In November 2011, the Claimant (the “Trust”) entered into a five-year contract with the Defendant (“ATOS”) for the provision of an electronic medical record (“EMR”) system and associated services (the “Contract”). The value of the contract was in the region of £5 million.
On-going issues in relation to the implementation and performance of the EMR System resulted in the Trust invoking the contractual dispute resolution procedure in September 2014, and ultimately, to terminating the contract by reason of material breach in April 2016.
THE CLAIM The Trust claimed:
- £7.9 million in damages for wasted expenditure as a consequence of the EMR system‘s failure to function adequately; and
- that the limitation of liability provision in the contract was unenforceable for ambiguity or uncertainty.
ATOS contended that:
- any claim for wasted expenditure was expressly or impliedly excluded by the Contract as lost profits, business, anticipated savings, or indirect or consequential loss or damage; and
- any damage claim was subject to a valid and enforceable liability cap.
Although ATOS denied liability in respect of the alleged breaches, it was agreed that the Court should assume that the Trust would be able to establish its case on both liability and quantum in order that the issues be tried as preliminary issues.
1. Wasted expenditure
The aim of a damages claim is to put the claimant in the position they would have been in had the contract been successfully performed. In a commercial context, compensation is often calculated by reference to the additional revenue that a claimant would need in order to realise the financial value of the expected contractual benefit (e.g. the cost of replacement, lost profits, savings, etc.).
However, the Court held that it is wrong to assume that a contractual benefit can only be represented by the “expectation” value. In the case of the Trust, the value of the EMR system would always have been non-pecuniary and it was equally valid to calculate the Trust’s loss by reference to the money spent as a result of relying on a defendant’s contractual promise, i.e. the “reliance” value.
The Trust's claim for wasted expenditure as a result of ATOCs breach of contract was therefore not debarred by the contractual provisions excluding liability for lost profits, business, anticipated savings or indirect or consequential loss or damage. It was instead a claim based on a rebuttable presumption that the expenditure incurred by the Trust in reliance on its anticipated use of a functional EMR system was wasted expenditure. For the Trust, this expenditure included internal staff costs, the purchase of hardware and software, procurement and tendering costs and related infrastructure costs. The burden of proof fell to ATOS to show that the Trust’s expenditure would have been wasted in any event, because it made a "bad bargain".
2. Liability Cap
The Trust argued that the contractual liability cap did not apply to its claim for wasted expenditure because the imitation of liability provision was ambiguously worded and therefore void for uncertainty. The Court agreed with the Trust that the limitation of liability provision was unclear but it affirmed that the mere presence of such a provision suggested that the parties had intended for a limitation to apply. It was then for the Court to decide whether the relevant provision could be interpreted with sufficient certainty to render it enforceable.
The Court’s starting point was to look at the intentions of the parties by reference to what a reasonable person, having all the background and knowledge available to the parties at the time would have understood the meaning to be. This well-established test disregards any subjective evidence of a party's intentions and considers instead (i) the ordinary meaning of the words, (ii) other provisions in the contract, (iii) the purpose of the limitation of liability provision within the context of the contract, (iv) facts and circumstances known to the parties at the time and, (v) commercial common sense*.
Mrs Justice O’Farrell reminded the parties that there is no presumption against the parties having agreed to give up or limit their remedies for breach of contract**. Where the words used are clear, the Court will give effect to the commercial allocation of risk in the contract. However, the Courts also try to give effect to all contractual terms agreed by the parties where possible and are reluctant to find that a contractual provision is void for uncertainty***.
The Court held that although the words of the provision could give rise to competing interpretations, only one of those interpretations made commercial sense. It was up to the Court to prefer the interpretation that made commercial sense.
The preliminary issues were decided as follows:
- The Contract did not exclude and was no bar to the claims made by the Trust for wasted expenditure on a reliance loss basis.
- The limitation of liability provision in the contract was valid and enforceable.
It appears that damages for breach of contract can be calculated by reference to any benefit relied on under a contract and not just by reference to profits, revenues and savings. In particular, where a claimant would have received a non-commercial benefit, loss can be calculated by reference to the expenditure undertaken in reliance of that contractual benefit. This opens up the possibility that a claimant could potentially run parallel claims for both wasted expenditure in relation to the contractual benefit relied on and also for the lost revenue that the claimant expected to receive as a result of the contract being properly performed. Arguably, there would be no overlap between these claims. Suppliers will need to ensure that any attempt to exclude or limit liability for wasted expenditure clearly covers reliance loss as well as the standard lost profits, savings, etc.
This case also serves as a reminder that the Courts are reluctant to find contractual provisions void for uncertainty. If the words of an exclusion or limitation of liability provision are not clear, the Courts can infer an interpretation and, in doing so, will not presume that a party would necessarily choose to avoid limiting its remedies under a contract.