Articles Posted in Legal and Contracting Issues

Most business clients would rather be in the dentist’s chair than sit through negotiation of the indemnity and liability provisions of their agreement. Admit it: your eyes glaze over, time appears to visibly slow down, and you wonder at how the lawyers can find this stuff interesting enough to argue about.

As dull as they appear to be, there are some significant issues that can arise from the indemnity clause. One issue that I see more often than not is that suppliers try to put a financial limit on their indemnification obligations.

Sometimes the supplier will agree to remove the limitation, but not always. What are the consequences of having a limitation on an indemnification obligation,

In a recent judgement, the Court of Appeal of England and Wales held that an electronic database was not a chose in possession or a chattel but a chose in action (see our earlier blog regarding the grant of leave to appeal in this case). In other words, a database is intangible property, not goods which can be possessed. This means that when the parties to a database hosting contract are silent about what happens to the database when the contract ends, the service provider cannot exercise a common law lien over the database so as to force full payment of its fees, and must return the database to its customer.

In giving the lead judgement in the Court of Appeal, Lord Justice Moore-Bick, quoted extensively from the judgment of Lord Justice Diplock in Tappenden v Artus (Tappenden v Artus [1964] 2 Q.B. 185). Tappenden is a case with which most first year law students in the UK will be familiar. In that case, a van owner allowed a customer to use the van pending the completion of a hire-purchase agreement. The van then broke down and was repaired by the defendant garage, but the price of the repairs was not paid. The question arose whether the garage could exercise a lien over the van against the owner. In finding that it could, Diplock L.J emphasised “actual possession of goods” as necessary for the self-help remedy of possessory lien to arise under the common law.

Referring to another leading case, Moore-Bick LJ went on to state that “[a]s OBG v Allan makes clear… the common law draws a sharp distinction between tangible and intangible property…”, which leads to the conclusion that “it is [not] possible to have actual possession of an intangible thing …[and that] it is [not] open to this court to recognise the existence of a possessory lien over intangible property …”

Mario Dottori is quoted in Stephanie Overby’s recent CIO.com article discussing 8 Tips to Deal With Liability When Outsourcing to Multiple IT Vendors.

“In theory, a multi-provider service delivery environment should not create additional complexities in terms of liability. The contracts — entered into separately between the customer and each supplier — should, if well constructed, clearly delineate the liabilities between the parties,” says Mario Dottori, leader of the global sourcing practice in Pillsbury’s Washington, D.C. office.

One tip offered is to create operation level agreements, “OLAs state how particular parties involved in the process of delivering IT services will interact with each other in order to maintain performance, and can help all parties ‘see the forest for the trees,’ says Dottori.  ‘These arrangements offer the opportunity for enhanced visibility of the service regime as a whole and helps to reduce — or better arm the parties with solutions for — missed hand-offs and finger pointing.’ One caveat: Most providers will not agree to take on additional liability in OLAs. But such an agreement can be an effective preventative measure.”

As part of its UK Employment Law Review in 2012, the UK Government announced that it intended to remove the third-party harassment liability provision from section 40(2) of the Equality Act 2010. This provision was repealed on 1 October 2013. This post considers the impact of the repeal and whether employers are safe from claims made by their employees based on harassment by their outsourcing or other third party contractors.

Background

In October 2010, section 40(2) of the Equality Act introduced the concept that employers could be liable for harassment of their employees by a third party where the harassment was persistent and based on a protected characteristic. Under this provision, employees could bring a claim against their employer if they had been subjected to discriminatory harassment by third parties during the course of their employment on at least two occasions and their employer had failed to take any reasonably practicable steps to prevent the harassment. This provision had potentially far reaching impact as employers became potentially liable for acts committed by third parties such as their suppliers, customers or visitors.

On 19 November, Datateam won permission to appeal from an unreported decision of District Judge Bell sitting in the Reigate County Court on 12 June. The facts of the case, which related to unpaid invoices for database maintenance services, are not of interest except to say that the services agreement did not establish a contractual lien over the customer’s data, that is, it did not contain an express term requiring the return of the data to the customer at the end of the contract period.) What is of interest is that when it hears the appeal, the Court of Appeal will consider “whether or not a service provider can claim a [common law] lien over electronic data which it manages.”

In English law, a common law lien normally arises in respect of tangible property but not in the case of intangible property such as intellectual property. The classic example is a mechanic who is entitled to exercise a lien over (hold onto) a customer’s car until the customer settles his bill. However, electronic data is intangible property. In granting Datateam permission to appeal, Lady Justice Arden commented that there is no English authority “which establishes that a [common law] lien is exercisable over intangible property.” She thought this was “a point of law… worthy of consideration… since it could have very considerable implications if there was no lien.”

The Court of Appeal’s decision is eagerly awaited.