This blog post looks at a recent Judgment, in which the Court of Appeal considered how to construe an ambiguously drafted cap on liability clause.
Parties to construction contracts (and in particular professional appointments) will commonly include provisions in their agreements which seek to apportion the risk of loss, or limit (or ‘cap’) the financial liability of one party to the other in the event of a breach of contract or negligence. However, if caps on liability are not carefully drafted, parties can sometimes find themselves in dispute as to how they ought to be interpreted.
In more extreme cases, it may even be possible for a party to argue that the wording of a cap on liability clause is so ambiguous that it is not possible for the meaning of the clause to be construed and the clause should be declared unenforceable.
In its recent Judgment in Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd, the Court of Appeal considered a limitation of liability clause. The appeal was from a Judgment of O’Farrell J in the TCC.
The parties’ contract was for the defendant to provide IT services to the claimant NHS Trust. It contained a provision which sought to limit the defendant’s liability to the claimant as follows:
“The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:
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
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.”
The NHS Trust argued that it was not clear whether the “aggregate liability” of the contractor was in respect of (i) one aggregate cap (the amount of which would be determined upon the timing when the first claim was made); or (ii) two separate aggregate caps for claims either made firstly in the first 12 months; or secondly after the first 12 months. The NHS Trust argued that, in the circumstances, the liability cap provision should be declared unenforceable.
O’Farrell J rejected the argument that the liability cap was not capable of being construed and should be declared unenforceable, and re-confirmed the principle that the Courts will be reluctant to strike down a contractual provision as being void for uncertainty. The Judge accepted that the wording of the clause could give rise to competing interpretations but, applying established legal principles for interpretation of written contracts, decided it was open to the Court to prefer the interpretation that it considered made most commercial sense.
The Court decided that, properly construed and applying principles of commercial sense, the disputed provision imposed one cap on liability that could arise from either event and was dependent upon the timing of the claim.
Court of Appeal
The NHS Trust took its case to the Court of Appeal, although it abandoned its argument that the liability cap was not capable of being construed and should therefore be declared unenforceable. The issue for the Appeal Judges to consider was therefore whether the High Court had erred in deciding that the disputed provision imposed one aggregate cap on liability rather than two separate aggregate caps on liability.
Like O’Farrell J in the High Court, as part of its reasoning in construing the disputed provision, the Appeal Judges considered which of the alternative interpretations made most commercial sense. However, in applying the ‘commercial sense’ test, the Court of Appeal took the opposite view to the High Court and decided upon an interpretation of the disputed provision which imposed two separate aggregate caps: i.e. one for the first 12 months and a separate cap for claims after this 12 month period. If there were defaults in both periods, the contractor’s liability for claims made during the first year was capped at an aggregate amount and claims made subsequently were capped at a separate aggregate amount. This made most commercial sense to the Court of Appeal and was therefore to be preferred. This was because the contractor was doing high value work in the first year of the contract, where the potential damages for the contractor’s default could be a lot higher and so it was commercially justified to have a higher cap on liability for claims made during the first 12 months and for the contractor’s liability to be subsequently lowered.
The Courts remain reluctant to strike down a limitation/cap on liability clause on the basis that ambiguity in the drafting should make the clause unenforceable. However, care should be taken when drafting and negotiating such clauses in order to ensure certainty as to their effect. Here, the Court of Appeal interpreted a disputed clause in a totally different way to the High Court and lack of certainty provides further scope for disputes.