Legal jargon buster for contracts

Consequential/indirect losses

Commonly thought to mean loss of profits/sales/business/revenue, consequential or indirect losses refer to types of loss which only arise from special circumstances and not in the usual course of events. Contrast this with loss of profits/sales etc which are often an obvious loss flowing from the breach and which are usually widely anticipated by both parties. The result? Loss of profits/sales etc are typically not consequential losses. Therefore, where consequential losses are stated to be unrecoverable under the contract, it does not follow that loss of profits/sales etc are unrecoverable. To ensure loss of profits/sales/business/revenue can’t be claimed, each type of loss should be listed out with clarification that it is not recoverable regardless of whether it is a direct or indirect loss. (All exclusions and limitations on liability are subject to a reasonableness test under the Unfair Contract Terms Act 1977.)

Force majeure (FM) event

FM events refer to circumstances genuinely outside a party’s reasonable control which prevent their ability to perform their contractual obligations. To rely on a FM clause, you must be able to prove that the event caused the failure to perform. A classic example is a fire burning down a warehouse preventing customer orders being despatched on time or a CRM (hosted by the supplier) being unavailable due to a local power outage. However, whether an event qualifies as a FM event is often not clear cut particularly since the party relying on the FM clause is normally required in the contract to take steps to prevent or mitigate the event. In the above examples this could mean that the warehouse’s lack of fire prevention measures or the software supplier’s lack of redundant power supply prevents them relying on the FM clause.

Increasingly, parties are seeking to rely on FM clauses where the contract is no longer commercially viable due to market changes or unexpected cost increases. However, it is well-established by the Courts that to rely on a FM clause, performance must be physically or legally impossible, not just difficult or unprofitable. This makes sense when you consider the purpose of a force majeure clause (to protect parties from unforeseen and unavoidable events outside of their control) rather than to allow parties to extricate themselves from what turn out to be bad bargains.

Material breach

There is no set meaning and it depends on the facts of the case but broadly speaking it is understood to be a breach that has a serious effect on the benefit that the innocent party would otherwise have received from the contract. In other words, the innocent party needs to have received significantly less than they should have under the contract. Contracts typically provide for a termination right where there has been a material breach which is not cured within a certain period. As explained in the crib sheet referred to above, given the uncertainty around the meaning of material breach, if you are the client receiving the goods or services, it is best to use non-exhaustive examples of what would constitute a material breach so you know you will be able to exit the contract in those circumstances.

Without prejudice to…

Means ‘without affecting clause X’. It’s shorthand for ‘Without prejudice to the generality of clause X’. There is no priority given to either clause.

Clause 1: The Supplier will comply with Applicable Law.

Clause 2: Without prejudice to clause 1, the Supplier will comply with all applicable data protection and privacy legislation in force from time to time and the guides and codes of practice issued by the ICO.

The use of ‘without prejudice’ clarifies that the supplier’s more specific obligation in clause 2 does not affect the supplier’s wider obligation in clause 1.

Notwithstanding…

Is used to indicate that the current clause overrides the other clause/s it refers to. Has the same meaning as ‘in spite of’.

Clause 5: Notwithstanding clause 6, the Supplier can increase the charges on 7 days’ written notice.

Clause 6: The charges are set out in Schedule 1.

Although clause 6 confirms the charges payable, clause 5 overrides clause 6 providing a way for the charges to be increased.

Subject to…

Has the opposite meaning to ‘notwithstanding’. It confirms that the clause it refers to takes priority over the current clause. An alternative would be ‘Except as set out in clause X’.

Clause 10: Subject to clause 13, the Supplier’s liability under the contract is limited to £1 million.

Clause 13: Nothing in this agreement shall limit any liability which cannot be limited by law.

Clause 13 overrides clause 10 with the effect that liabilities which cannot be limited by law under clause 13 will not be included in the cap in clause 10.

Indemnity

In theory an indemnity should make the receiving party ‘whole’ again so that it is compensated for a loss or liability. For example if a supplier designs your website using another party’s design and you are subsequently sued by that party for breach of their intellectual property, ideally the indemnity in your contract with the web designer will compensate you for any legal costs you have to pay and for any damages awarded against you. In each case, the trigger for payment and the losses recoverable will depend on the drafting of the indemnity.

Warranty

An assurance or promise in a contract which if breached may allow recovery of damages. In a contract for the supply of goods or a software contract, the supplier will typically warrant that the goods/ software will conform to the specification. Where the goods/software do not conform, the supplier will normally offer to repair or replace the faulty product or software (instead of paying damages).

Assignment

Commonly mistaken with novation (see section 10). Better understood in the context of property and intellectual property.

If you have a general right of assignment in a contract this only relates to your rights under the contract and not your obligations. For example, if you are a supplier providing services to a client, typically the only right you have is to get paid so this is all you can assign to a third party. For example, if as part of say a group structure you want to transfer both the right to be paid and the obligations to perform the contract, this would require a novation not an assignment. (A potential way round this is for the obligations to be sub-contracted to the same party that the rights are assigned to – providing the contract permits this).

Novation

A way of replacing one contracting party with another. Technically a new contract is formed which replaces the previous contract. Formal consent by the outgoing party is not required and can be inferred by their conduct so novations are not always formally documented in an agreement.

For example, company A provides accountancy services to company B. Company A is having financial difficulties and its assets are bought by Company C. Company C wishes to replace Company A in the contract with Company B which requires a novation.