent presentation to an accountants’ forum on professional negligence I was asked several questions on the topic of disclaimer, exclusion and limitation of liability for accountants in respect of written terms of engagement. Clearly, this is an area of concern and is equally applicable to all professional advisors. Whilst a detailed analysis of the various issues that must be carefully considered, not least the governing rules and regulations for professionals’ retainers, is beyond the scope of this article, there have been two recent cases which illustrate the Courts’ interpretation of and approach to exclusion and limitation clauses.
The first case is a construction dispute (The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited (July 2012)). The case principally concerns the issue of professional negligence and letters of intent. There was an additional consideration for the Court, namely, if negligence was established against Turner & Townsend Management Ltd (T&T) on the facts, could T&T rely on the benefit of an effective limitation clause? The first issue that arose in respect of the clause was whether it was incorporated into the contract between the parties and second, if it was incorporated whether it was deprived of effect by reason of Section 3 of the Unfair Contract Terms Act 1977 (UCTA).
The terms of appointment or contract between the parties were not signed and the terms of the fees payable to T&T were not discussed and agreed expressly. The Court held that the fact that the terms of appointment were not signed did not mean that there was no acceptance of them on an objective basis. It therefore followed that the limitation clause was incorporated into the contract between the parties.
The clause read as follows:
“ Liability for any negligent failure by us (T&T) to carry out our duties under these terms shall be limited to such liability as is covered by our professional indemnity insurance policy terms. Liability is also limited to such a sum as it would be equitable for us to pay having regard to the extent of our responsibility for any loss or damage suffered by you on the basis that all other consultants, contractors and subcontractors who also have a liability shall be deemed to have provided contractual undertakings to you on terms no less onerous than these terms and shall be deemed to have paid to you such sums as it would be just and equitable for them to pay having regard to the extent of their responsibility for any such loss or damage and in no event shall our liability exceed the fees paid to us or £1 million whichever is the less. ”
T&T stated that it would take out a professional indemnity policy with a limit of indemnity of £10 million which it would maintain for 6 years from the date of completion of the services.
SOME LAW
The material parts of sections 2, 3 and 11 of the UCTA 1977 provide as follows:
“ 2. NEGLIGENCE LIABILITY
(2) In the case of other loss or damage [i.e. other than personal injury or death], a person cannot [by reference to any contract term] exclude or restrict his liability for negligence except insofar as the term ... satisfies the requirement of reasonableness. ”
“ 3. LIABILITY ARISING IN CONTRACT
(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 respect of the breach ...
except insofar as ... the contract term satisfies the requirement of reasonableness. ”
“ 11. THE ‘REASONABLENESS’ TEST
(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act ... is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
(4) Where by reference to a contract term ... a person seeks to restrict liability to a specified sum of money, and the question arises ... whether the term… satisfies the requirement of reasonableness, regard shall be had in particular ... to -
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
(5) It is for those claiming that a contract term ... satisfies the requirement of reasonableness to show that it does. ”
The Court held that the limitation clause would result in a limit of liability equal to the fees paid to T&T which was approximately £111,000. In the absence of any explanation as to why T&T should have stipulated insurance cover of £10 million despite a limitation of liability to less than £200,000, the Court considered it unreasonable that the contract purported to limit liability in this way.
The second case involves the purchase at auction of a painting which was described in the catalogue as the work of a Russian artist, Boris Mikhailovich Kustodiev (Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd (2012)). The auction house, Christie’s, stated that its catalogue descriptions were based upon “careful study” and represented “the opinion of experts”. The buyer paid Christie’s a substantial premium in addition to the hammer price for the painting.
Although authenticity was hotly disputed, the Court found that the painting was probably not by Kustodiev. Therefore Christie’s was in breach of warranty based on the incorporated conditions of sale in the catalogue. Christie’s express warranty was given for 5 years from the date of sale and that the description of the painting which was stated without qualification to be the work of a named author, was “authentic and not a forgery”. The buyer was therefore entitled to cancel its purchase and recover the price under the express terms of the contract. The Court rejected the buyer’s claims for negligence and misrepresentation.
