One of the key clauses in any commercial contract is the limitation of liability clause. This seeks to protect the parties - often the supplier - from disproportionate and unbudgeted exposure to large losses if something goes wrong.

The clause usually has: a limitation of liability, to limit the liability to a capped amount and an exclusion of certain types of losses.

The cases have traditionally interpreted the liability clauses strictly against the party looking to rely on them. This so-called "contra proferentem" rule has involved linguistic contortions to find the interpretation least favourable to the party trying to minimise or exclude its liability. Consequently, very clear drafting is needed, but sometimes not even what is apparently clear drafting could be enough.

Recently, there has been a trend to move away from the contra proferentem rule of interpretation in liability clauses, to interpret them in the same way as other clauses in contracts, ie what would the wording objectively have meant to someone with all the background knowledge? This change of approach has not been universally followed, and one recent Court of Appeal case, Nobahar-Cookson v The Hut Group Ltd, took a strict interpretation view.

The High Court has now looked at the issue again in the recent case of McGee Group Ltd v Galliford Try Building Ltd.

Facts

Galliford appointed McGee to carry out certain construction works. Clause 2.21 considered what would happen if McGee did not carry out the works on time. The clause also limited McGee's liability for direct loss and/or expense and/or damages to 10% of the contract price. Clause 4.21 said McGee was liable for any loss, damage, expense or cost as a result of any delay under the head contract caused by McGee's delay.

The inevitable happened and there was a delay, which impacted on the main contract. The parties ended up arguing over how much McGee was liable for. McGee said its liability was limited to 10% of the contract price, but Galliford said that that cap on liability applied only to clause 2.21 and not to clause 4.21.

High Court Decision

The High Court ruled on the words used in these particular facts. It said all claims for delay fell within clause 2.21. The natural meaning in clause 2.21 was plain. It was specifically for delays and disruptions, whether under clauses 2.21 or 4.21. Despite the limit on liability being located within clause 2.21, it could not sensibly have applied just to clause 2.21.

Galliford's attempt to persuade the court that those clauses covered separate ground and that there was no limit under clause 4.21 was an "artificial and uncommercial" interpretation of the contract.

If the court was looking to apply the most restrictive interpretation of the liability clause, it could have applied it only to clause 2.21 rather than clause 4.21 here. However, the court took a business common sense view of what the parties would surely have intended and overlooked any chance to latch onto an ambiguity that could have avoided applying the liability cap.

This is a further case along the current trend away from adopting the meaning least likely to give effect to a liability clause. However, it would be best to have avoided any ambiguity in the first place, and thus any doubt one way or another, by having a clearly drafted agreement.