The Court of Appeal disagreed with KF. D had always acted within the scope of his authority and had not agreed to take on any additional liability. Also, he was not liable for failure to identify the principal. He had always identified the principal even if he got the name wrong. KF did not provide any evidence to show that the mistaken legal name had induced it to enter into a contract that it would otherwise not have done. Further, KF could have found out the correct name if it had wanted to do so.

The ECJ has now delivered a dramatic ruling as follows:

• Where goods are advertised from outside of the European Economic Area and they have not been put on the market within the EEA with the brand owner’s consent, there is trade mark infringement even where the goods are just targeted as being offered or advertised for sale within the EEA without having to show further that they were actually put on the market in the EEA.
• It would be for a national court to rule on what was meant by “targeted”, but the mere fact that a website was accessible from a particular country would not be enough to satisfy that. The national court would need to consider the context of the offer, such as whether the territory was included in a list of countries to which the seller was willing to send the goods.
• Consumers do not “use” the brand in a trade mark sense when they use the eBay service. However, in this particular case, the people using eBay were deemed to be businesses as they were selling goods in the course of a trade, so they were “using” in a trade mark sense.
• The operator of an online marketplace like eBay does not generally “use” a third party’s trade marks (like L’Oréal’s) when its users advertise goods under those marks.
• However, its exemption from liability for its users’ actions under the E-Commerce Directive is removed when, as in eBay’s case, the operator of an online marketplace buys advertising keywords that are identical to the trade marks in order to optimise the presentation of the online offers. In that case, it is playing an “active role”.
• For the “active role” to apply and the operator to have liability, the trade marks have to be used on the site itself rather than in a sponsored link.
• Where an Internet service provider does not play an “active role”, such that it does not have knowledge or control of the unlawful advert, it is exempt from liability under the E-Commerce Directive, assuming it acts expeditiously in taking down the offending material as soon as it discovers the offending material.
• An online marketplace is not deprived of the exemption from liability merely because it stores offers for sale on its servers, sets terms of service, is paid for the service or provides general information to its users. However, the line is crossed if the online operator helps its customers in other ways such as by promoting or optimising its customers’ adverts. It was then no longer taking a neutral position and had taken an active role.
• Member States must ensure that trade mark owners can obtain an effective, proportionate, dissuasive injunction to stop infringers. This means ensuring effective protection for intellectual property rights. To do this, national courts should have the power to require online service providers to take steps not only to prevent a current infringement but also further infringement. It could be too much to expect ISPs to actively monitor all the data of its customers, but if it is aware of a particular problematic customer, it should not be able to wait until it is told again but there may, for example, be the need for an injunction ordering the ISP to suspend the account of the infringer so as to prevent further infringements by that user.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: “This case creates two interesting developments. Firstly, taking an active role by optimising the material on its site could leave an ISP open to liability. Online intermediaries should therefore reduce their active involvement where they may be at risk of having liability for that content. Previously, they had assumed that they were not liable for their users’ activity unless they were informed otherwise.

“The second major impact is the wider-ranging injunctions mentioned by the ECJ. This could lead to actions by rights holders to try to get an injunction against ISPs to require them to shut down serial infringers’ accounts.”

In 2009, the High Court ruled in Internet Broadcasting Corporation (t/a NetTV) v Mar LLC (t/a MARHedge) that there is a rebuttable presumption that an exclusion clause should not apply to a deliberate personal repudiatory breach of a contract. In that case, the High Court ruled that extremely clear drafting would be needed for a court to rule that the parties intended an exclusion clause to cover a deliberate personal repudiatory breach. The Court had said that there was a presumption that a party would not intend to limit their liability for really serious deliberate breaches (such as deliberately walking away from a binding contract).

What happened in this case?

In this case, AstraZeneca (AZ) and Albemarle International (AI) entered into an agreement for AI to supply a product called DIP to AZ that AZ then distilled to produce propofol. AZ foresaw that it might, at some point in the future, be more beneficial to be supplied with propofol rather than DIP, and the agreement contained a provision that, if AZ did want to make such a change to its process, it would give AI first refusal on the supply of propofol.

