By Barrister Aemen Zulfikar Maluka
It is common to encounter, during contract review requests by clients, a contractor request for a limitation on liability for “intentional or criminal misconduct or wilful violation” in an agreement for which legal services involving drafting and/or review have been requested. Many times when we received such a request, a request for a ‘liability cap’ in pecuniary terms will also be requested but a more problematic area is when the same requested cap is too low. This is of course, the time when such a request seems outright unreasonable and our general advice to clients is that it would be wholly inappropriate to include any such explicit limitation of liability. In many cases, it is also questionable whether such limitation of liability will be upheld later on by a Pakistani or International Court at all. Common law courts, like that of UK and Netherlands tend to frown upon such clauses. Hence their enforceability is often dependent upon the forum involved, where of course their merits would be assessed as per the applicable law and selected forum. In many cases, in our experience, we have successfully pleaded in Pakistani law that such a clause might well be declared null and void in a contract.
From a personal point of view, we would consider such a limitation to be acceptable only in those industrial settings where there is a thin line between normal behaviour and ordinarily expected performance on the one hand. Furthermore in such a case, the legitimacy (not being criminal) of such behaviour or performance would also become a factor to be considered. In instances where the customer basically requires a particular behaviour, it would make sense to make them accountable for the related risk and liabilities. Even in such a case, the courts may still choose to consider such a clause unenforceable at the least.
Also, we feel that in many cases, the Seller can use this clause to literally, get away with ‘murder’.However as lawyers we have to take the middle-path and try to dig into the facts, actual circumstances and possible motives of such a request, before we make any sweeping judgements.
In many cases, it may also seem too more appropriate to do some further digging/due diligence. It may be that you wish to ask them, why they would need such a limitation. It would make sense if a lawyer would feel suspicious if the request appears far from standard and the other party has not got a good reason to request such non-standard provision. In such a case the only way this is going to be accepted is a negotiation based on a position of strength. In this vein, another point of caution is that many different jurisdictions may very well interpret the contract in favour of the weaker/less influential party .The term Freedom of Contract is often interpreted very liberally and differently in many areas of the world.
On principle, based on the following cautions, the professional and ethical way out would suggest that a similar request is not justifiable, neither from a legal standpoint nor from a business perspective. Many of our colleagues are also of the opinion that such requests should be firmly rejected. In essence, this is because they would represent a large risk for the company, as the clause may decrease the interest of the counter-party to act properly and legally. Also, another justification would be that
however, such clause may be unenforceable under many national laws. Just to make an example, many countries’ laws provide that damages caused by gross negligence or willful misconduct cannot be limited; any contrary provision is totally void.
It is also best to caution the client, who has been posed with such a dilemma from the counter-party, that such limitations of liability may limit the client’s ability to recover to direct damages. It can lead to expensive costs of re-procurement, also if the contractor started work and then abandoned it there would be additional costs to correct any faulty work had been done so you would need more, not less.
When it comes to Oil and Gas Contracts, it is possible to note that international oil joint operating agreements tend to have clauses which limit the gross negligence/willful misconduct to senior supervisory personnel within in international oil joint operating agreements (JOA). Such a clause may be justified where the local government with whom an International Oil company is contracting insists upon the company hiring local national personnel that may or may not be trained. In jurisdictions like Latin/South America model JOAs routinely require IOCs to hire 90% of their personnel from local jurisdictions. This and given the risks involved in operating in such oil and gas jurisdiction,it would be fair to assume that Operating companies would be extremely reluctant to o assume unlimited liability for an accident brought on by ethnic, political tribal or religious issues , which has nothing to do with safe operations or health and safety based negligence. From a practical perspective, the root cause of major industrial accidents is often, sabotage. So it would be fair to say that in some situations , we can assume that such a clause would emerge as the preferred alternative to a blanket limit on gross negligence/willful misconduct which may or may not be enforceable in many jurisdictions.
When analysing Oil and Gas Contracts, particularly within the realm of international oil joint operating agreements (JOAs), it is pertinent to observe that these agreements frequently incorporate clauses that limit the scope of gross negligence and wilful misconduct to senior supervisory personnel. This limitation is especially prevalent within the context of JOAs. Such clauses are often justifiable in scenarios where the local government mandates that an International Oil Company (IOC) must employ a significant percentage of local personnel, who may or may not possess adequate training.
For instance, in several Latin American and South American jurisdictions, model JOAs commonly stipulate that IOCs hire up to 90% of their workforce from the local populace. This requirement, compounded by the inherent risks associated with operating in these regions, underscores the reluctance of operating companies to assume unlimited liability for accidents that may stem from ethnic, political, tribal, or religious tensions—issues that are unrelated to the safe operations or health and safety negligence.
From a practical standpoint, it is critical to acknowledge that the root cause of many major industrial accidents is often sabotage. This reality reinforces the need for specific clauses within JOAs that address the scope of liability. It would be reasonable to assert that in certain situations, a clause limiting the liability for gross negligence and wilful misconduct to senior supervisory personnel may emerge as the preferred alternative to a blanket limitation, which might not be enforceable in numerous jurisdictions.
This perspective is supported by several factors:
- Local Hiring Mandates: In jurisdictions with stringent local hiring requirements, such as those found in parts of Latin America, the need to limit liability becomes more pronounced. The local workforce may not have the same level of training or experience as the international personnel, thus increasing the risk of operational mishaps.
- Jurisdictional Enforcement: The enforceability of broad limitations on gross negligence and wilful misconduct varies significantly across jurisdictions. A narrowly tailored clause focusing on senior supervisory personnel is more likely to withstand legal scrutiny and be enforceable in a wider range of jurisdictions.
- Risk Management: Operating in politically or socially unstable regions presents unique risks that are outside the control of the operating company. By limiting the liability for gross negligence and wilful misconduct to senior supervisory personnel, JOAs can provide a balanced approach that mitigates risk while ensuring accountability at the highest levels of management.
- Sabotage Considerations: The prevalence of sabotage as a root cause of industrial accidents necessitates a nuanced approach to liability. Limiting liability to senior supervisory personnel can help ensure that the most experienced and capable individuals are responsible for preventing and managing such incidents, while also protecting the company from excessive liability for actions beyond its control.
In conclusion, the inclusion of clauses that limit the scope of gross negligence and wilful misconduct to senior supervisory personnel within international oil JOAs is a pragmatic and justifiable measure. It addresses the complexities of local hiring practices, the enforceability of liability limitations, and the unique risks associated with operating in politically and socially volatile regions. This approach balances the need for accountability with the practical realities of operating in the global oil and gas industry.
