Gross negligence in construction contracts - law and practice

Gross negligence in construction contracts Law and practice Abstract The starting point has remained the same for almost 200 years: the tort of gross negligence is not a concept that is recognised by English law. Nevertheless, gross negligence is a term that, for better or worse, is often embedded into important clauses of a construction contract. For instance, the liability of a party may be limited save for where that party has been grossly negligent. Consequential loss may be excluded except where the loss is caused by gross negligence; a right to terminate right may arise in the event of gross negligence; one party may agree to indemnify the other save for gross negligence; or a professional consultant may exclude liability save for instances of gross negligence. Each of the above examples relate to core clauses in a construction contract. In the event any one of them is triggered by an act or omission amounting to gross negligence, the consequences are likely to be draconian. And yet, despite its importance, the term gross negligence is almost never defined. This is either because it is a term that has not been given a meaning in law, because no thought is given to the consequences of not defining it, or because the parties are unable to reach a suitable definition that is mutually agreeable. Absent any contractual terms to the contrary, gross negligence has been said to embrace not only conduct undertaken with actual appreciation of the risks involved, but also a serious disregard of or indifference to an obvious risk. In all cases, whether or not gross negligence has occurred will be determined by considering the contract as a whole and the surrounding circumstances. It will always be a matter of fact and degree. When negotiating a construction contract, the advice is: avoid using the term gross negligence at all, but if it is necessary to use it, clearly define it. The success of a claim for loss flowing from gross negligence will depend on the claimant demonstrating that the gross negligence caused the loss. This article considers development of the tort of gross negligence in England and Wales, the use of gross negligence in other areas of English law, the status of gross negligence in foreign jurisdictions, whether and if so how to include reference to gross negligence in construction contracts, whether an act or omission does or does not constitute gross negligence and how to claim loss that flows from gross negligence. A history of the tort of gross negligence The tort of negligence dates back to Roman times. It is the most well-known and pervasive cause of action in England and Wales. Put simply it imposes, in certain circumstances, a duty to take reasonable care. This duty may arise under statute, under contract or at common law. To succeed in an action for negligence at common law, it is necessary for a claimant to establish that (i) the defendant owed a duty to the claimant; (ii) the defendant breached the duty owed to the claimant; and (iii) the defendant’s breach of duty caused the claimant to suffer recoverable loss. How and when the duty of care is owed is a matter of some debate, but it often requires there to be a proximal relationship between the parties. Gross negligence (or crassa negligentia) also has its genesis from Roman law. The concept was applied in numerous circumstances, including the liability of a lawyer to his client, or of a doctor to his patient; whether the holder of a bill of exchange would be affected by a defect in the bill; and whether a tenant was barred from relief against forfeiture.1 However, the tides turned against the concept of gross negligence in tort and indeed any rule of law that sought to demarcate degrees of negligence, such that by the mid 19th Century it did not find favour with the courts of England and Wales. In Hinton v Dibber (1842), the court held that “It may well be doubted whether between gross negligence and negligence merely, any intelligible distinction exists” and a year later in Wilson v Brett, the court held that “gross negligence is negligence with vituperative epithet”. That position remains to this day. In the 2007 Court of Appeal case of Traidigrain S.A. v Intertek Testing Services Ltd,2 the court held that gross negligence had a recognisable meaning under German law (the contract in that case was subject to German law) but noted that the term itself “has never been accepted by English civil law as a concept distinct from simple negligence”. Broadly, the rationale behind this stance is that, in the court’s view, a party had either met the requisite duty of care or it had not and distinguishing between levels of negligence was not necessary, as explained by the judge in Pentecost v London District Auditor:3 “The use of the expression “gross negligence” is always misleading. Except in the one case of the law relating to manslaughter, the words “gross negligence” should never be used in connection with any matter to which the common law relates, and for this reason: negligence is breach of duty. If there is a duty and there has been a breach of it which causes loss, it matters not whether it is a venial breach or a serious one: a breach of a legal duty in any degree which causes loss is actionable.” 