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Key Liability Issues & Right Of Refusal

In this article Dr Maria Anassutzi, Intellectual Property Expert, analyses some key issues regarding liability, entire agreement and right of first refusal.

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In this article, Dr Maria Anassutzi, Intellectual Property Expert, analyses some key issues regarding liability, entire agreement and right of first refusal.

1) Entire agreement clauses

Are entire agreement clauses such as:

“This agreement constitutes the entire agreement between the parties, and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, between them” an effective way to exclude claims for misrepresentation, breach of collateral warranty and/or implied terms?

The short answer is no. When the entire agreement clause consists of just a basic complete agreement statement, like the statement above without specific and clear provision to misrepresentation, the clause is ineffective to exclude misrepresentations. The exclusion of liability for misrepresentation has to be clearly stated. Traditional ways of doing this include clauses which state the parties’ agreement that no representations have been made; or that there has been no reliance on any representations and an express exclusion of liability for misrepresentation.

A basic entire agreement statement is also ineffective to exclude terms being implied to give the contract business efficacy. However, it does exclude collateral warranties and other implied terms. Click here for further explanation on this case and for some drafting tips.

2) Right of first refusal

Right of first refusal clauses, whereby a party gives the other the possibility to quote and be awarded a further contract, a renewal or some additional right is common in commercial contracts. A party may be persuaded to grant such a right in the belief that since the right and the terms will need to be discussed and agreed they represent an agreement to agree and therefore unenforceable obligation.

Regarding the right of first refusal clause:

  1. The Courts will try to give the clause some commercial effect.
  2. The clause gives not only the opportunity to negotiate with the other party, as part of the tender process but also it should be offered an opportunity to accept or refuse a contractual offer on the same terms offered from a third party.
  3. When receiving third party terms these must be fully disclosed, so that the party with the right of first refusal could understand the terms it is to match. In the event the third party offer is matched then the other party is obliged to accept that party’s offer rather than that of the third party.
  4. Words such as “under mutually acceptable terms and conditions” which often accompany a right of first refusal clause do not indicate an agreement to agree but mean that, once the right of first refusal has been exercised, further matters may need to be resolved, before a binding contract could be entered into.

Click here for further explanation on this case

3) Limitation and exclusion of liability for deliberate breach

The above case helps to clarify also the question of whether a limitation of liability applies to a deliberate breach. Previous case law indicated that this was not the case. So a clause such as the one set out below:

“No claims by [X] 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 in respect of which such damages are claimed. Plus failure to give written notice of claim within sixty (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 [X] of all claims with respect to that. In no case shall either party be liable for loss of profits or incidental or consequential damages.”

Would also apply to breaches incurred deliberately. What you can do now. One option is, of course, not to do anything if you believe that your current terms reflect your business needs adequately. Alternatively, you could:

  • Amend your exclusion clause to state that the clause does not exclude or restrict liability for deliberate breach. If this is a correct statement of the law, businesses should assume that an exclusion clause will apply to a deliberate breach of contract. Therefore, if a business wants to be sure that a counterparty’s liability will not be limited if that counterparty commits a deliberate breach of contract, it should amend the exclusion clause to state this expressly. Businesses are most likely to consider that they would benefit from this carve-out when buying goods, services or rights (as most of the major obligations under the contract will belong to the other party).
  • Amend your exclusion clause to state that it covers liability for deliberate breach. This approach would now only be appropriate if a business wanted to put the matter beyond all doubt. The courts are averse to over-wide exclusions which allow parties to abandon performance of a contract and leave the non-defaulting party with no meaningful remedy, and construe them strictly. However such exclusion is very unlikely to succeed in standard terms and conditions, or if the clause is not genuinely negotiated by the parties.

All articles are for general purposes and guidance only and do not constitute legal or professional advice.

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