Gross Negligence Interpreted And Applied

In a decision helpful to both special purpose vehicles (SPVs) and service providers utilising SPVs, the Irish Supreme Court has given effect to a gross negligence carve-out to a general (and standard-form) limitation of liability clause (Clause) in an Irish-law commercial licence. The case also highlights the dangers of taking for granted the protections such clauses purport to provide, in particular where key terms such as gross negligence and wilful default are not defined.

Findings

In GCC Foundation FI-LLC v European Computer Driving Licence Foundation Ltd [2012] IESC 55, a licensor sought to rely on the Clause to cap its liability in respect of a lower court finding that it had breached the licence. The Clause did not apply where there was gross negligence, but the term 'gross negligence' was not defined in the licence. The Court had no difficulty giving effect to the Clause, but on the facts found that the licensor's behaviour leading to the breach constituted gross negligence. Accordingly, the carve-out applied, and the licensor faced an uncapped liability exposure. In applying the carve-out, the Court endorsed the lower court's approach which "assumed that the parties intended the clause to have meaning and, indeed, a meaning which would have business efficacy". The Court found it significant that the parties had agreed to a standard of gross negligence as opposed to negligence only. It found that the appropriate meaning of 'gross negligence' (in the context of the Clause) to be 'a degree of negligence where whatever duty of care may be invovled has not been met by a significant margin'. Applying this 'significant margin' test, it found that the carve-out would apply when alleged breach of contract could be said to have resulted from the conduct of the offending party which was, with regard to the party's obligations arising under the contract, significantly careless.

Impact

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 what is generally considered to be the best in the UK (that is, the obiter Hellespont Ardent standard), and the UK practitioners should be aware of this formal Irish departure from their position (for example, when dealing with Irish asset-holding...