Exclusion clauses, implied terms and protection of trade secrets

Exclusion clauses

The courts have recently denied a party the protection of an exclusion clause. As always, clients are reminded to have a specialist solicitor review their exclusion clauses and insurance cover on a regular basis. This is particularly so during a recession where the perceptions of risks and rewards, and thus parties' behaviour, are prone to alter. The clause read

"... neither party will be liable to the other for any damage to software, damage to or loss of data, loss of profit, anticipated profit, revenues, anticipated savings, goodwill or business opportunity, or for any indirect or consequential loss or damage."

Under section 3 of the Unfair Contract Terms Act 1978 businesses contracting on their standard terms can rely on exclusions of liability only to the extent that the clauses are reasonable. The availability of insurance is one of the factors the courts will consider when assessing a clause's reasonableness.

In this particular case the contract was fully negotiated, ie not on one party's standard terms, so UCTA did not apply. This left the court to apply the common law.

The contract was for a fixed term of three years. During this period one party decided to write to the other party stating that it was terminating the contract with immediate effect ! This amounted to a deliberate repudiation by the "controlling mind" of the terminating company - ie it was not a repudiation brought on by a chance event such as a fire, or carelessness by a member of staff.

If an exclusion clause is ambiguous or uncertain, it will generally be construed against the party trying to rely on it (the contra preferentem rule).

Here the court held that in the absence of express wording in the clause addressing situations of deliberate repudiation, the terminating party would not have the protection of its exclusions clause. The innocent party could claim for loss of profit and not merely set up costs.

Internet Broadcasting Corporation Ltd (t/a NetTV) and NetTV Hedge Funds Ltd (formerly Marhedge TV Ltd) v Mar LLC (t/a Marhedge) [2009] EWHC 844 (CH).

Implied terms

If you get into an argument with a contractor, supplier or other party to a contract about what the contract should have said or was intended to say then a little advice on the law of implied terms could be of help with negotiations, even if court action is not economic.

There have been various judicial expressions of when a term will be implied - imported into a contract - by the courts. The oldest is perhaps the officious bystander test and more recently the business efficacy test.

More recently still the Privy Counsel, which is of similar status to the House of Lords, has said the proper question to ask is whether such a provision (ie the missing provision that one of the parties wishes to insert) would spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean.

The House of Lords in 1978 said that five factors were required to add a "missing" [our word] clause. One is that the missing provision has to be so obvious that the parties would both say, if asked to include it at time of entering into the contract, "yes of course, that goes without saying".

(1) Attorney General of Belize (2) ECOM Ltd and (3) Belize Telecommunications Ltd v (1) Belize Telecom Ltd and (2) Innovative Communication Co LLC [2009] UKPC 10

Protection of trade secrets

Recently the High Court has upheld a claim for breach of confidence relating to technical information contained in a database, brought by a group of companies against a number of defendants, including two ex-employees. The judge found that a consultant, who was initially engaged by the claimants and who then worked with the defendants in developing their competing product, had been subject to an express and implied obligation of confidence.

As the information in the database constituted the claimants' trade secrets, this obligation continued after the consultant's relationship with the claimants had ended. Consequently, his use of recipes and test results in the database to devise the initial recipes for the defendants' product amounted to a misuse of confidential information, for which all the defendants were liable.

Vestergaard Frandsen a/s and others v Bestnet Europe Limited and others, 3 May 2009.

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