In Royal Devon and Exeter NHS Foundation Trust v Atos IT UK Services Limited ( EWHC 2197 (TCC)) the Technology and Construction Court was asked to determine as a preliminary issue the enforceability of a limitation of liability clause in an IT services agreement. The Royal Devon and Exeter NHS Foundation Trust argued that the clause was sufficiently ambiguous so as to be unenforceable. The court disagreed, concluding that, despite being poorly drafted, the clause could be interpreted in a way which reflected the intention of the parties, made commercial sense and was therefore valid and enforceable. The dispute also involved a claim for wasted expenditure against ATOS, but the decision is interesting for the court's analysis of the liability clause (which is the focus of this update).
In November 2011 the trust signed an agreement with ATOS for "health record scanning, electronic document management and associated services", which comprised the provision of a system called "Mobius Clinical Electronic Medical Records". The value of the contract was around £5 million and had a term of five years. The trust was unhappy with the performance of the system and in 2014 served notice on ATOS terminating the contract and brought a claim for £7.9 million for breach of contract.
ATOS argued that any claim by the trust was subject to Clause 8.1.2 of the agreement, which limited its liability by reference to the amount set out in Schedule G of the agreement. The relevant clause in Schedule G provided that:
"The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:
9.2.1 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
9.2.2 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 trust argued as follows:
- Paragraph 9.2.2 sought to limit the liability of ATOS for "claims [plural] arising after the first 12 months of the Contract" by reference to "the total Contract Charges paid in the 12 months of the Contract prior to the date of that claim [singular]". The clause did not work because the reference to "that claim", which determined the relevant 12-month period, was not itself defined; it did not obviously refer to "claims" at the beginning of the paragraph and could not be interpreted as if it read "each such claim".
- "Claims arising" meant the date or dates on which a breach or default occurred, in respect of which ATOS would be liable under the agreement. This set the liability cap by reference to contract charges paid in the 12-month period prior to the date of the breach. ATOS agreed that "claims arising" could be read as "default occurring".
- It was not clear how the clause should be interpreted in the event that there was more than one claim; was there a single cap calculated by reference to a claim or was there a separate cap for each claim that arises? If the latter, ATOS's liability could potentially exceed many millions of pounds. If the reference to "claims arising" should be read as "claims notified", ATOS's liability would expand with each notification of a material breach.
- As a result of these ambiguities, it was not clear what meaning a reasonable person should ascribe to the clause and therefore the liability cap provision should be declared unenforceable.
In reply ATOS argued that despite the unfortunate drafting, the clause was capable of being interpreted and had contractual force. The cure was to substitute the formulation in the opening sentence of 9.2.2 with the same words that were used in the opening of 9.2.1 (ie, "any claim arising"). Further, the use of the words "the aggregate liability of the Contractor… shall not exceed" and the disjunctive "or" in paragraph 9.2 indicated that these were alternative caps and not cumulative. There was therefore only one cap determined by the timing of the first default. ATOS also submitted that in the alternative there were two caps: one applying to defaults occurring in the first 12 months of the contract and calculated by reference to the total contract price and the second applying to defaults occurring after the first 12 months, calculated by reference to the total contract charges paid in the 12 months prior to the claim.
The court identified the general principles governing the interpretation of written contracts, which it briefly summarised as follows: the court is concerned to ascertain the intention of the parties by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract. This exercise in interpretation should focus on the meaning of the words in their documentary, factual and commercial context and that meaning must be assessed in light of:
- the natural and ordinary meaning of the clause;
- any other relevant provisions of the contract;
- the overall purpose of the clause and the contract;
- the facts and circumstances known or assumed by the parties at the time that the document was executed; and
- commercial common sense; but
- disregarding subjective evidence of any party's intentions.
The judge cited a number of well-known recent decisions concerning contractual construction, including Arnold v Britton ( UKSC 36), Rainy Sky SA v Kookmin Bank ( UKSC 50), Chartbrook Ltd v Persimmon Homes Ltd ( UKHL 38) and Wood v Capita Insurance Services Ltd ( UKSC 24).
As to the interpretation of limitation of liability clauses, the court held that there was no presumption against the parties having agreed to limit their remedies for breach of contract. If the words were sufficiently clear, the court would give contractual force to such clauses in accordance with the court's general approach of striving to give effect to contractual terms rather than finding them void for uncertainty.
Applying that analysis, the court agreed with ATOS that while paragraph 9.2 had not been drafted with precision, it was capable of contractual force by rectifying the plural references to "claim(s)" in paragraph 9.2.2 to be read in the singular. Further, the formulation "aggregate liability… shall not exceed" pointed towards the intention of the parties to limit the total liability of ATOS such that there was only one cap, not multiple caps. To read it otherwise would render the clause devoid of any real purpose, as ATOS could face a liability amounting to many times the total contractual price.
The court commented that where the words used in a contract give rise to competing interpretations, one of which makes commercial sense and the other does not, it is open to the court to prefer the interpretation that makes commercial sense. The decision reflects the willingness of the court to seek to give legal effect to contractual provisions rather than declining to adjudicate on an issue of contractual interpretation merely on the basis that the parties had defined their obligations in an imprecise or unclear way. The case provides a useful reminder to practitioners of the importance of clear contractual drafting to ensure that the agreement accurately reflects the parties' intentions as to their respective obligations and liabilities.
Although the court observed that courts may take a commercial approach when faced with competing interpretations of contractual clauses, it does not follow that an uncommercial or harsh result is a sufficient reason to favour one interpretation over another; a number of recent decisions have shifted the emphasis back to the primacy of the language used when interpreting contracts, even if that language produces an uncommercial or absurd result (eg, Wood v Capita Insurance Services, which was cited by the court).
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