Interpreting a liability clause

Since Finola o’Farrell became a High Court judge last year and joined the Technology and Construction Court, IP Draughts has taken to looking out for her judgments on BAILII.

Last week Dame Finola published two judgments that concerned contractual interpretation. This posting is about one of them, The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWHC 2197 (TCC) (31 August 2017).

The case is about the supply of a health record scanning system (comprising hardware and software) by ATOS to a hospital trust. The contract price was approximately £5M. The trust became dissatisfied with the system and eventually (after several years) terminated the contract. It claimed approximately £8M for breach of contract, including wasted expenditure.

The judgment concerns two preliminary issues that were ordered to be tried before the main hearing. In summary those issues were:

  1. Is the claim for wasted expenditure excluded by a contract term that stated that neither party would be liable for lost revenues?
  2. Is a limitation of liability clause so badly drafted that it cannot be interpreted, and therefore is ineffective?

On the first point, Dame Finola reviewed case law on when wasted expenditure can be claimed and concluded that the losses were “reliance losses” and not lost revenues. This is a technical point about recoverable damages and difficult to summarise in headline terms – read the judgment!

On the second point, IP Draughts puts aside his usual moan about courts being too ready to damn contractual language as badly drafted. Here, the trust’s barrister had a point. The wording in question was as follows:

Clause 8.2.1:
8.2.1 … the liability of either party for Defaults shall be limited as stated below:

(b) the aggregate liability of either party under the Contract for all Defaults, other than those governed by sub-clause 8.1.2 (a) above, shall not exceed the amount stated in schedule G to be the limit of such liability.
Schedule G, paragraph 9.2:

The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:

9.2.1 for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price as set out in section 1.1; or

9.2.2 for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim.

How do you interpret paragraph 9.2 in the situation where there are multiple claims, e.g. one in the first 12 months, one at the end of the second 12 months, and one at the end of the third 12 months of the contract? Is the cap:

  1. Total Contract Price + year 2 Contract Charges + year 3 Contract Charges? or
  2. Total Contract Price + year 2 Contract Charges? or
  3. Total Contract Price + year 3 Contract Charges? or
  4. Total Contract Price? or
  5. Something else?

And does the answer depend on when the trust submits its claim, or when the act of Default occurred?

Answers on a postcard, please.

There are at least 3 problems with the above-quoted wording for paragraph 9.2:

  1. 9.2.2 starts with the word “claims” but ends with the phrase “that claim”, which doesn’t take account of multiple claims.
  2. The paragraph refers to “claim arising” (which sounds like insurance industry jargon) but what it should probably refer to is “Defaults”, which is the term used in clause 8.2.1 above.
  3. The relationship between 9.2.1 and 9.2.2 is not clear, particularly in the case where claims (or defaults) arise under both sub-clauses.

It seems as though the drafter only thought of the situation where there was one claim. He or she didn’t think around the wording, and test it against different scenarios.

Dame Finola (IP Draughts can’t tire of using this form of address, for someone he encountered in a first-year law tutorial 38 years ago) ran quickly through the case law on interpreting contracts. Her summary of the leading cases on this subject such as Arnold v Brittan is admirably concise, taking in aggregate not much more than half a page; IP Draughts wishes other judges could be so concise!

Her conclusion is equally concise and clear:

89. In my judgment, paragraph 9.2 imposes one aggregate cap on the liability of ATOS for all Defaults (excluding claims for personal injury or property damage). The level of the cap is determined by the timing of the first Default. If a Default occurs in the first twelve months of the Contract, the level of the cap is the Total Contract Price. If no Default occurs during the first twelve months of the Contract, the level of the cap is the total Contract Charges paid in a twelve month period prior to the first Default.

This could be viewed as being generous to the poor drafter (in more than one sense) who came up with paragraph 9.2, but in IP Draughts’ view this decision is consistent with the recent approach of the courts to be more willing to give effect to limitation of liability clauses rather than strike them down for imperfect drafting, as happened too often in the past.

But we should not read too much into this sensible interpretation: other judges (including the Court of Appeal in this case, if this decision is appealed) may take a less benign view of such drafting imperfections.

A better solution than hoping that the judge sees it your way is to get the drafting right in the first place. IP Draughts is groping towards a rule of thumb for contract drafting and negotiation. A possible formulation is: you should spend at least as much time thinking about and drafting a clause as you will spend negotiating it. This won’t work for all clauses and all negotiations, but it may be a start.



Filed under Contract drafting, Legal Updates

2 responses to “Interpreting a liability clause

  1. Mark, thanks for this interesting (as ever) blog post. The situation that you describe rings lots of bells with me because one of my pet hates is the liability clause that says (in effect) “Neither party’s aggregate liability to the other under this agreement shall exceed a sum equal to the fees paid or payable in the 12 month period prior to the date on which the liability arises.” I see it regularly – especially but not exclusively in U.S. origin contracts. It seems clear to me that that formulation is defective and confuses both overall-aggregate liability with annual-aggregate liability – and, in my view, probably ends up imposing per-event liability. I shall read the case report with interest: the decision that you describe is much more generous to the drafter than I would have been!

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