1 D. Ibbetson, An Historical Introduction to the Law of Obligations (Oxford 1999), pp. 92-95. 2 [2007] EWCA Civ 154, 23. 3 [1951] 2 K.B. 759, 766. Recent developments in England and Wales In the past 15 years, there have been a number of cases in England and Wales that address tortious gross negligence. Whilst none of these cases recognise gross negligence as concept in English tort law, where parties to a contract have used the term gross negligence and where there is a dispute as to whether a party is or is not grossly negligent, it has been necessary for the courts to consider what it means. The starting point in recent times is the case of Red Sea Tankers Ltd v Papachristidia (the “Ardent”).4 There, Mance J considered circumstances from a range of cases to establish whether the conduct of a party was grossly negligent. The characteristics he considered were: 1. the existence of a high degree of risk of loss or damage; 2. the foreseeability of that high degree of risk; 3. the seriousness of loss which ought to have been foreseen; and 4. the extent to which the defendant took any precaution to avoid the risk. The judge said: “Gross negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and care and/or care constituting negligence... 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 a serious disregard of or indifference to an obvious risk.” 5 4 [1997] 2 Lloyds Rep 547. 5 Ibid at 586. Thus, the court acknowledged a separation between negligence and gross negligence. The description by the judge seems eminently sensible. Intuitively, it must be right that gross negligence means something more then negligence. The court went on to say: “All the circumstances must be weighed and balanced when considering whether acts or omissions causing damage resulted from negligence meriting the description of “gross””. Whilst Ardent is useful, it can only be used as guidance because (i) the contract between the parties was subject to New York state law; and (ii) the comments on gross negligence were obiter dicta. However, the judge indicated that he would have come to the same conclusion had he been ruling on a point of English law. The characteristics in Ardent were therefore seen as a set of building blocks that the English court could use to develop a set of parameters that directly apply to that jurisdiction. In the Court of Appeal case of Great Scottish & Western Railway Co Ltd v British Railways Board,6 the court was asked to consider the following clause: “The Board... will not be liable to GS&W for any damage to or loss...except to the extent that such loss or damage or any severable portion thereof was caused wholly by the gross negligence or wilful neglect of the Board.” 6 Unreported, 10 February 2000, Court of Appeal. The court interpreted the meaning of gross negligence in this way: “In the context of [this clause], the words “gross negligence” take their colour from the contrast with “wilful neglect” and refer to an act or omission not done deliberately, but which in the circumstances would be regarded by those familiar with the circumstances as a serious error. The likely consequences of the error are clearly a significant factor. Thus, whether negligence is gross is a function of the nature of the error and the seriousness of the risk which results from it.” Gross negligence was considered again, albeit briefly, in A v Bottrill.7 There, the court held that gross negligence is not the same as subjective recklessness, although it may come close to it. More recently, in Camarata Property Inc v Credit Suisse Securities (Europe) Ltd,8 the court was asked to consider gross negligence. In this case, the contract between the parties was subject to the law of England and Wales and gross negligence was one of the substantive points to be decided. It concerned the provision of financial advice by Credit Suisse to Camarata Property in relation to a financial note which, due to the collapse of Lehman Brothers, lost all value. Camarata alleged that the advice provided by Credit Suisse was grossly negligent by not highlighting the risk of counterparty default. 7 [2003] 1 AC 449. 