Daniel Wood
Partner
Article
9
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.
"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."
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:
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".
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:
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 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
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