AZ later told AI of its intention to enter into an agreement with a third party (“S”) for the supply of propofol. AI objected as it wanted to continue to supply and cited the first refusal provision in the agreement. Negotiations ensued, but, despite AI matching the third party offer of supply, no agreement was reached, and AI served notice to terminate for AZ’s breach of the first refusal provision which had not been remedied on demand. During the negotiations, AZ attempted to stockpile the goods, whilst AI refused to supply two additional orders made by AZ under the agreement, although this did not affect AZ’s operations. Things got rather messy as allegations were thrown around about who was breaching the agreement.

AZ issued proceedings against AI for breach of contract as AI had failed to supply the two additional orders. AZ argued this was a repudiatory breach entitling AZ to terminate the agreement and claim damages. AI denied the claim, and further argued that any liability it might have was, in any case, limited by an exclusion clause in the agreement. AZ argued that AI could not rely on the exclusion clause because (following the ruling in the NetTV case) the breach was deliberate and repudiatory. AI then counter-claimed for breach of contract due to the alleged failure to give it first refusal on the right to supply propofol, but AZ denied liability.

The ruling

The High Court ruled that AI was, on the facts, in breach to AZ for its failure to fulfil one of the two additional orders and was liable in damages for that breach. However, it went on to rule that failure in respect of one or two orders did not amount to a repudiatory breach of a minimum three year contract.

Meanwhile, AZ was also liable for failing to honour the first refusal provision and AI was entitled to terminate the contract as a result of that breach. However, despite that liability, the High Court had to decide whether the exclusion clause excluded or limited the liability of either party and in particular whether AI could claim for its loss of profits despite an apparent provision excluding liability for lost profits. Meanwhile, although AI’s failure to supply was not serious enough to be repudiatory and although the breach was not deliberate (as AI had had legal advice that suggested that it would not be breaching the agreement in the circumstances by failing to supply), the court went on to consider the issue of deliberate repudiatory breach anyway.

Right of first refusal

Where AZ had decided to move to buying propofol rather than DIP and it was considering an offer to supply from a third party, AZ was under an obligation to provide AI with full details so that AI could match the opportunity. Of course, issues may arise in the course of negotiating that could mean that AI would not supply on the terms offered by S, but if AI was willing to match the terms that AZ was minded to accept from a third party (as happened here) then AZ was obliged to accept AI’s offer. The right of first refusal clause had to mean something. AZ was obliged to provide full disclosure of the terms of the proposed deal with S and act in good faith to AI. The only sensible construction of a right of first opportunity was to give AI sufficient opportunity and right to match the offer and not just as AZ was about to award the contract to S. AZ was in breach of the right of first refusal clause, and AI had rightly given AZ 30 days to remedy the breach and then rightly terminated the contract when the breach was not remedied.

Waiver

The court added that AI’s willingness to continue negotiating after that 30 day period had expired did not amount to a waiver of its rights. It could still terminate despite not exercising that termination right immediately.

Deliberate Repudiatory Breach

The High Court ruled that, if there had been a repudiatory breach by AI, it had not been deliberate as AI had followed legal advice that it was acting within its contractual rights (albeit the legal advice had been incorrect). As such, there was no question that the exclusion clause applied and limited AI’s liability. However, the Court went on to consider what would have been the position had the breach been deliberate and repudiatory. It said that the decision in NetTV had in fact been misguided, and that deliberate repudiatory breaches should not be treated any differently from any other breach. The High Court said that, although it was not necessary to consider whether or not an exclusion clause applied to a deliberate personal repudiatory breach, it would be inclined not to follow the NetTV ruling if it did.

Limited “Contra Proferentem” interpretation of exclusion clause in relation to breach of right of first refusal provision

The exclusion clause said “No claims by AZ of any kind whether as to the products delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product…; and failure to give written notice of claim within 60 days from the date of delivery, or in the case of non-delivery, from the date fixed for delivery, shall constitute a waiver by AZ of all claims with respect thereto. In no case shall AZ or Albermarle be liable for loss of profits or incidental or consequential damages.”

