What’s so bad about… assumption of responsibility? Indirect loss under English law

Some months ago, this blogger wrote a piece about indirect loss (the blog post is here  and the full article is here).  Recent and robust discussions with BigPharma over the terms of a CDA have led me look at the position again and to wonder whether the judgment of the House of Lords (as it then was) in 2008 in Transfield Shipping v Mercator Shipping deserved the critical response it received.

  There is also a note on the Anderson Law website here that looks in more detail at the issues discussed in this blog article.

The first thing to note is that there is no need for panic.  The Transfield case has not effected any major change in the law.  Subsequent cases have largely confined it to its facts rather than treating it as a new rule of general application.

The facts of the Transfield case were relatively simple.  A ship, the Achilleas, was late returning from a charter with the result that the following charter had to be renegotiated.  The ship’s owner claimed damages for the period of delay and for the reduced value of renegotiated charter.  The original terms of the following charter were especially lucrative.  The House of Lords awarded damages only for the period of delay and did not allow the owner to recover in respect of the following charter.

Hadley v Baxendale is the starting point for any consideration of a question of remoteness of damage.  That case tells us that damages for breach of contract are recoverable in respect of any loss that flows naturally from the breach or in respect of any loss that could reasonably be supposed to have been in the contemplation of the parties at the time the contract was made.  However, the House of Lords in the Transfield case appeared to conclude that loss could not be recovered based merely on what was in the contemplation of the parties at the time of the contract.  The implication of the judgments was that the defendant also needed to have assumed responsibility for a loss before any damages would be awarded.

Five Law Lords gave five judgments in the Transfield case and each appeared to take a slightly different approach.  The most eye catching judgment was that of Lord Hoffman who decided that the determining factor was whether or not the party in breach had agreed to assume responsibility for losses of the type claimed.  If this statement represented the true position at law, then the consequence would be that claimants could only recover damages for a loss where the defendant had assumed responsibility for that specific risk.

Five Law Lords gave five judgments….

In the immediate aftermath of the case, this caused a great deal of concern.  However, as is often the way with the elastic English law, subsequent decisions have quietly distinguished the Transfield case and things have carried on largely unchanged.  Most notably, the Court of Appeal in 2010 concluded that Hadley v Baxdendale remained the standard test, albeit that it had been “rationalised”.

To return to the discussions with BigPharma, I wonder whether Lord Hoffman’s concept of no liability without an assumption of responsibility would be such a bad thing.

Consider this scenario:  BigPharma wants to talk to Research Institute about a possible collaboration and to do this effectively will need to disclose sensitive information.  BigPharma is adamant that any breach of confidence will destroy absolutely all of the value in the information.  But BigPharma is unable (or unwilling) to give any hint of what that value might be, what the potential loss might be or what particular risks are causing concern.   Research Institute is pushed towards a CDA with no limitation of liability, no exclusion of indirect loss and no information that it can use to quantify the potential loss.

Leaving aside the point that much of the information will probably find its way into a patent application and be published in time anyway, Research Institute is in a bind.  It wants to talk but the CDA exposes it to theoretically unlimited liability, something which it cannot accept.  Research Institute gets no immediate benefit from the evaluation and indeed it may never benefit.  It is, on one reading, being asked to accept a massive risk for no return.

Lord Hoffman’s concept of the assumption of responsibility would give Research Institute some hope.  It would force BigPharma to provide a proper explanation of the risks they have in mind and would promote a considered apportionment of risk.  This would allow Research Institute the chance to negotiate and to avoid the spectre of unlimited liability which gives research institutions, universities and other PSREs such a headache.  Research Institute could control its exposure by specifically listing the types of loss it was prepared to assume A promising ringresponsible for.  If BigPharma cannot elaborate on its concerns, Research Institute cannot be expected to assume responsibility.

Seen in that light, the Transfield case has a promising ring to it.

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Filed under Contract drafting, General Commercial

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