8 [2011] EWHC 479 (Comm). Whilst Camarata failed even to prove negligence in the case, the ruling did provide some useful clarification on how the English courts will interpret gross negligence: “The relevant question, however, is not whether generally gross negligence is a familiar concept in English civil law, but the meaning of the expression in these paragraphs of the Terms and Conditions. I cannot accept that the parties intended it to connote mere negligence: in paragraph 1.2 and also in paragraph 1.3 both the expression “gross negligence” and the expression “negligence” were used, and some distinction between them was clearly intended...... I therefore accept that, as a matter of interpretation, paragraphs 1.1 and 1.2 provide that, in order to establish liability, Camarata have to show more than mere negligence on the part of [Credit Suisse]” The court supported the view of the judge in Ardent that gross negligence does have a meaning and that it means more than just negligence. However, it arrived at that view based on an interpretation of the contract as a whole and not on the basis of past precedent or a derivation from an English law concept. In other words, because the contract referred to negligence and gross negligence, the parties must have intended gross negligence to mean something else, something more. This case was followed shortly thereafter by Winnetka Trading Corporation v Julius Baer International Ltd, which is the most recent case to consider gross negligence.9 The court in that case referred to the contract, which contained limitation and exclusion provisions, both of which referred to gross negligence and negligence. Gross negligence was not defined. Agreeing with the decision in Camarata, the court held that negligence and gross negligence cannot have the same meaning and must be interpreted by reference to the contract. It went on to say that the parameters for that interpretation should be consistent with the guidelines laid out in Ardent. 9 [2011] EWHC 2030 (Ch). Gross negligence in other areas of English law Although gross negligence as a concept has been abandoned by the English law of tort, gross negligence is regularly deployed in other areas of English law. It is helpful to touch on some of these areas now. In English criminal law, it is well established that manslaughter can be committed by gross negligence.10 The straight forward test laid down is whether the “conduct falls far below the standard of the reasonable person”. The concept is also used (in effect) to distinguish dangerous driving from the lesser offence of careless driving.11 However, one wonders the extent of comparison that can be legitimately drawn from criminal law. The jury in a criminal trial does not have to give reasons for its verdict, and in determining whether the defendant’s conduct crosses the line of criminality, it is able to concentrate solely on the circumstances of an individual case without fear of setting a precedent for future occasions.12 The judge in a civil trial is charged with very different responsibilities. The Credit Rating Agencies (Civil Liability) Regulations 2013, implementing Article 35a of Regulation (EC) No 1060/2009 on credit rating agencies, defines gross negligence of a credit rating agency as the recklessness of its senior management, where senior management are reckless if they “act without caring whether an infringement occurs”. This definition seems to marry more closely with subjective recklessness and indeed, this aligns with the position under New York law as described below. Gross negligence has recently been considered in trust law. In the Privy Council case of Spread Trustees v Hutcheson,13 the beneficiaries under a trust were claiming damages for breach of trust from the professional trustees for failing to identify and investigate breaches of trust on the part of previous trustees. In their defence, the trustees sought to rely on an exclusion clause in the trust deed that purported 10 Corporate Manslaughter and Corporate Homicide Act 2007, s. 1(4)(b). 11 Road Traffic Act 1988, s. 2A(1) (a person drives dangerously if, inter alia, “the way he drives falls far below what would be expected of a competent and careful driver”). 12 The Law Commission Consultation Paper No 171. 13 [2011] 071 PBLR. to exclude liability for gross negligence. The question raised in this preliminary hearing was whether it was permissible for a trustee exoneration clause to exclude liability for acts of gross negligence under Guernsey customary law. Supporting the decision reached in Armitage v Nurse,14 the court held that a trustee exoneration clause can validly exclude liability for gross negligence. Thus, it can be seen that gross negligence is not a concept that is alien under English law, nor is it one which the courts have found difficult to decipher. The widespread reliance on the distinction between gross and ordinary negligence would suggest that the distinction is perfectly intelligible and that its application is not particularly problematic. The definitions and the court decisions in these other areas may be helpful when parties are negotiating a contract or they may be deployed as persuasive authority in the context of a contractual claim arising out of gross negligence. Gross negligence in foreign jurisdictions How is gross negligence considered outside of England & Wales? Many jurisdictions follow the same line and do not recognise gross negligence as a concept. They include (unsurprisingly) a number of the Commonwealth jurisdictions, including Australia and New Zealand. However, civil law jurisdictions such as China and Belgium also follow suit. In contrast, there are a number of jurisdictions that do recognise the tort of gross negligence. The law in these different jurisdictions has tended to focus on gross negligence in the context of exclusion clauses more than any other area of contract. United States The position in the United States varies from state to state. Under New York law, misconduct that rises to the level of gross negligence must show “reckless indifference to the rights of others.” 