In-House Counsel Masterclass: Managing Third Party Relationships 10 February 2015

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Third-Party Relationships: Recent Trends

Robert McDonagh

Partner, Procurement

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Notable Trends

Risk allocation

Data protection

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Risk allocation

Suppliers concerned too much risk being passed to them

Public sector, in particular, taking hard line

Risk allocation discussions increasingly tailored to specific contract

and not standard “legal” positions

Liability Caps

Traditional carve outs:

Death / personal injury caused by negligence

Fraud / fraudulent misrepresentation

IP / Confidentiality

Property damage (or separate cap)

Current trends:

TUPE

Regulatory fines

Data incidents

Wilful default / abandonment

If covered by insurance

Liability Caps

Caps subject to indexation

Liability caps linked to customer remedies, e.g.

Right to terminate if cap exceeded

Loss of supplier exclusivity

Customers also looking for broad (unlimited) indemnities

Common supplier positions

Cap as % of fee

Suppliers seek to make service credits not exhaustive

Generally resisted and, if accepted, only up to a point:

Level of mal-performance

Quantum of damage

Supplier’s seek right to remedy

Recoverable losses

Suppliers continue to push for exclusion of indirect loss and damage

Line between what, in practice, is direct and indirect is increasingly

uncertain

UK direct loss cases

Case What was “direct” loss?

Millar v David Way (1934) Additional labour cost

Croudace v Cawoods (1978) Workers left idle

British Sugar v NEI (1997) Loss of profits

Deepak Fertiliser v Davy McKee

(1998)

Fixed factory costs incurred during

plant interruption; increased

operating costs after operations

resumed

Hotel Services v Hilton (2000) Loss of profits

Pegler v Wang (2000) Loss of anticipated profit

PwC v University of Keele (2004) Loss of anticipated savings

Ferryways v ABP (2008) Payment to third parties

British Gas v Accenture (2010) Various knock on financial losses

McCain v EcoTec (2011) Lost revenue

British Gas v Accenture (2010)

Type of loss incurred Direct?

Charges incorrectly levied on GB Gas by

third party gas distributors because of IT

errors

Yes

Cost to GB Gas of chasing debt not

actually due, thought to be due because

of software error

Yes

Costs of stationary used to pacify

customers

Yes

Ex gratia payments to customers to

preserve reputation

Yes

Additional bank borrowing charges

caused by fall in revenue

Yes

Customer reaction: recoverable approach

Customer reaction is to make clear what is recoverable

Recoverable losses often sought:

Additional operational / admin costs

Cost of procuring replacement

Wasted managed time

Fees payable / liability to third parties

Loss, corruption or alteration of data

Regulatory fines

Lost opportunity

Business losses?

Consequences of wilful misconduct / fraud

Financial / business losses

Supplier reaction is to specifically exclude financial / business

losses (whether foreseeable, direct or indirect)

But customers frequently asking for:

loss of profits / revenue

anticipated savings

transaction processing errors

Suppliers beware

Indemnity type language: “is direct and recoverable…”

Common intention / objective clauses

Omission of “non-reliance” / “no remedies” statement in entire

agreement clause

Re-performance obligations

Due diligence risk

A common position:

All due diligence risk transferred to supplier

No pricing assumptions

No customer warranty as to accuracy or completeness

Compromise positions increasingly common

Data Protection

Increasingly more prominent in contracts

Security breaches

Overhaul of data protection rules

Safe Harbour concerns

Security breaches

Stringent security obligations:

Specific policies

Compliance with security standards

Broad security incident indemnity (often with unlimited liability)

Control over incident

Confidentiality

Right to attend any DPC site visit / meeting

Co-operation / assistance / information obligations

Data Protection: Future Proof

Providing for alternative if Safe Harbour falls

Supplier considering changes resulting from draft Regulation

Privacy by design

Tasks to be documented in more detail

Create necessary measures to be able to respond to SAR

J&S liability, unless can show not responsible

Supplier becomes joint data controller if processes data other

than as instructed

Change in Law clause important

More detailed slides

Consumer contract trends

Best and reasonable endeavours

Trends in consumer contracts

Increasingly, companies see terms and conditions as part of

branding and marketing

Focus on plain friendly language

You / we

Present tense: “we are not responsible” instead of “we shall

not have…”

Avoid use of legalese: herein, therein etc.

