Courts uphold badly drafted liability cap

Welcome to the latest episode of Gowling WLG's Listen Up podcast, where we look at a range of topics trending in the legal and commercial landscapes.

David Lowe: Hello everyone and welcome to our contract law podcast. I am David Lowe; I am a partner in our Commercial Contracts team and I spend my time drafting and negotiating contracts.

Andrew Smith: Hi, my name is Andrew Smith, I am a partner in the Dispute Resolution Group and I spend my time trying to avoid risks or then allocate the risks – in other words – litigate.

David: And today we are going to be talking about the Drax Wipro case, which is all about a liability cap and the drafting of it. It is a really, really useful case for people who draft contracts. Just to flag, we have also done a written alert setting out the case and importantly setting out the precise details of the clause we are going to talk about. So if, having listened to this, you want to go and actually read the clause we are talking about, do look at our written alert – it has got the key clause in that.

So Drax Wipro – it is… funny enough it is an IT litigation. Wipro has provided assistance to Drax – Drax was not very happy about it; they are now in dispute and they, of course, are arguing about whether Wipro was in breach of contract; they are arguing about how much damage has been caused, and all of the stuff that people like Andrew do all the time (arguing with each other).

They have come to the court with a preliminary hearing to ask how the liability cap works and this is really important because, if the liability cap works in the way that Wipro thinks it does then the maximum liability is going to be 10 or £11 million; while the maximum liability if Drax is right – it is going to be £30+ million. So there quite a big difference; £20 million delta that they are arguing about. And they are coming to the courts to go: "tell us what you think the liability cap is, because that is going to help us decide which football pitch we are in, are we in a £10 million football pitch or are we in a £30 million football pitch?"

Before we dive into the case itself, because this case is all about the interpretation of limitation clauses and exclusion clauses, Andrew, do you want to give a quick summary of what the judge said the law was in this area and how that worked?

Andrew: Yes, that is fine. This is a very thumbnail sketch approach to how you deal with the interpretation of liability exclusion and limitation clauses but, in essence, you treat them in the same way that you do any other clause. So the idea which did have its time in the sun a few years ago, which is that you had to treat limitation or exclusion clauses differently from normal clauses has gone.

So the usual rules apply which is the natural and ordinary meaning of the words used in their context, both of the contract itself and of the commercial realities of the parties entering into the contract. I suppose the only slight difference, although this is really just an extension of that point, is that the court has recognised that the parties are free to make whatever bargain they want, so they are not going to intervene in the event that one side has done a bad bargain by way of exclusion.

So essentially nowadays much more likely to find that an exclusion of liability applies, provided it is relatively clear. Having said that, the courts see that parties are not likely to have intended to cut or reduce their remedies so the wording needs to be pretty clear cut.

David: And there is that stuff about if there is two different interpretations, neither of which is quite right, then you should choose the least "bizarre" - I think is the wording that the judge used?

Andrew: Yes, a Court of Appeal judge used the term "least bizarre". I think what is very important about that though is, it is not the least bizarre actual consequence, you have got to measure the least bizarre at the time the parties entered into the contract. So, truth is stranger than fiction. The fact that it turned out that there was a terrible result for one party or another does not matter, what you have got to judge is look at the contract at the time it was entered into.

David: I mean that is important because I remember when I was training as a lawyer, limitation clauses were treated differently and they were you know very much the contra proferentem rule, reading it really hard against the person using it was very much the law then. But you are now saying it has become a bit more balanced.

Andrew: Absolutely! Lovers of Latin need to close their ears now, because contra proferentem is really out, and it is really just looking at this particular type of clause in the same way as the rest of the contract but, bearing in mind, the fact that essentially "why would parties sign away their ability to get a remedy in the event of a breach?"

David: Okay. So contra proferentem is dead but, that does not mean that suppliers can get all sloppy and relaxed about their liability clauses because a court is going to look at it and go "well why would the customer have agreed to limit their rights? It's not very clear". If it is not very clear then the court is going to be on the customer's side aren't they? So you sort of get to a place where it is in the supplier's interest to make sure it works.

