Gross negligence
Nigeria v J P Morgan (High Court) [2022]
Traditionally, English law has been slow to recognise ‘gross negligence’ as a separate and distinct concept. However, in part due to the fact that it is becoming more common for contracts to refer to the term, particularly in clauses limiting or excluding liability, the courts are now having to grapple with what the term means.
Facts:
Various claims arose in connection with the settlement of a dispute concerning the ownership of an oil prospecting licence for a Nigerian oil field. In 1998, Nigeria granted a licence to Malabu Oil and Gas (Malabu), before revoking it several years later and granting it to Shell. In 2010, the Nigerian government revoked the licence granted to Shell and subsequently awarded it back to Malabu. These repeated changes left a trail of litigation which the parties agreed to settle in 2011 via a tripartite settlement agreement.
As part of the 2011 settlement, the parties signed two agreements which provided that the licence would finally be granted to Shell. In return, Shell would pay USD1.3 billion to the Nigerian government, which would in turn pay USD1.1 billion to Malabu.
These payments were made by Nigeria to Malabu in 2011 and 2013 and were facilitated by JP Morgan. Nigeria opened an account with JP Morgan specifically for the purpose of making the payments which was governed by a Depositary Agreement. This Agreement contained a clause which excluded JP Morgan’s liability to Nigeria relating to the Agreement, unless caused by “fraud, gross negligence or wilful misconduct”.
Several years later, following a change of government in Nigeria, the new government sought to challenge the legitimacy of these payments. It was alleged that the award of the licence and the settlement agreement was part of a fraudulent and corrupt scheme by individuals who had been part of the Nigerian government. Nigeria argued that JP Morgan was in breach of a so called ‘Quincecare’ duty by actioning payment instructions where it had grounds to believe that there was a real possibility that Nigeria was being defrauded. A Quincecare duty is an implied duty on a bank not to follow a customer’s instructions where the bank is “put on enquiry” that it may in making the payment be facilitating a fraud on the customer.
Relevant parts of the Depositary Agreement – Clause 5.1 the duties and obligations of the [Bank] in respect of the [deposited cash] shall be determined solely by the express terms of this Agreement.
8.1 the [Bank] shall not be liable ... unless caused by the fraud, gross negligence or wilful misconduct of the [Bank].
Amongst other matters the courts have had to consider two things. Was the implied Quincecare duty excluded by clause 5.1? Second, had J P Morgan been “grossly negligent” in effecting the payment instructions?
Decision:
The Court of Appeal, in an earlier hearing, decided that in relation to the entire agreement clause “case law is clearly against Morgan Chase on this point”. It decided that the wording of clause 5.1 was not sufficient to prevent a duty being implied.
In a subsequent hearing, the High Court, in relation to the second question, said “The ‘target’ of gross negligence, is one which is necessarily fact sensitive. It is a notoriously slippery concept: it requires something more than negligence, but it does not require dishonesty or bad faith”.
The judge concluded that “even a serious lapse is not likely to be enough to engage the concept of gross negligence. One is moving beyond bad mistakes to mistakes which have a very serious and often a shocking or startling (cf. “jawdropping”) quality to them. The target is mistakes or defaults which are so serious that the word reckless may often come to mind, even if the test for recklessness is not met”.
The judge accepted that three factors in particular are relevant to the question of gross negligence namely
i. The likelihood of the risk
ii. The ease of mitigating that risk
iii. The seriousness of the consequences if the risk came about as a result.
The judge concluded that there was no serious disregard of the risk of the sort required by the authorities on gross negligence.
Points to Note:
- The way in which the court formulated the test for gross negligence means that very rarely will the relevant threshold be met. As a result, if a limitation clause does not apply to acts or omissions of gross negligence, suppliers and service providers will take some comfort from the fact that the scope of the carve out will be pretty narrow.
- Excluding gross negligence from the scope of a liability limitation clause still provides plenty of scope as to its meaning. If relying upon a limitation clause it is probably best to avoid such a carve out if possible.