In a recent and highly relevant contract interpretation case in the High Court, Drax v Wipro  EWHC 1342 (TCC), a judge held that a limitation of liability clause had a single liability cap rather than multiple caps. He reached this conclusion by studying the wording used in the clause but also comparing similar wording used in another limitation of liability clause in the contract, highlighting that consistency in drafting is key.
Drax Energy Solutions Ltd ("Drax"), an energy supplier, entered into a Master Services Agreement with Wipro Ltd ("Wipro") who were due to supply software and related services in relation to a new IT system. However, the project didn't go well. In particular, deadlines were missed, resulting in Drax terminating the contract for repudiatory breach and issuing proceedings against Wipro.
A trial was held to decide preliminary issues ahead of the main trial, which is due to take place next year, regarding the interpretation of a limitation of liability clause.
The judge decided that Drax had four potential claims in total: a misrepresentation claim, a quality claim, a delay claim and a termination claim. One of the preliminary issues to be decided was whether Wipro's standard limitation of liability clause had a single aggregate liability cap or multiple caps with a separate financial limit applying to each of Drax's claims.
The wording of the relevant clause was as follows:
….the Supplier’s total liability to the Customer, whether in contract, tort (including negligence), for breach of statutory duty or otherwise, arising out of or in connection with this Agreement (including all Statements of Work) shall be limited to an amount equivalent to 150% of the Charges paid or payable in the preceding twelve months from the date the claim first arose. If the claim arises in the first Contract Year then the amount shall be calculated as 150% of an estimate of the Charges paid and payable for a full twelve months.
The clause starts with the words "the Supplier's total liability to the Customer….shall be limited to" and the judge said that if this had been followed by a single amount it would be clear it was a single liability cap. This was because the words "total liability" were used and there were no words used such as "for each claim" after the word "liability". However, the clause in question does not refer to a single amount, instead there is formulae set out. The formulae refers to different caps depending on when "the claim first arose" or arises. This wording lead to confusion, with the parties arguing over whether "the claim" meant:
- "each claim" (which would mean multiple caps) or
- "the first claim that arose" (which would mean a single cap).
The judge decided on balance that the second meaning was the better one, meaning there was a single liability cap.
In reaching his conclusion, he looked at another limitation of liability clause in the contract where the wording was clearer. This clause said the "total aggregate liability" for "any and all claims" shall in no event exceed 200% of the charges paid in the preceding 12 months from the date "the claim first arose" or £20 million (whichever is greater). The judge decided it was clearer here the wording "the claim first arose" meant "the first claim that arose". The judge said he placed "considerable weight" on the fact the same phrase was used in both clauses and this supported his opinion that the second meaning was the favourable one. The judge also said that whilst the clause in dispute did not say "total aggregate liability" or "any and all claims" like the other limitation of liability clause in the contract, it still said "total liability".
Commercial and common sense interpretations were also considered. Drax tried to argue that a single cap did not make business sense, as there could be many potential claims over an indefinite period of time by more than one Drax entity (members in the group could also enter into Statements of Work under the Master Services Agreement). Drax argued that given the possibility of many claims in the future, Statements of Work might be more valuable in the future but they would be "stuck with" a cap based on charges made in earlier years if the claim first arose then. But the judge said that realistically, if there were problems in the first year, more orders would not have been made and Drax would surely terminate.
The somewhat ambiguous wording in the disputed clause here is typical of the drafting that is often used in template terms and conditions – both within the IT industry and beyond. So perhaps the most surprising element is the fact that it has taken this long for a clause like this to be tested before the courts.
The decision certainly opens the door up to further challenges to similarly vague clauses and is an important wake up call for those sitting on templates that have not been reviewed in a while.
One of the key lessons for those reviewing their liability clauses is to make sure that the drafting clearly reflects your desired intentions – especially when caps are based on a factor of the charges and the charges are to some extent uncertain (e.g. are volume based rather than fixed). Perhaps the safest way to do this – particularly when acting on the "supplier side" is to make sure that at the very least you have an annual cap on liability (which is ideally backed up by an aggregate cap). For customers, particularly those that are embarking on complex IT and service projects, it's important there is enough in the cap to cover the important early weeks and months of the implementation phase – where the chances of failure and loss are arguably at its highest.
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