AZ argued that it was not liable for AI’s lost profits arising out of its breach of the right of first refusal provision. However, the Court ruled that, in line with English law rules of interpretation on liability clauses, the exclusion clause had to be construed against the party seeking to rely on it if there was the slightest bit of doubt in the meaning (a rule known as “contra proferentem”). AZ’s interpretation would have meant that the first refusal provision would have been no more than a statement of intent, leaving AZ with no incentive to comply with it, which a court would always seek to do everything to avoid if there is no alternative construction.

In this case, the alternative construction was that the second sentence in the exclusion clause (ie the exclusion of lost profits) had to be read in the same light as the first sentence within the same paragraph – ie applying to late or non-delivery of DIP products. On that interpretation, it was not intended to deal with loss of profits arising out of not giving AI the opportunity to supply propofol.

Comment

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments, “This ruling is important because it deals with four important issues relating to commercial contracts – deliberate repudiatory breach, the meaning of rights of first refusal, waiver during contract negotiations and contra proferentem.

 ”The ruling in NetTV stated that deliberate repudiatory breaches can, in some circumstances, be covered by an exclusion clause but only if express words are used. This ruling suggests the opposite, in that liability would be restricted or excluded for deliberate repudiatory breach just as much as with other forms of liability. Those comments are not strictly binding on future cases, as the High Court did not need to make a ruling on that issue, as it had already ruled that the breach was not deliberate or repudiatory anyway. This uncertainty is not particularly helpful for businesses that need to know how to draft contracts going forward, but the best advice would be to draft appropriate wording to reflect the level of risk the parties are willing to take and not leave it to the courts to decide.

“The part of the ruling dealing with the narrow interpretation of an exclusion clause against the party seeking to rely on it – the ‘contra-proferentem rule’ – which meant that breach of the right of first refusal provision in the agreement was not covered by the exclusion clause is actually just a very useful reminder of existing rules. Exclusion clauses should be professionally drafted by specialist lawyers. A party to a contract should play devil’s advocate when drafting an exclusion clause and try to understand what a court might see from the outside looking in, rather than just looking on what might be beneficial for the business itself.

“The interpretation of the phrase “right of first refusal” was also extremely useful. That phrase is sometimes used in a contract but this ruling gives real insight into what that actually means.

“Finally, the decision that one party had not waived its rights of termination when it continued to negotiate for a few weeks in good faith was also helpful.

“All in all, this is a major judgment that affects all commercial dealings. We will have to see, though, whether the ruling will be appealed.”

The High Court ruled that all the losses were direct losses. The supplier was therefore liable for all the damages claimed.

There is nothing startling about the result. What is surprising is that many suppliers are still under a misapprehension about how much they are covered by a crucial clause which seeks to limit their exposure for something going wrong. A lot of businesses think that economic losses are indirect and they are therefore not liable for them. This is wrong. Physical damage or economic loss (such as loss of profits, loss of revenue, loss of reputation, etc) can be either direct or indirect. It depends on the circumstances according to an interpretation based on a legal case from 150 years ago.

Liability clauses go to the heart of why businesses have contracts – in order to give certainty. However, many people are trading under a misunderstanding of the level of the risk that they have accepted.

Under UCTA, any terms restricting a seller’s liability for breach of contract, where the buyer is either a consumer or deals on the seller’s standard terms and conditions, must comply with a reasonableness test. In the initial ruling, the High Court had issued summary judgment in favour of the seller on the grounds that deciding whether the clauses were reasonable or not did not require a full trial.

The Court of Appeal agreed with the High Court’s ruling, pointing out that both of these BIFA clauses had been ruled to be reasonable in previous cases in the Court of Appeal. Whilst reasonableness claims under UCTA are considered by the courts on a case-by-case basis, the ruling suggests that any attempt to claim that these BIFA clauses are not reasonable in future will require unusual circumstances to be present, the lack of which will mean the same conclusion – the clauses are reasonable. In respect of the set-off clause in question, the Court of Appeal said that the exclusion of the right to set-off did not stop the buyer from refusing to pay any incorrectly charged sums as the exclusion only stopped setting off against sums due. The Court also said that the wording of the nine month limitation clause stopped the bringing of cases whether the cause of action had been known or not before expiry of that period.