15 To put in another way, gross negligence must “smack of intentional wrongdoing” and that it is conduct that “evinces a reckless indifference to the rights of others.”16 Under New York law, not only is it impossible to exclude liability for gross negligence, but any gross negligence will in fact bar the enforcement of an exclusion clause.17 14 Op Cit. No. 4. 15 Kalisch-Jarcho, Inc. v. New York, 448 N.E.2d 413, 416 (N.Y. 1983). 16 Sommer v. Federal Signal Corp., 79 N.Y.2d 540 (N.Y. 1992) 17 Gregory Odry, ‘Exclusion of Consequential Damages: Write What You Mean’, [2012] ICLR 142, 159. The position is the same in California,18 albeit what amounts to gross negligence has its own spin. In the City of Santa Barbara case, the California Supreme Court held that gross negligence “has long been defined in California and other jurisdictions as either a ‘want of even scant care’ or ‘an extreme departure from the ordinary standard of conduct.’” The Sommer standard would seem to require greater misconduct than does the City of Santa Barbara standard on the basis that Sommer invokes recklessness. Perhaps because there is no uniform definition of gross negligence, some states do not recognise it, among them Pennsylvania. The view taken aligns with that in England & Wales namely that negligence, whatever epithet is given to characterise it, is the failure to exercise the care and skill which the situation demands and that it is more accurate to call it simply ‘negligence’ than to attempt expressions of degrees of negligence. France Under French law, an exclusion clause cannot exclude liability for a breach of contract which constitutes wilful misconduct (dol) or gross negligence (faute lourde). The position is the same in France as it is in New York. If a clause contains an exclusion for gross negligence, the whole clause may be held unenforceable. The Chronopost19 decisions of the Court of Cassation suggest the gross negligence rule will operate to make any exclusion clause unenforceable to the extent it seeks to exclude liability for the breach of an essential contractual obligation. The Court in the recent “Faurecia”20 case, on the other hand, adopted a more subjective approach, focussing on the “seriousness of the breaching party’s conduct” under which a breach of an essential obligation is not in itself sufficient to constitute gross negligence. 18 City of Santa Barbara v. Superior Court, 161 P.3d 1095 (Cal. 2007) 19 Joint Chamber of the Court of Cassation, 22 April 2005, JCP 2005.I.149 n°3 Note Viney; Commercial Chamber of the Court of Cassation, 21 February 2006, Recueil Dalloz 2006 n°10, 717; Commercial Chamber of the Court of Cassation, 30 May 2006, Recueil Dalloz 2006 n°33, 2288; Commercial Chamber of the Court of Cassation, 13 June 2006, Revue Lamy Droit Civil, October 2006, n° 31, 17. 20 Commercial Chamber of the Court of Cassation, 28 June 2005, n°09- 11.841 (French original: “attendu que la faute lourde ne peut résulter du seul manquement à une obligation contractuelle, fût-elle essentielle, mais doit se déduire de la gravité du comportement du débiteur… seule est réputée non écrite la clause limitative de réparation qui contredit la portée de l’obligation essentielle souscrite par le débiteur”). Germany In Germany, a limitation of liability is enforceable unless the loss or damage was caused intentionally or by gross negligence. Where loss or damage is so caused, the loss cannot be capped or otherwise limited.21 There is extensive reliance on gross negligence in other areas of German law also. If, for example, an object gratuitously given or lent to another causes him injury, the donor is liable only for wilful default or gross negligence.22 Where an employee causes loss in the course of his employment, this is generally apportioned between employer and employee if the worker’s fault was “normal”, but borne entirely by the worker in the case of gross negligence. Switzerland In Switzerland, § 44 (2) of the Swiss Civil Code provides that where the tortfeasor would meet economic difficulties as a result of fully compensating for the damage, and if the tortfeasor did not cause the damage by gross negligence or intentionally, the court may reduce the compensation. Under Swiss law, limitations