On the question of whether the exclusions of liability were reasonable, on the facts of the case, the Court held it was reasonable to include conditions limiting the buyer’s claims to breach of a 5 year warranty and its remedies to undoing the sale and refunding the price. The Court considered the UCTA reasonableness test set out above. The Court held Christie’s had a rational basis for excluding potential claims and remedies by the buyer and furthermore it was reasonable that Christie’s should not have to pay compensation without getting the painting back. The commercial context of the contract was also important and the fact that the parties had similar bargaining power, real choice of contracting partner and could be expected to know of the terms.
COMMENT
The Christie’s case demonstrates that if a party is seeking to limit liability it should do so on a coherent and justifiable basis rather than attempting to exclude all potential liability. The Court upheld the reasonableness of the disclaimers of liability limiting liability to a 5 year warranty and whilst Christie’s did not escape liability, it did restrict the extent of their liability to a specified sum.
The Christie’s case may be contrasted with the T&T case. In the T&T case, the decision of the Court to limit the liability to the contract price was less coherent and based on the level of insurance and that it was unreasonable for T&T to introduce a draconian term which was wholly inconsistent with the requirement for substantial professional indemnity insurance without specific notice and any discussion with the claimant.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Monday, 26 November 2012
Friday, 2 November 2012
Monday, 23 July 2012
EFFECTIVE DISPUTE RESOLUTION STRATEGIES
In this second edition of Law Bites I will focus on how to successfully manage commercial disputes.
1. Prevention is better than cure.
Everyone hopes that they will never be involved in a commercial dispute. Protracted and expensive litigation or arbitration is not an appealing prospect. Disputes are, however, an unfortunate fact of life, so it is more a case of minimising your company’s exposure to the risk of a dispute.
Whenever possible and practical, use a written contract rather than rely on an oral contract. A standard form contract will cover the essential terms and conditions for a simple commercial transaction. A bespoke contract will deal with more complex matters and should adequately address all the major considerations, including the assignment of risk in a project or commercial transaction. Don’t leave things ‘loose at the edges’ and make sure you protect your business’ reputation and legal position.
A written contract should contain the following terms: Parties – Names and addresses of the parties to the contract. Definitions and interpretations. Payment provisions. A specific description of the goods or services. Term of the contract. Timescale. Limitation of liability. Termination provisions. Change of control (during course of contract). Dispute resolution clause. Confidentiality clause. Intellectual property rights. Warranties. Indemnity clause. Force Majeure clause. Assignment clause. Governing law clause.
2. Have in place good dispute management policies
A dispute is sometimes akin to a game of chess, namely tactical in nature with plays and counter-plays, so try to see the big picture. Dispute resolution is in itself a risk and the use of good management techniques should become routine for the successful management team. Be full and frank with your lawyer from the outset. Nominate a ‘point man’ to act as the day-to-day contact for your lawyer. Be prepared for a good lawyer to challenge you on some of the more problematic areas of the dispute which the other side may seek to exploit to your detriment. Many years ago, I was witness to a case imploding on the first day of a trial due to the lawyer becoming too friendly with a client possessing a strong personality and definite opinions about the presentation of the case. The lawyer was reluctant to play devil’s advocate and challenge the client’s defence to the claim.
3. Prepare a paper trail
Diaries, minutes of meetings and emails can be of vital importance during any dispute. Make sure proper records are kept and that your filing systems are up to date.
4. Adopt a commercial outlook for dispute resolution
I am never too surprised to see warring parties decide on the first day of a hearing that they finally need to settle a dispute. The reason? Well, a previous mutually beneficial relationship and the prospect of perhaps working with the other party again in the future. The years spent building and developing that commercial relationship are simply too valuable to lose in what may later be seen as an expensive misunderstanding.
Aside from the legal costs, never underestimate the management time and stress which is involved in the dispute resolution process. A tough, successful underwriter once admitted to me that he was not sleeping well a few days before the start of an arbitration. He was very happy when the case settled and he no longer had to give evidence and be cross-examined. He could return to his day job and earning a living!
5. Use lawyers effectively
Involve lawyers at an early stage to marshal the evidence, to identify the issues, give preliminary advice on the matter and develop a strategy. Make sure that they are fully involved with the company so that prompt and full instructions are given.
6. Use experts in the right way
Use experts wisely. Ensure they are truly independent, have the right pedigree and experience, particularly if they are likely to be giving evidence. Not someone who just says what you want them to say!