It is also worth noting that the Court of Appeal commented that although the relative bargaining power is one of the criteria under UCTA for deciding reasonableness, the relative size of the parties was not likely to be important in deciding whether the clauses were reasonable if a small but commercially experienced buyer had a number of competing suppliers to choose from. That was the case here.

The Tribunal accepted that there would likely to be a prejudice to the DWP’s commercial interests. However, it did not accept that it would actually prejudice. There was no evidence to show that it was more probable than not that there would be prejudice – this was mere speculation. The Tribunal did agree to keep one bit secret, though – Atos’s financial model should have special protection as a trade secret. The Tribunal said that for trade secrets, there was a stronger public interest in keeping it secret because of the investment involved, and competitors would get an unfair advantage. However, for liability caps, benchmarking and the rest of the contract, the public interest favoured an order for disclosure so that the public could know the service levels, performance measures, costs and risks.

On a preliminary hearing on these points (rather than a ruling as to whether the system was actually faulty), the Court of Appeal agreed with the High Court in that a series of minor errors could amount to a fundamental breach. Also, all of the following types of loss did not fall within any of the excluded categories:

• Compensation payments to customers.
• Increased gas distribution charges.
• Employing more staff to deal with doing the things that the IT should have done, and also to deal with customer issues.
• Writing off millions of pounds of unbilled or late bills caused by the IT system not working.
• Paying to investigate and get the IT problem resolved.

In addition, the Court of Appeal said that it was not necessary for the customer to state in their warranty correction notice the nature of the alleged material errors or the serious adverse effect.

The Court of Appeal added that the warranty correction clause was construed as requiring the serious adverse effect of the Fundamental Defect to have been suffered by the customer before the end of the warranty period for the supplier to have to remedy. The idea of a limited warranty period was to draw a line in the sand and not create an indefinite warranty obligation, so even if it was known that a future serious adverse effect would take place, the warranty remedy obligation only applied if the serious adverse effects kicked in before the warranty period expired.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: ‘This case is interesting for all commercial contracts but especially IT projects (where a number of small errors frequently occurs), particularly for the following two reasons: (1) it shows that breaches which individually are minor can cumulatively mount up to be something entitling the purchaser to more serious remedies; (2) it highlights non-lawyers’ frequent misconception as to what indirect or consequential losses involve, when the reality is that many losses that non-lawyers consider to be ‘indirect’ are really understood at law to be ‘direct’.’

The High Court refused to grant the tenant’s claim. HB had an honest belief in the statement based on the commissioner report. The judge added that there was no duty to keep the other person continually updated of changes in circumstances; what mattered was the state of affairs when the contract was concluded. None of the statements were false when made; HB believed them to be true and had reasonable grounds for that belief. There was no lack of reasonable belief from HB to continue to rely on the original report, but even if there was it was not a fraudulent misrepresentation if the belief was held honestly. A duty to correct would only arise if HB knew that previous representations that it had made had since become false or was reckless as to whether they were still true.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘This case does not really change the law in a great way. However, hopefully it will settle a few frayed nerves that there may have been following the High Court’s recent decision to grant a claim that a salesperson’s fraudulent misrepresentation had caused EDS to have potential hundreds of millions of pounds of liability to Sky.’

The High Court ruled that the total liability in contract included liability for contractual interest. However, any interest applied by statute was a discrete statutory liability arising from the exercise of the court’s discretion and was therefore not covered by the contractual cap on liability.

The High Court also ruled on other matters that emphasised the need to draft exclusions or limits on liability absolutely clearly beyond doubt. Failure to do so could result in the liability clause being interpreted against the person looking to rely on it.

One clause said: ‘Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss business[…]) arising out of or in connection with this Agreement.’ Endsleigh argued that the specific types of losses in brackets could apply to direct or indirect losses, but the court rightly disagreed. The phrase ‘including but not limited to’ gave a clear indication that those losses were a type of indirect or consequential loss.

More surprising, perhaps, was the court’s interpretation of the following clause: ‘Endsleigh will not be liable to Markerstudy for any indirect or consequential loss or loss of profit or loss of business arising out of…’ The court ruled that only indirect loss of profit or business was covered by the exclusion. Endsleigh argued that the specified types of loss were free-standing from the phrase ‘any indirect or consequential loss’ and could therefore be direct or indirect loss of profit or loss of business, but the court rejected that argument too.