or exclusions of a service provider (which is not subject to special regulations) are not valid in case of, among other things, gross negligence or wilful intent of the provider.23 Hence, a complete exclusion of damages for lost profits will be valid and applied by a court only to the extent that such losses were caused by a provider behaving in a manner that would qualify as slight or medium negligence. UAE The position in Germany is broadly reflected in UAE law. The law supports freedom of contract, but this is limited by a number of mandatory legislative provisions, which include the rule that parties cannot exclude liability where there is evidence of wilful (deliberate) breach and/or gross negligence. Ireland Like England, Irish law does not recognise a formal distinction between negligence and gross negligence. However, the Irish Courts have recently had occasion to consider the meaning of “gross negligence” in a limitation of liability clause. At first instance,24 the High Court held that gross negligence meant “a degree of negligence where whatever duty of care may be involved has not been met by a significant margin”. The Supreme Court upheld this view and gave effect to a clause which purported to provide that a limit on liability did not apply where damage was caused by a “wilful act or gross negligence”. 21 Section 309 subsection 7 lit. b) BGB 22 §§ 521, 599 B.G.B. 23 Article 100 of the Swiss Code of Obligations 24 (ICDL GCC Foundation FZ-LLC & Anor v European Computer Driving Licence Foundation [2011] IEHC 343 (High Court) and on appeal to the Supreme Court, GCC Foundation FZ-LLC & Anor v European Computer Driving Licence Foundation [2012] IESC 55 The case is helpful in that the court recognised that undefined ‘gross negligence’ terminology in commercial contracts can and should be given effect to provide business efficacy to the agreed terms. However, the standard of gross negligence endorsed appears to represent a significantly lower level of culpability than in England and therefore it is important to draw a distinction between the two jurisdictions. Incorporating gross negligence into the contract Having considered the English law position on the tort of gross negligence, the consideration of gross negligence in other areas of English law and the treatment of gross negligence is some foreign jurisdictions, it is now possible to turn to whether and if so how one might incorporate gross negligence into a contract. In tort, it is clear the concept of gross negligence is not recognised and as a result, there is no meaning given by the court as to what gross negligence means. At best, all that has been provided is a broad set of parameters. Where the contract does not make express provision as to the precise meaning of gross negligence, there will be manifest uncertainty as to exactly what is required before it can be said that there has, or has not been an act of gross negligence. That uncertainty will inevitably lead to a difference of opinion between the contracting parties, which may formalise into a dispute. Clearly this is not in either party’s interests. Before analysing how one limits the risk of uncertainty with a definition of gross negligence, consider whether it is necessary to refer to gross negligence at all. Most standard forms do not entertain any distinction. By way of example, the most recent editions of the JCT, NEC, FIDIC and IChemE forms make no mention of gross negligence. Where negligence is raised, the phrase is often ‘any negligence’. This no doubt is intended to reflect the court’s view that there is either negligence or there is not and that gross negligence is not a recognised concept under English law. It is submitted that the position in law, reflected in the major standard form contract, is the correct position to adopt. However, if it proves necessary to refer to gross negligence, it should be defined. That task is not without difficulty. Quite what the definition should be will depend on the particular circumstances of the contract and so there is unlikely to be a one size fits all definition. That said, it should not be particularly troubling to define gross negligence. In the same way as the law has derived a test for negligence, can there not be a further test which considers whether a person fell, not only below the duty of care, but sufficiently far below to it constitute gross negligence? However, care should be taken when defining gross negligence. For example, gross negligence should not be equiparated with a conscious act in the way that recklessness might be. Recklessness is a state of mind, while negligence (of any kind) is a failure to comply with a particular standard of conduct. Furthermore, negligence is different from fraud or wilful misconduct because it may be committed in good faith and so it must follow that gross negligence may also be distinguished. Finally, the difference between negligence and gross