So with that background, let us turn to the clause. I am going to read the key elements of it but, as I said, do not worry you can go and read it for yourselves in the alert. So if you are listening to this driving the car/walking the dog – you do not need to start scribbling down now, it will make sense as we go. So the clause said that "the supplier's total liability to the customer shall be limited to an amount equivalent to 150% of the charges paid or payable in the preceding 12months from the date the claim first arose".

So let me say that again – "Wipro's total liability is limited to 150% of the charges paid or payable in the previous 12months from the date the claim first arose". So there are two elements, there is the beginning bit which said "total liability" and then there is the reference to "150% of the charges" and it is the charges "paid or payable in the 12months prior to the claim". So they are the key elements.

If you read it quickly it certainly looks pretty typical and I think that anyone reading the clause quickly would go "well, total liability is 150% of the charges in the first year" or something like that, is roughly what you would take from quickly reading the clause. Why are they arguing about this? And that is basically what Wipro said!

Wipro said "well, we can work out what 150% of the charges paid or payable in the 12months prior to the first claim, we can work that out! That comes to £11.5million and that is the total liability we have under this contract – easy! Why are we arguing about this?" And that is where Wipro got to, basically saying "this is an aggregate pack that you calculate by reference to 150% of the charges in the 12months prior to the first claim". Andrew, why did Drax disagree?

Andrew: Drax saw "claim" as a different thing so, as David has just said, Wipro essentially said that "claim" meant 'liability', in essence. Drax's view was "claim" meant 'cause of action'. So what is a 'cause of action'? Well, cause of action is a set of factual circumstances that give you a right of remedy in the courts. That is a kind of long winded way of saying "it gives you a right to sue" basically. And so, essentially, Drax said "claim means your right to sue" and I think the problem for Drax was, on the basis of their claim – if you added up on a kind of a legal, technical basis all of the causes of action they had by sort of casting your eye down their pleaded case, you would see that they have about between 50 and 60 causes of action.

So, on their sort of primary case they would have 50 to 60 times the cap. So, I think even they realised "mmm, that doesn't quite work, does it?", "that is not likely to persuade a judge" because then it means the clause has no real effect. So they kind of had a secondary case which, of course as time went on, became their primary case, which was that they kind of bundled up those causes of action into four sort of heads of claim. And those four heads of claim each had a sort of sub‑divisions, which essentially gave them a sort of more reasonable number of what they would allege were caps.

David: So you have Wipro going for aggregate cap, 150% of charges coming out at £11.5million, you have got Wipro going "no, no, it is a per claim cap and okay we can debate how many claims there are, but that adds up to a much bigger number. And I think they were trying to make that that the word 'total' that was referred to at the beginning of the clause, they are sort of saying that "didn't really mean much really" you know you just ignore that bit, you get to the 'per claim' bit. And, I guess they are also going to say to Wipro "look Wipro you are going on this word 'total' but if that is right, how does this work if you have got multiple claims coming in over a period of time? How does this clause make any sense? How is it right that let's say claim numberfour in the life time of this contract, the cap on liability for claim numberfour is determined by the size of claim numberone that might have been three years earlier?" I imagine that was some of the logic they were thinking through.

Andrew: And another point, which is… this was an MSA contract, so this was essentially an umbrella contract upon which sort of "mini‑me" contracts would then come. And the point was that there could be all sorts of contracts that were under this umbrella contract. And how could it be right that one matter, one breach effectively or one set of breaches would use up the totality of the liability and then completely separate contracts - there would be no redress at all? So that was another argument that was raised.

David: I have some sympathy with Drax thinking that because you know MSAs are complex… with these complex statement of works, but nobody ever thinks too hard about that and do not really engage really on the full impacts of that.

Andrew: Although the judge was looking at the entirety of the contract by this stage and effectively said "well yes, but you have some other remedies". So there was an ability to terminate; there was an ability to terminate for part. So effectively sort of countered that, certainly in his own mind with well, if things are going this badly, so you are having these multiple breaches of different contracts, then you have the right to call the whole thing off, or call part of it off. So it is not, I have only got one remedy for damages, which is capped in one way – you have got several remedies.

David: Yes, so actually if Drax's view of the world that the cap is an aggregate cap determined by the size of the first claim, that might be a bit unjust might it not if the first claim is a small claim, it might be a really low cap. Well the judge was observing that "but Drax, you have got other opportunities to deal with that if that comes out badly for you", I think.