7. Consider mediation
Explore the possibility of mediation. It is an increasingly important forum to resolve disputes cost effectively, expeditely and privately. Never lose sight of an opportunity to settle. A formal mediation is not always necessary. It is not a sign of weakness to contact the other side and to try to settle. Rather, it is a sign of strength.
8. … And finally
If a dispute does occur - stay calm, don’t panic. Contact me and I shall be very pleased to assist. This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Download Newsletter as PDF »
1. Prevention is better than cure.
Everyone hopes that they will never be involved in a commercial dispute. Protracted and expensive litigation or arbitration is not an appealing prospect. Disputes are, however, an unfortunate fact of life, so it is more a case of minimising your company’s exposure to the risk of a dispute.
Whenever possible and practical, use a written contract rather than rely on an oral contract. A standard form contract will cover the essential terms and conditions for a simple commercial transaction. A bespoke contract will deal with more complex matters and should adequately address all the major considerations, including the assignment of risk in a project or commercial transaction. Don’t leave things ‘loose at the edges’ and make sure you protect your business’ reputation and legal position.
A written contract should contain the following terms: Parties – Names and addresses of the parties to the contract. Definitions and interpretations. Payment provisions. A specific description of the goods or services. Term of the contract. Timescale. Limitation of liability. Termination provisions. Change of control (during course of contract). Dispute resolution clause. Confidentiality clause. Intellectual property rights. Warranties. Indemnity clause. Force Majeure clause. Assignment clause. Governing law clause.
2. Have in place good dispute management policies
A dispute is sometimes akin to a game of chess, namely tactical in nature with plays and counter-plays, so try to see the big picture. Dispute resolution is in itself a risk and the use of good management techniques should become routine for the successful management team. Be full and frank with your lawyer from the outset. Nominate a ‘point man’ to act as the day-to-day contact for your lawyer. Be prepared for a good lawyer to challenge you on some of the more problematic areas of the dispute which the other side may seek to exploit to your detriment. Many years ago, I was witness to a case imploding on the first day of a trial due to the lawyer becoming too friendly with a client possessing a strong personality and definite opinions about the presentation of the case. The lawyer was reluctant to play devil’s advocate and challenge the client’s defence to the claim.
3. Prepare a paper trail
Diaries, minutes of meetings and emails can be of vital importance during any dispute. Make sure proper records are kept and that your filing systems are up to date.
4. Adopt a commercial outlook for dispute resolution
I am never too surprised to see warring parties decide on the first day of a hearing that they finally need to settle a dispute. The reason? Well, a previous mutually beneficial relationship and the prospect of perhaps working with the other party again in the future. The years spent building and developing that commercial relationship are simply too valuable to lose in what may later be seen as an expensive misunderstanding.
Aside from the legal costs, never underestimate the management time and stress which is involved in the dispute resolution process. A tough, successful underwriter once admitted to me that he was not sleeping well a few days before the start of an arbitration. He was very happy when the case settled and he no longer had to give evidence and be cross-examined. He could return to his day job and earning a living!
5. Use lawyers effectively
Involve lawyers at an early stage to marshal the evidence, to identify the issues, give preliminary advice on the matter and develop a strategy. Make sure that they are fully involved with the company so that prompt and full instructions are given.
6. Use experts in the right way
Use experts wisely. Ensure they are truly independent, have the right pedigree and experience, particularly if they are likely to be giving evidence. Not someone who just says what you want them to say!
7. Consider mediation
Explore the possibility of mediation. It is an increasingly important forum to resolve disputes cost effectively, expeditely and privately. Never lose sight of an opportunity to settle. A formal mediation is not always necessary. It is not a sign of weakness to contact the other side and to try to settle. Rather, it is a sign of strength.
8. … And finally
If a dispute does occur - stay calm, don’t panic. Contact me and I shall be very pleased to assist. This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Download Newsletter as PDF »
WINNING THE BATTLE OF THE
SMALL PRINT
‘As so often happens in the commercial world, those dealing with the projects had little or no interest in what might justifiably be called the small print.’
The above quote from a judgment in a recent case highlights the importance of paying attention to the terms and conditions of a contract, more commonly referred to in business as the ‘small print’.