I would say that some of the court’s findings here are surprising. However, what is not surprising is that if someone wants to exclude or limit its liability, the clause has to be drafted very clearly – more so, perhaps, than many people realise. Failure to do this could result in not having liability limited or excluded in the way intended. Since the liability clause nearly always crop up in the event of a dispute, it is arguably the most important clause in the contract, but the one drafted incorrectly most often.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘Although this ruling is not binding on English courts, it is of great concern that any court anywhere in the European Union could have come to this decision. If not successfully appealed, it could change the Web 2.0 as we know it and make anyone more cautious if they are involved with acting as a mere host or intermediary of content supplied by other people. The fact that there is criminal liability is even more concerning – it’s one thing risking being sued; it’s another if people at a responsible business risk jail terms.’

On 26 January 2010, the Technology and Construction Court in London ruled that EDS had “deceitfully induced” Sky into entering into a contract for new Customer Relationship Management technology for use in Sky’s call centres. The contract value was not a small matter either – £54 million is a lot of money by anyone’s standards. Damages payable by EDS are still to be assessed but, based on comments from Sky’s barristers, are likely to exceed £200 million.

Other postings on our website have already showcased, in other contexts, the nature of spiralling court fees due to court rules – and this case demonstrated again that, particularly in technology matters, this is ever more true.  The fees spent by each side far exceeded the value of the contract. The case itself was huge in every sense of the word, being one of the largest cases ever to come to trial in an English court. There were 70 witnesses called and over half a million documents were scrutinised.

In this case, Mr Justice Ramsey found from the evidence that:
(i) the head of the CRM practice at EDS had been dishonest (the key words) in the EDS bid to win Sky’s business;
(ii) EDS had made an actionable misrepresentation to Sky in order to induce Sky into a form of settlement agreement after the project failed;
(iii) EDS was in breach of contract for the whole time it was the systems integrator;
(iv) but for EDS’ deceit (the crucial ‘but for’ test), Sky would have contracted with PwC instead; and
(v) it was untrue that Sky had failed to mitigate its loss after EDS had been removed as systems integrator. (It is a requirement of English contract law that the innocent party to a breach of contract mitigate its loss, else it cannot recover that loss from the breaching party, to the extent of its failure to mitigate.)

So – if this is landmark IT case, why is it also of such great significance to anyone contracting for any type of goods and services? The reason is that any business that has sales-people who are “economical with the actualité ” (in the words of the late Alan Clark) when securing a deal – will be called to account if that deal goes wrong. And most crucially any caps on liability (or exclusions of liability) which were carefully placed into a contract will be ignored. Damages could (and frequently will) be huge – as in this case.

The High Court and Court of Appeal rejected MacSalvors’ claim against Brush. Usually, the Owner would be vicariously liable for the operator’s actions. (Vicarious liability means liability of an employer for anything done by the employee in the course of their employment.) Clause 8 was intended to make the hirer responsible for the operator’s negligence for claims brought by third parties; it did not seek to make the hirer liable for a claim out of the owner’s negligence.

As to clause 13, the main issue was whether it denied the owner an indemnity in respect of its own negligence. At issue was whether the Conditions satisfied the Alderslade principle (named after the Alderslade v Hendon case of 1945). The Alderslade principle effectively says that for an exclusion of liability provision to be wide enough to exclude liability for negligence, the wording must be absolutely clear. Without clear wording, the court must decide whether the wording is wide enough and if there is any doubt then negligence should not be deemed to be excluded. In seeking an indemnity from the other party, this amounted to an exclusion of liability by the owner for its own negligence. The Court of Appeal ruled in this case that the wording of the Conditions was not sufficiently clear to exclude the owner’s liability for its own negligence and so the hirer was not indemnifying the owner for the owner’s negligence.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘This case does not break new legal ground. However, it is a timely reminder that limitation of liability clauses would be interpreted against the person relying on them, particularly if it involves negligence. Liability clauses need very careful drafting to work legally.’