When negotiating contract terms, parties will very often seek to include clauses that attempt to exclude or limit the damages that may be claimed if a breach of contract occurs. However, even if a clause is agreed and included in the signed contract it will not necessarily work as expected.

In this article, we consider the recent decision in Drax Energy Solutions Limited v Wipro Limited.[1] In this case, the parties disagreed on the meaning of a clause seeking to cap the supplier's liability in an IT contract, which fell to the Technology and Construction Court (TCC) to determine in a preliminary issues hearing.

We briefly summarise below the background to the dispute, some general principles on exclusion / limitation clauses which the TCC set out in its decision, and why in this case, the clause was found to impose a single aggregate cap on the supplier's total liability, rather than a cap on each individual claim.

Background facts

  • The dispute arose out of a Master Services Agreement (MSA) between the claimant, Drax Energy Solutions Ltd (Drax) and the defendant, Wipro Ltd (Wipro).
  • The MSA related to the provision of a new IT system by Wipro, which was to include customer relationship management, billing and smart metering facilities for Drax's business in the energy supply sector.
  • Wipro's services were to be provided and charged under numbered Statements of Work (SOW). It was common ground between the parties that the total SOW charges payable in the first 12 months of the project were £7,671,118.
  • Clause 33.2 of the MSA provided – subject to certain other limitation of liability clauses which the parties agreed did not apply – that:

    "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 project was not a success; there were significant delays and missed milestones. Drax terminated the MSA on 7 August 2019 for alleged repudiatory breaches on the part of Wipro.
  • Drax commenced proceedings in September 2021, claiming approximately:
    1. £9.8 million in respect of its Quality claims;
    2. £9.7 million in respect of its Delay claims;
    3. £12 million in respect of its Termination claims; and
    4. £31 million (although this partially overlapped with each of the other claims) in respect of its Misrepresentation claim.
  • The main trial on these issues is due to commence in October 2023. In the present decision, the TCC considered the following two preliminary issues:
    1. does clause 33.2 of the MSA provide for a single aggregate cap which applies to the defendant's liability for the claimant's claim; or multiple caps with a separate financial limit applying to each of the claimant's claims?
    2. if there are multiple caps, what are each of the claimant's claims to which the cap applies?

The parties' submissions

It was common ground between the parties that Drax's Quality, Delay and Misrepresentation claims arose in the first 12 months of the MSA – and only its termination claims arose after that date. The relevant part of clause 33.2 provided that:

"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."

Wipro contended that the reference to "claim" in clause 33.2 meant the total liability that was established. On this basis, it submitted that the clause imposed one single cap in relation to all claims, however numerous.

Accordingly, it submitted that:

  • the total charges payable in the first 12 months were £7,671,118;
  • 150% of that sum is £11,506,677;
  • therefore, even if Drax succeeded in full in its Quality, Delay and Misrepresentation claims, Wipro's liability would be capped at £11.5 million.

Drax, on the other hand, submitted that the £11.5 million figure is a cap which applies to "each and every separate claim", effectively equating "claim" with "cause of action".

How will the courts interpret clauses which exclude or limit liability?

The courts have developed a number of rules or principles of general application to clauses which seek to exclude or limit a party's liability.

In Drax, Mr Justice Waksman helpfully summarised some of these key principles, noting in particular, as reiterated by the Supreme Court in Triple Point Technology v PTT [2021], 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".

The TCC decision

The TCC rejected Drax's submission that Clause 33.2 imposed a series of separate caps. Instead, it held that the clause provided for a single aggregate cap, as argued by Wipro.

It reached this conclusion on the basis that:

  • the first part of Clause 33.2 states that Wipro's "total liability….shall be limited to" – this strongly suggests that this is a cap for all claims.
  • If this language had been followed by a reference to a specific sum, rather than a formula for calculating liability, this would "clearly indicate a single cap".
  • The formula is concerned with when the claim "first arose": the same expression was used in the following sub-clause, which the parties agreed imposed a single cap for all claims relating to a breach of the data protection clause;
  • There is no decided case law to support Drax's argument that "claim" should be equated with "cause of action" – furthermore, the consequences of that interpretation would render Clause 33.2 devoid of utility since it would mean that the total cap (based on the many causes of action pleaded by Drax) would be around £132 million.

Commentary

The TCC noted that "on any view", the clauses which sought to impose a cap on liability in the MSA were not well-drafted.

This type of drafting, which sets out a formula for calculating the liability cap over a rolling period (typically 12 months) is commonly seen in IT contracts, and reflects the changing risk profile over the period of such contracts. However, care must be taken when drafting such provisions, as the risk of introducing ambiguity and inconsistency is high.

Ultimately, the interpretation reached by the TCC in this case may not have been what either party intended when the clause was agreed.

If you have any questions about this article, please get in touch with Ashley Pigott or Daniel Wood.

Footnotes

[1] FM Conway Ltd v The Rugby Football Union & Ors [2023] EWCA Civ 418