Avoid use of CAPS

Plain language also required by Unfair Terms Regulations

Trends in consumer contracts

• Use of punchy informal language

Licence expressed as – „Don‟t worry! You can use the

[software] for this…‟

Large social media messenger – „We don‟t support or

encourage illegal consumption of alcohol or tobacco, so there.‟

• Make sure legal protections are not lost in translation

Trends in consumer contracts

Inclusionary liability clauses:

“We are responsible for loss or damage you suffer that is a

foreseeable result of our breach of these terms or our negligence,

but we are not responsible for any loss or damage that is not

foreseeable. Loss or damage is foreseeable if it is an obvious

consequence of our breach or if it was contemplated by you and

us at the time we entered into this contract”.

vs

“The Supplier shall have no liability (whether under contract, tort,

equity, common law, statute or otherwise) for any indirect,

consequential, special or exemplary loss or damage.”

Best, reasonable endeavours etc

Question of interpretation in each case / fact specific

Hierarchy:

Shall / will

Best endeavours

All reasonable endeavours

Reasonable endeavours

Definition or other text may vary it, e.g. best reasonable

endeavours, but only to the extent reasonable having regard to

supplier’s interests

Best endeavours

Look at from customer’s perspective, but supplier’s interest relevant

May require significant expenditure by supplier but not ruinously so

Not an absolute obligation

Includes steps which a prudent, determined and reasonable person,

acting in his own interests and desiring to achieve that result, would

take

May be subject to countervailing duties on the supplier

All reasonable endeavours

Unclear if assessed in light of the customer’s circumstances

May require expenditure

May or may not require the supplier to sacrifice its commercial

interests

Likely to exhibit characteristics of both best and reasonable

endeavours

Reasonable endeavours

Primarily considered in light of the supplier’s circumstances and

interests

May require limited expenditure, but does not require the supplier to

sacrifice its commercial interests

Involves balancing the contractual obligation against all relevant

commercial considerations

The chance of achieving the result is of prime importance

Endeavours case law

IBM United Kingdom Limited v Rockware Glass Limited [1980] FSR 335

Jet2.com v Blackpool Airport Ltd [2012] EWCA Civ 417

Rhodia International Holdings Limited v Huntsman International LLC

[2007] EWHC 292

Dany Lions v Bristol Cars [2014] EWHC 817)

CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010]

EWHC 1535

Drocarne Ltd v Seamus Murphy Properties [2008] IEHC 99

Third Party Relationships and Your People: TUPE and Outsourcing

Melanie Crowley, Partner

Employment Law and Benefits

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What is TUPE?

• European Communities (Protection of Employees and

Transfer of Undertakings) Regulations 2003

• Transfer of a business or part of a business

• Employees transfer with accrued service and terms and

conditions of employment

• Obligation to inform and consult

• Contracting out prohibited

• Dismissals void

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What is Outsourcing?

• First Generation Outsourcing

• Change of Contractors (Second Generation Outsourcing)

• Insourcing

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Does TUPE apply to Outsourcings?

• Sometimes…but not always!

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To Trigger TUPE

• There must be a transfer of an economic entity

• There must be a concomitant transfer of significant

tangible or intangible assets or a major part of the

workforce in terms of their numbers and skills

• Asset reliant v labour intensive functions

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Trends

• Huge increase in outsourcing

• Tendency to insist on the application of TUPE waning

• A better understanding that TUPE does not always apply

• Provide now for what might happen at the end

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Take Away Tips

• Stand back and reflect upon what the transaction involves

from a TUPE perspective

• Is this an outsourcing, a changeover in contractors or an

insourcing?

• Decide whether the transaction is asset reliant or labour

intensive

• If labour intensive is continuity of personnel important or a

non issue?

• What will happen the employees or does it matter?

• What will happen at the end of the contract or does it

matter?

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Q&A

Rob McDonagh Melanie Crowley

rmcdonagh@mhc.ie mcrowley@mhc.ie