But no matter how well these terms and conditions are drafted and understood, a common problem is competing terms and conditions between buyer and seller. This can sometimes lead to a dispute between the parties as to the applicable terms and conditions that have been incorporated into the contract where there is no signed contractual document. The so-called ‘battle of the forms’ or ‘small print’.
In law, an agreement and a contract are different animals. A contract is formed when an offer by one party is accepted by the other party provided there is consideration (normally the price) and a mutual intention to create legal relations. It is important to identify the precise moment when a contract comes into existence, because the question of which party’s terms and conditions apply to the contract can then be determined.
HOW TO WIN THE BATTLE OF THE SMALL PRINT ?
A successful party needs to take sufficient steps to bring its terms and conditions to the attention of the other party. In reality, it is the last set of terms and conditions despatched before the contract comes into existence that wins and will be deemed to be incorporated into the contract.
Therefore, try and include your terms and conditions in as many pre-contractual documents as possible.
One strategy is to refrain from discussing the other party’s terms and conditions as an issue before sending your own just before the contract comes into existence. In practice, this date will be before performing, delivering or receiving the respective goods or services.
A more direct strategy is to carefully read the other party’s terms and conditions and discuss any particular clauses which are onerous or of concern. Even better, let your lawyer review them and advise! A side letter to lessen the impact of onerous terms and conditions or exclude them is an option and part of the commercial negotiations between the parties. A Court should, in these circumstances, find it much easier to determine who has won the battle of the small print.
A FEW WORDS OF WARNING
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Download Newsletter as PDF »
‘As so often happens in the commercial world, those dealing with the projects had little or no interest in what might justifiably be called the small print.’
The above quote from a judgment in a recent case highlights the importance of paying attention to the terms and conditions of a contract, more commonly referred to in business as the ‘small print’.
But no matter how well these terms and conditions are drafted and understood, a common problem is competing terms and conditions between buyer and seller. This can sometimes lead to a dispute between the parties as to the applicable terms and conditions that have been incorporated into the contract where there is no signed contractual document. The so-called ‘battle of the forms’ or ‘small print’.
In law, an agreement and a contract are different animals. A contract is formed when an offer by one party is accepted by the other party provided there is consideration (normally the price) and a mutual intention to create legal relations. It is important to identify the precise moment when a contract comes into existence, because the question of which party’s terms and conditions apply to the contract can then be determined.
HOW TO WIN THE BATTLE OF THE SMALL PRINT ?
A successful party needs to take sufficient steps to bring its terms and conditions to the attention of the other party. In reality, it is the last set of terms and conditions despatched before the contract comes into existence that wins and will be deemed to be incorporated into the contract.
Therefore, try and include your terms and conditions in as many pre-contractual documents as possible.
One strategy is to refrain from discussing the other party’s terms and conditions as an issue before sending your own just before the contract comes into existence. In practice, this date will be before performing, delivering or receiving the respective goods or services.
A more direct strategy is to carefully read the other party’s terms and conditions and discuss any particular clauses which are onerous or of concern. Even better, let your lawyer review them and advise! A side letter to lessen the impact of onerous terms and conditions or exclude them is an option and part of the commercial negotiations between the parties. A Court should, in these circumstances, find it much easier to determine who has won the battle of the small print.
A FEW WORDS OF WARNING
- Check that your terms and conditions are kept up to date and regularly reviewed by a lawyer. Use clear and precise language.
- Read the other party’s terms and conditions for onerous terms. Negotiate if possible but remember that it is the last set of terms and conditions sent and brought to the attention of the other party before the contract is formed that wins.
- Understand that an agreement is not always a contract and that specialist legal advice should be taken as to the distinction and whether the agreement is enforceable.
- If a contract is substantial it is sensible to have the contract prepared or checked by a lawyer to ensure that there is a single document with no uncertainty as to the relevant terms and conditions.
- If you do amend or update your terms and conditions, make sure you delete the old ones from the system and bring the new ones to the attention of your clients or customers at the first opportunity.
- Do not think that sending out the terms and conditions after the contract will wash. It will not!
- Finally, be on your guard about the phrase ‘terms and conditions available on request’. Do request them as otherwise they risk being incorporated into the contract!
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Download Newsletter as PDF »
Friday, 13 January 2012
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