UK: Courts Uphold Badly Drafted Liability Cap

In the recent High Court case relating to an IT contract Drax Energy Solutions Limited v Wipro Limited[2023] EWHC 1342 (TCC), the courts have looked closely – as preliminary issues – at the drafting of a clause capping liability.

Disputed liability cap

The liability cap drafting at the core of the dispute provided that:

Wipro (the supplier – relying on the cap) claimed that this wording created a single aggregate cap on liability of just over £11.5 million (150% of the first year's charges of £7,671,118). Drax disagreed, querying:

• why if it was a single cap, the clause did not use the word "aggregate"; and
• why the reference to 12 months prior to the date the claim first arose – how would that work with an aggregate cap potentially covering several claims?

Drax (the customer) claimed instead that the cap was a per claim cap – i.e. liability is capped at £11.5 million per claim. But Wipro challenged this, arguing that:

• if it was a single cap, why the reference to "total liability"?

The difference between interpretations made a big difference. Drax was claiming £31 million. If Drax's interpretation of the liability cap was correct, Drax was comfortably within its calculation of the overall liability cap (potentially around £132 million). If Wipro was right, Drax's claim would be heavily reduced to a maximum of £11.5 million.

Court's analysis of the liability cap

The judge referred to the recent Supreme Court decision in Triple Point Technology v PTT [2021] which looked at the key principles for interpreting cap and exclusion of contractual liability clauses, noting that:

• commercial parties are free to make their own bargains and allocate risk as they see fit – the task of the courts is to interpret the words used, applying the ordinary methods of contractual interpretation;
• "clear words" will be needed before the court will find that a contract has taken away valuable rights or remedies which one of the parties would have had at common law or under statute;
• the court may well have to choose between two interpretations, neither of which makes complete sense or is free from odd or unusual consequences. In such cases, it may be a question of adopting the interpretation which yields the "least bizarre" results;
• in relation to clauses seeking to impose a cap on a party's liability, it is also legitimate to consider commercial considerations, such as whether one party's interpretation would "deprive the relevant limitation clause of any real purpose because the operative cap would be so high".

What does "claim" mean?

The court looked at the meaning of "claim". Did a claim mean each "cause of action"? The court noted that in Drax's claim there appeared to be 56 different claims, although Drax in its submissions stated that there were actually 16 different claims. Wipro suggested that "claim" really meant "liability" and therefore there was only a single "claim". In the end, the court decided that there were four claims; referring to a "common-sense view" and went on to consider how the clause should be applied to these.

Court's conclusion

The court's conclusion was that on balance Wipro's interpretation was correct – the clause imposed a single aggregate cap determined by the charges paid or payable in the previous 12 months. This meant that the maximum cap was £11.5 million. This was even though the court commented that "on any view", the clause was not well drafted.

Key Insights

• Use the word "aggregate" if that is what is meant. The court gives considerable weight to the word "aggregate".
• Keep liability clauses and caps simple and avoid the argument. If the liability cap in this case had simply been an aggregate cap of £11.5 million there would have been no dispute on this point.
• It is common to include reference to the charges paid or payable in the previous 12 months. But, given the ambiguities that often arise with this type of wording, is it worth it? If you know the likely spend in each year of the contract why not convert this to a simple number?
• Note that the court concluded that "claim" could be interpreted in a number of ways, and there was no decided case law which required it to reach any one interpretation. This means that a "per claim" cap is always at risk of debate. Consider avoiding a "per claim" cap – an aggregate limit tied at a single simple financial cap is more likely to be enforceable (although a customer will naturally prefer a per claim cap).
• The court looked at the drafting used for a different liability cap in the contract (for data protection claims) to get some insight into what was intended by the person who drafted the contract. Therefore, do try to make key clauses such as those on liability consistent. If there is an inconsistency that might influence the court as they will consider that there is good reason for that inconsistency (the courts never seem to factor in that the parties are under pressure to conclude the contract and will not thank the lawyer for checking the agreement for consistent drafting....)
• Where a dispute nevertheless arises, the case is an example of how having a hearing on preliminary issues, before the main trial of a case, can assist with ensuring litigation is handled cost-effectively.

Read the original article on GowlingWLG.com

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