So we ought to put listeners out of their misery – you might have guessed that the judge landed on Wipro's side and said "yes, this is an aggregate cap" and this aggregate cap is 150% of the charges payable in the 12months for the first claim which is £11.5million. So it basically agreed, pretty wholesale I would say, with Wipro's perspective.

Andrew: Certainly, what they wanted as the outcome. I think the only bit where he had a serious disagreement with them was he said, "claim is not synonymous with liability" - it does not mean exactly the same thing. I think his point was in the context of this particular contract, using this particular wording, then the effect of "claim" in this contract, in this particular provision was that it was an aggregate cap to the liability. It raises, I think, quite an interesting issue. He was, by the way, requested by Drax because the parties had their obviously diametrically opposed views of what "claim" meant. Drax tried to sort of cover off the position by saying "if you do not agree with either of us, can you tell us what 'claim' actually means". You know you could come up with your own view, not dependent on what either of the parties said. The judge deliberately decided not to avail himself of that offer, which is quite interesting.

I think some people might say "well that's a bit of a shame really". It would have been an ideal opportunity for a judge to give us all clarity as to what 'claim' actually means. Why didn't the judge do that? And I think that really throws a light upon how contracts are interpreted by the courts… which is, as I said a little bit earlier, they very much look at the natural and ordinary meaning of the words used. That is very important but it is in the context of the contract as a whole. It is in the context of the objective intention of the parties and the commercial realities of that contract.

And I think that the reason why the judge refused to give a legal definition of claim is actually because, in different contracts 'claim' could mean different things. I mean the reality is because of the way contracts are interpreted, one word can mean a different thing in different contracts and that is a really important, I think, lesson for us all, particularly litigators, but also in the drafting of contracts because try to make it simpler or try to find a different way to get the right answer.

David: Yes, I certainly found it interesting reading the case, seeing how the judge was struggling with the meaning of 'claim' and drawing up different possible interpretations. More interpretations of the word 'claim' I had ever thought of and that is alarming to me as a contract drafter because it is common in contracts to have a per claim cap, but actually this case demonstrates exactly what that might mean is very difficult to predict because a judge in a particular contract might interpret claims in different ways. And so a key lesson I think for people drafting contracts, particularly those on supplier side, is a per claim cap with no aggregate cap is quite dangerous because you do not really know what that claim is going to be and therefore actually what your exposure is. So you should certainly, if you are going to have a per claim cap you should also then have a, sort of, umbrella aggregate cap as well just to make sure there is a clear total cap to keep you out of trouble.

I certainly think it is interesting looking at the clause because I can see… I can sense how this clause developed in drafting, is that, I bet it started off as Drax's liability cap, which was a per claim cap, and then I think Wipro then tried to tweak the clause to take it from being a per claim to an aggregate cap, were successful in the end but I would imagine the Wipro lawyer was a bit stressed before this case came in, worrying about how by doing some limited drafting to get an aggregate cap he still had not made it clear, or she had not made it clear, and now it is being fronted by court, who pawed all over it. And so that is certainly another thing I draw from this is it really emphasises how simplicity, it is hugely valuable to people drafting contracts and the judges. If this clause simply said Wipro's maximum liability is £10 million in aggregate full stop, they would not be at court with this question. They would be settling the dispute somewhere with a very clear understanding what the liability cap. It is only because the liability cap has been drafted so it flexes, have they found themselves in this place.

Andrew: Yes I agree with that. Although as you and I have found in the past David, I think sometimes the uncertainty allows the contract to be signed in the first place. So although you are right to say, if it had been far clearer then it would not have got to court. In certain instances, maybe not this one, but in certain instances if the cap or limit of liability had been clearer, then the contract would not have been signed.

David: Yes absolutely. If you look at this from a customer point of view, well at least the slight… the ambiguity and the drafting allowed them to at least have the argument, and who knows, on a different day with a different judge it might have gone differently. Difficult to imagine, because I think I would struggle to see how this is anything but an aggregate cap, but who knows. And so yes. And as you said it, that ambiguity might be what is required to help bring the parties to agreement and get something signed and get a deal done by having a little bit of ambiguity so they can each read the clause slightly different at the time of signing and get themselves happy with it, and wait for another day to have the dispute.