negligence is one of degree, not kind. In that regard, any workable test of gross negligence should require a clear and obvious departure from the standard test of negligence. Quite aside from the challenges of crafting a suitable definition, reaching agreement between parties presents a further challenge. Where for instance, there is a clause limiting the contractor’s liability save for an act or acts of gross negligence by the contractor, the employer will surely want to negotiate a definition which lowers the threshold that must be met before the contractor can be said to be grossly negligent. The contractor will want the reverse. Where the balance of the clause ends up will come down to the bargaining power of each party. Whatever the result, parties should ensure that they maintain a paper trail which explains the history of negotiation between the parties. Practical considerations to consider when interpreting whether an act or omission does or does not constitute gross negligence Where there is a test of gross negligence in a contract, how might one go about determining whether an act or omission does or does not constitute gross negligence? In any analysis concerning the application of the contractual rights and obligations of contracting parties to a given factual scenario, there is one principle that must come above all others. It is this: the contract is king. The contract determines the precise relationship between the parties. If the contract states that gross negligence means X, then it means X, not any other meaning set out by the courts. For example, if the contract states that gross negligence means that the offending party has to commit a specific act, that is the test the parties and the court must apply. With that in mind, the following types of behaviour could satisfy a test of gross negligence: • Obvious and sustained lack of any diligence in the carrying out of acts; • Disregard of professional duties by, for example, issuing incomplete design documents or inaccurate designs; • Ignoring specific instructions; and/or • Disregard of contractual obligations to manage the project properly, by failing to supply qualified personnel for the project, failing to assign personal to carry out critical tasks and refusing to allocate enough resource to the project. Evidence will be vital. The more evidence that is available to demonstrate that the particular act does or does not amount to gross negligence, the better. This is particularly important because however gross negligence is defined in the contract (if it is defined), the evidential threshold to overcome is high. It is likely that only the clearest evidence will compel a court or tribunal to find gross negligence. Claiming losses caused by gross negligence Unlike negligence, gross negligence is not a cause of action. The cause of action for a claim for loss flowing from an act of gross negligence is contractual. The cause of action may arise as a result of a clause which requires a party not to commit gross negligence such that, where gross negligence is committed, that party is in breach of contract. Alternatively, it may arise in the context of an exclusion or limitation which is released, or a right which is triggered (such as a right to termination or a right to claim loss) upon the occurrence of gross negligence. Where the act or omission constituting gross negligence itself leads to loss and the recovery of that loss is contingent upon it being demonstrated that there was gross negligence, it will be necessary to demonstrate that the gross negligence was linked to, or caused the loss claimed. The most straightforward approach is to demonstrate that particular losses flowed from a particular instance of gross negligence. So, the claimant needs to show that the gross negligence caused the loss claimed. However, it may be the case that numerous acts have occurred which in themselves do not amount to an act of gross negligence, but together meet the required threshold. In theory, the claimant may claim a “rolled up” sum of all the resulting losses which have arisen as a result of all the individual acts. However, this is likely to be a difficult claim to succeed on and will only be available where it is impractical or impossible to prove the specific causal link and where there is no material causative factor for which the defendant is not liable. Furthermore, the approach is usually seen as an indication of a weak or exaggerated claim. Another problem is that without clear demonstration of causal linkages if one element of the claim fails then it becomes more difficult for the court to choose a “middle ground” approach. www.eversheds.com ©EVERSHEDS LLP 2015. Eversheds LLP is a limited liability partnership. DT04369_01/15 For further information please contact: Simon Oats Global Head of Construction and Engineering +44 207 919 4750 [email protected] James Pickavance Partner +44 207 919 4646 [email protected] Author