When negotiating technology contracts, a customer may require that liability for negligence be excluded from the general contractual exclusions and limitations of liability. In this situation it is common, especially when dealing with technology suppliers or service providers based overseas or who are part of a global operation, for a suggestion to be made that only "gross negligence" or "wilful default" should fall outside the liability exclusions and caps. These concepts do not have settled legal meanings in New Zealand and, if used without further definition, there will be a degree of uncertainty as to where the "line" of liability should be drawn.

Background

Both technology suppliers and customers have long understood that, due to the vital part technology plays in business today, the losses that can result from a failure of technology products or services can far exceed the price paid for those products or services.

It has therefore been common practice for a number of years for technology suppliers to require, in their contracts and standard terms of business, that liability for indirect or consequential loss be excluded, and that remaining liability be capped at an agreed level (often related to the value of the products or services supplied).

Customers however will often look to exclude certain situations from these exclusion and limitation clauses. For instance, it is common for technology contracts to provide that there are no exclusions, or caps on liability, for intellectual property indemnities or for breach of confidentiality. The rationale for this is that, while the loss that the customer could suffer could well be significant, the ability to prevent the risk occurring is within the supplier's control and therefore these are risks that the supplier should assume.

Customers will also often argue that there are certain other situations where it would be unjust for the supplier to obtain the benefit of the exclusion or limitation. Fraud is the most common exception to the exclusion and limitation clauses. We also commonly see "gross negligence" and "wilful default" (or "wilful misconduct") raised.

There is usually no argument from either side in relation to an exception for fraud, as this will involve a deliberate act and simply states the position that would apply at law anyway. However, the terms "gross negligence" and "wilful default" are ill-defined in a common law context, and there is therefore a risk for each party that its expectations as to where liability should (or should not) fall might not be reflected in a court's decision on the matter, or that expensive and time-consuming litigation may be necessary in order to determine the question.

Negligence versus gross negligence

Negligence is a well understood concept in common law courts (eg England, Australia, New Zealand) and can be defined as failing to do something that a reasonable person would do in the circumstances, or doing something which a reasonable person would not do, in a situation where a person owes a duty of care to another person.

"Gross negligence" is primarily a civil law (eg continental Europe and Latin America) concept. The term is also used in the United States and Canada. In a civil law context, "gross negligence" generally requires two elements:

  1. a failure to exercise ordinary care in circumstances where the risk of harm was plain for all to see; and
  2. the absence of anything which makes the act or omission excusable from the point of view of the wrongdoer.

In some European jurisdictions, a party that is grossly negligent may not be able to rely on a contractual limitation of liability.

The term "gross negligence" has not been accepted in English, Australian or New Zealand courts as a concept distinct from ordinary negligence. In the case of Armitage v Nurse[1], a trust deed contained a clause excluding trustee liability for negligence. The plaintiff argued that the defendant's conduct had fallen so far below a reasonable standard of care that it should be categorised "gross negligence" and that as a result the defendants should not be excused from liability. The English Court of Appeal was unwilling to make a distinction between gross and ordinary negligence, stating that "we regard the difference between negligence and gross negligence as merely one of degree". Accordingly, the Court held that the clause excluding liability for negligence was effective to exempt the defendants from liability even though the carelessness in question could be labelled "gross carelessness".

This view has been consistently approved in English law, with the effect that there is only one type of culpable carelessness: ordinary negligence.

If the term "gross negligence" is used in a contract without further explanation, there are a number of possible outcomes:

  • If, as in the Armitage case, liability for negligence is effectively excluded, and the court finds there is nothing that can be separately categorised as "gross negligence", all negligence might be excluded from liability regardless of how far the supplier's behaviour has fallen below a reasonable standard.
  • Alternatively, if the parties purport to exclude "gross negligence" from the general exclusions and limitations of liability, a court may find that "gross negligence" means ordinary negligence and therefore all negligence falls outside the exclusions and limitations on liability.
  • A third possibility is that, if it is clear that the parties intend "gross negligence" to mean something different to ordinary negligence, a court may give some meaning to the term. However this will turn on the drafting of the contract and, as there is not currently any clear meaning in law, this is something particular thought should be given to when the contract is prepared.

Wilful default

There is also a lack of clarity in the common law courts about the meaning of "wilful default". As with gross negligence, this may be a concept that has derived from use in European jurisdictions: for example, in Spanish law, where there is an event involving "dolo" (intentional misconduct), it is not possible limit the damages that arise from that event.

In English law, the expression has been interpreted requiring that the person must know "that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in a sense of not caring whether his act or omission is or is not a breach of duty"[2]. However, a more recent Australian case[3], discussed the possibility that "wilful default" could include negligence. The Court in that case did not make a decision on that point, but if this line of argument were to be adopted by a future court, the effect could be that, in certain circumstances, by excluding "wilful default" from the general contractual liability exclusions and caps, negligence could also be excluded from the exclusions and caps.

Contract drafting tips

Therefore if the concepts of "gross negligence" or "wilful default" are proposed in the course of negotiations then care needs to be taken to ensuring it is clear what the parties to the contract mean by these terms.

The parties should consider the particular matters and areas in which loss may arise, and work through these particular scenarios to determine appropriate definitions for these terms.

Conclusion

Use of the terms "gross negligence" and "wilful default" in New Zealand appears to have a European influence, where these terms are well defined and have a specific statutory role. However in the common law system the terms do not have clearly defined meanings. As a result, when these terms are used to allocate risk through contractual exclusion and limitation clauses, there is a danger in that the end result may not accord with a party's intentions, or that litigation may be necessary to define the meaning. A careful consideration by the parties of the likely risks and the appropriate allocation of these risks, and documentation of these issues in the contract, is more likely to provide certainty to the parties.