Andrew: I think the other sort of practical issue that this raises with me is on a litigation front, which is the use of preliminary issues. Deciding things early. And I think this is quite a good example of that because… I mean, you have got, on the face of it, at the start at least, a £31million claim. It was issued in 2021. It was supposed to go to trial in 2024. So approximately three years later, for a seven week trial. A seven week trial, you are talking millions in legal costs basically. And what this preliminary issue did was, in effect, knock out £20million of a £30 million claim, making it a £10million claim. Incidentally, with a £10million counterclaim. And that decision was made considerably earlier than the trial and without the expenditure on legal costs. And you can see as a tactic in litigation, instead of fighting a £30million case, with a large amount of legal costs, you are now fighting a £10million case with a £10million counterclaim, there is a much greater likelihood of a settlement being done, without the expenditure on legal costs. So as a tactic to, sort of, rip the guts out of a claim that otherwise you would be taking all the way because of the size, it is a really good option.

David: And I imagine the courts sort of welcomed the idea that instead of having a big long expensive complicated trial about all kinds of things, if actually we can help the parties settle by answering a core legal question, that is attractive is it not.

Andrew: Well it is, and particularly for the judge. They love deciding legal questions, and as we all know, factual questions can be very difficult, require a lot of evidence and the value of claims is very tricky, particularly for all of us lawyers because it involves numbers rather than words. And if, if now you can only recover £10million, it takes quite a lot of the heat out of that quantum claim.

David: The other thing to point out about this is, it was interesting how the judge went and read another liability cap in the contract, it was a data protection cap, which had similar but different wording and was trying to reconcile that would be actual cap wording, and that is a key message to us drafting contracts is to remember the court might go and say, well what did you say somewhere else in the contract. There must have been a reason why you drafted that differently. Now we all know that the reason why clause x and clause y were drafted differently is we did them on different days of the week, at different stages in negotiation, and may have been different people. Maybe the data protection lawyer did the data protection wording and the IT lawyer did the rest of the wording. There are lots of reasons why it is inconsistent. None of which were about the intention to mean different things, and although in a big contract it is a really difficult practically to make the wording consistent. I think it is well worth the effort trying to make sure your liability wording is at least consistent so that a court does not accidentally find that, "oh because it is different wording to the data protection cap therefore it means something different, and therefore I am going to find I end up with a different result".

Finally Andrew, I have said, early on, that I thought it looked like an aggregate cap smelt like an aggregate cap and the judge got to the right place. Do you agree with me?

Andrew: I agree with you. I think, more importantly, I agree with the judge! But perhaps for slightly different reasons. It seemed to me, just reading the clause, as if the cap was a total liability cap. And claim came in when assessing what the value of that cap would be. And that it seemed to me was an important element to it. So it was… it seemed to me on the face of the words as if it was intended to be the total liability. But that the amount of that total liability would depend on a calculation relating to the claim. So I come to the same answer but for a slightly different reason.

David: So you are saying, actually this clause makes sense as it is. It does not require all these hoops the judge has gone to to get there. Its total liability… it is like an equation is it. Total cap equals, and then you go, what does it equal, it equals 150% of the charges arising in 12 months.

Andrew: Well I think we could all agree, and the judge said, that the clause could have been clearer, but essentially what you have to do is work on what you have. And the clause it seemed to me was sufficiently clear to set out what the intent of the parties was, even though the wording was not perfect.

David: So if you draft and negotiate contracts, particularly liability clauses, I really recommend you read alert or read the clause itself. It is really useful. It is really unusual to have a case which just focuses on the drafting, because normally it is a whole load of stuff, the facts (who cares about those!) in the case. And the legal bits are, sort of, hidden amongst it. Here it is purely about the drafting. It is really well worth reading the case even, actually, to see how the Court does it, to help those of you who draft contracts to reflect on how can you make sure that this really crucial clause in the contract for its supplier, is clear and will work and not lead to a dispute.

Thank you very much for joining us all today and we look forward to the next contract law podcast. Thank you.

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