What are the risks and benefits of explicitly defining 'gross negligence' and 'wilful misconduct' in contractual agreements versus relying on traditional legal interpretations? With an analysis of the different considerations that apply to civil and common law jurisdictions, as well as a comparison of real-world contract examples, this piece offers insights into the rewards and pitfalls in the quest for greater certainty.
In approaching negotiations of any contract, the trifecta of limitation of liability, indemnity, and insurance clauses serve as crucial safeguards, delineating the boundaries of accountability and financial responsibility between parties. A customary exclusion built into these clauses are events borne as a result of 'gross negligence' and 'wilful misconduct' by a party and/or its personnel.
Development in market practices and the constitution of standard inclusions/exclusions is slow but inevitable. One driving factor for such developments is the desire to achieve greater certainty with each iteration of the contract. To that end, parties have been increasingly eager to define 'gross negligence' and/or 'wilful misconduct' as a standard starting point. This represents a significant departure from these definitions being left to be construed in accordance with the governing law of said contract and the applicable rules of interpretation if a dispute arises.
The risks and benefits arising from such an evolution are inherently dependent on variables including the tolerance for risk, commercial economics, and the position of the contracting party in the transactional chain.
Unsurprisingly, the legal landscape also forms a critical consideration in answering the titled question.
At civil law
The doctrine of pacta sunt servanda is a foundational principle of contract across both civil and common law jurisdictions. Its effect is illustrated in civil law systems where the interpretation of contractual terms are not guided by binding judicial precedents, but are generally confined to their express definitions. This approach ensures that the original intentions of the parties involved are respected and upheld, albeit within the parameters set by overarching principles of civil law, including the imperative of good faith. The absence of definitions for 'gross negligence' and 'wilful misconduct' therefore poses uncertainty and increased liability for clients, especially those operating within higher-risk sectors.
At common law
One similarly looks first at the express terms of the contract when approaching questions of proper construction in a common law jurisdiction. However, paths then immediately diverge, not least owing to a lack of applicable overarching codified principles as well as jurisdiction-specific sets of rules of interpretation developed in accordance with the doctrine of stare decisis.
In England and Wales [1], the prevailing position when deciphering the meaning of 'gross negligence' (in the absence of an express contractual definition) first necessitates a consideration of what constitutes 'negligence', and thereafter, whether such negligence was to such an extent that it was 'grossly' so [2]. The question is one of degree and not of kind: a party whose conduct involves a serious disregard of or indifference to a serious risk has the potential to be found grossly negligent [3].
'Wilful misconduct' on the other hand does not have a precise meaning at common law, and will therefore be interpreted with rules of interpretation in England & Wales, which may include an appraisal of its ordinary and natural meaning: an act will usually be considered 'wilful' if it is intentional or reckless [4].
Though an apparent lack of a concrete interpretation framework may tempt some into immediately opting for clear definitions in their contracts, the flip side of the common law coin is that any developments at common law as to the proper construction of the meaning of such terms would be excluded due to a closed definition – for better or for worse. Naturally, this is a risk that one that increases with the length of the contract term in question.
A selection of agreed definitions (albeit truncated) of the two terms seen in recent contracts governed by the law in England and Wales are as follows.
Gross negligence
Wilful misconduct
The aforementioned drafting largely mirrors the position currently established at common law. What is also reflected is the notable distinction between the two terms, being the inclusion of a mental element where 'wilful misconduct' is concerned.
This is of no surprise. The echoed position taken serves to enhance the clarity and precision of the contract's language, driving it to be interpreted and applied with a higher degree of confidence in certainty as part of the course of a party's business operations.
Of course, it hardly need be said that the crafting of these definitions will be influenced by the contracting position of a party. Levers commonly toggled during negotiations include the option of benchmarking a party's performance against that of a hypothetical and reasonable counterpart, and the express omission of liability for errors made in good faith.
Ultimately, and as with all things, there is no universal approach to the employment of these definitions. The discussion presented here only scratches the surface of the comprehensive and thoughtful factors that should be contemplated by any entity and its counsel during the process of contract negotiations.
While things currently seem broadly instep, there may come a time, at least under the common law, where there could be significant changes to how wilful misconduct and/or gross negligence are defined, which means that contracts with defined terms would then be out of step.
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