Video

Wragge & Co experts take a look at topical issues in contract law. Covering everything from competition law and boilerplate, to trends in liability law and how to terminate a contract, they outline the main issues in-house lawyers should consider.

Liability

David Lowe: Liability is fundamental in every contract. Sally Mewies is going to help us understand the recent trends in the law.

Sally, why is liability such an important issue in contract law?

Sally Mewies: Well, liability is an important issue David because it's really at the heart of risks allocation in any contractual relationship. So what liability says is, in a scenario where something has gone wrong, there's a breach of contract or somebody has suffered a loss, then the liability provisions will determine who takes what responsibility for that loss.

David Lowe: Tell me about the underlying principles.

Sally Mewies: Well, it's interesting isn't it, because quite often people think that if they're actually an innocent person in a breach of contract scenario, that they can recover absolutely every aspect of loss that they might incur. That's not the case. Absent a written contract, even at common law, we have rules that govern how much you can recover if you're a victim of a breach of contract. And those rules determine the types and kinds of losses that can be recoverable, and we call that 'the rules on remoteness'.

David Lowe: What is an indemnity?

Sally Mewies: Yes, what is an indemnity David? And that's a very interesting question. Because people often think that the word 'indemnity' has a specific legal meaning, and in fact it's not like other phrases like 'subject to contract' and 'time of the essence', because it doesn't really have a specific meaning. It's really however it's used in the context of a contract. That's a slightly flippant answer I guess, because we do in commercial contracts use indemnity in two scenarios. So we use it in the insurance sense, so if I have to pay £10 to you then one of my partners will reimburse that £10, that's sort of an insurance style indemnity. But we also use it in a breach of contract scenario, so we might say that if you breach this contract with me then you will indemnify me against all of the losses that I suffer as a result of that.

David Lowe: Sally, what's the recent case law on indemnities?

Sally Mewies: Well, I don't think there's been any recent case law that's particularly interesting around indemnities. But I think the point that's coming out more strongly in every case we see, is this idea that when you use an indemnity mechanism for a breach of contract, that the judge is, and the courts are, gong to construe that very narrowly. So they're not seeing an indemnity for breach of contract as an open cheque: you can just recover absolutely all of your losses. They will construe those narrowly.

David Lowe: Is there a new test for remoteness?

Sally Mewies: Well, it's a very interesting time I think in contract law around all of this David, because in the last few years we've had some cases that have suggested that those very old cases that you remember from your college days of Hadley v Baxendale and Victoria Laundry, may have been altered or extended slightly. And if you remember, those cases were all about what was in the reasonable contemplation of the parties as likely to happen. And what recent cases have been saying is you've just got to tack something on the end of that test, and say, well yes okay, something might fall within the rules of remoteness on those old cases, but have you assumed responsibility for that loss? And if you have, or haven't, we'll determine whether actually you're liable. So it is an interesting time and it's still very much the developing area I think.

David Lowe: What is the difference between direct and indirect loss?

Sally Mewies: Well direct loss is those losses that were in the reasonable contemplation of the parties as not unlikely to happen. So they're those things that arise naturally in the ordinary course of things, as a result of the breach. And the key thing around that is to understand that that's very much an objective test, so it's about imputed knowledge. It's not necessarily the things that you were told about or you thought about. It's what you ought to have thought about, or known about, if you'd sat down for a minute and given it some thought. So actually that's a quite large pool of loss. Whereas indirect losses are losses that don't fall into that quite big category of loss but which you were told about, a sort of special circumstances, and as a result of that you're then liable. So the indirect loss piece is in fact quite narrow.

David Lowe: What are the three main things that in-house lawyers should bear in mind about liability?

Sally Mewies: I think the three things for me is understand when you use the word indemnity that you really need to spell out very clearly in the contract what you mean, especially if you're trying to use it in a breach of contract scenario because it won't automatically denote those consequences you think, i.e. allow you to recover absolutely every last pound of loss, no matter how ludicrous, or unlikely. Understand that the direct loss piece is a large pool of losses and actually the indirect loss isn't, and use that to your advantage if you have to accept liability for certain things, think about that and it might be a useful negotiating position. And thirdly, again understand that this direct loss pool is actually quite a large pool of losses, and that there's a lot in that. So when you accept liability for that you're not necessarily keeping your liability narrow, and that indirect loss is probably fairly narrow and unlikely, I guess, in most scenarios to be an issue.

This video may contain information of general interest about current legal issues, but does not give legal advice.