The negotiation and interpretation of liability caps in contracts are often fraught with difficulties but such clauses are important in terms of managing commercial risk and understanding potential liabilities. Clear drafting is required to ensure that all parties understand their obligations and exposure. In the recent case of Royal Devon and Exeter NHS Foundation Trust -v- ATOS IT Services UK Ltd  EWCA Civ 2196, the Court of Appeal considered the meaning of a contractual limitation of liability clause in an I.T. contract.
The claimant, an NHS trust (the Trust), entered into a five year contract with ATOS IT Services UK Ltd (ATOS), an I.T. company, for the provision of an I.T. system which could provide an electronic document management and scanning facilities.
The system was supplied and the Trust was unhappy with it and raised issues regarding defects in the system in correspondence, which it claimed ATOS did not remedy, and eventually terminated the contract. The Trust claimed damages against ATOS under two broad heads:
- for wasted expenditure incurred in reliance on ATOS’ promise to provide a functional system, including sums it paid to ATOS under the contract, sums incurred in purchasing hardware and software for the system
- the costs of internal I.T. projects and health records staff of the Trust who would otherwise have been employed in other work.
The limitation of liability clause in the contract was raised as a defence to the claim.
Limitation of liability clause and cap
Clause 8.1.2 of the contract contained a limitation of liability provision:
‘… the liability of either party for Defaults shall be limited as stated below:
(a) the liability of either party under the Contract for any one Default resulting in direct loss of or damage to tangible property of the other party or any series of connected Defaults resulting in or contributing to the loss of or damage to the tangible property of the other party shall not exceed the figure set out in schedule G
(b) the aggregate liability of either party under the Contract for all Defaults, other than those governed by sub-clause 8.1.2 (a) above, shall not exceed the amount stated in schedule G to be the limit of such liability.’
The aggregate cap was drafted as follows:
‘Schedule G, Paragraph 9.2
The aggregate liability of [ATOS] 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
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 total contract price was £4.9 million. The contract charges were £2.8 million in year one and £2.1 million for years two to five. There was therefore a significant difference in the amount of the liability cap depending on which mechanism for calculation applied.
The trust accepted that the contract contained a limitation of liability clause (and cap) but argued that it was ambiguous and uncertain and accordingly unenforceable. ATOS’ position was that the claim was subject to the liability cap which significantly impacted on the level of damages that the trust could claim. The issue for the court was one of pure contract interpretation – what precisely did the clause mean?
Interpretation of the clause
The difficulty with the wording of the clause related to the liability cap in Schedule G which could be interpreted as imposing two separate caps – the first based on the total contract price (a higher cap – £4.9 million) and the second based on the total contract charges (lower cap – £2.1 million) – which one should apply?
At first instance the High Court held that the liability cap imposed a single cap on liability, rather than two separate caps depending on which of the circumstances applied (either paragraph 9.2.1 or paragraph 9.2.2) which ATOS could rely on.
The trust appealed and the Court of Appeal held that two separate caps applied. For any default(s) occurring in the first year of the contract, ATOS’ liability was capped at the contract sum. For any default(s) occurring in subsequent years, ATOS’ liability was capped at a lower sum, namely the amount of the contract charges paid in the previous 12 months. Its reasoning was that:
- The natural meaning of the words used accorded with business common sense. The result was a finding that there was two separate caps which was entirely consistent with commercial common sense. The work carried out by ATOS in the first year of the contract was different from the subsequent period as defaults could have very expensive consequences. In the subsequent years of the contract the consequences of default would be less expensive.
- The phrase ‘aggregate liability’ at the beginning of paragraph 9.2 was not necessarily a pointer towards one cap on liability rather than two, as the judge at first instance had held. The phrase could equally well be interpreted to mean that the limit of liability was the aggregate of the sums set out in paragraphs 9.2.1 and 9.2.2.
- The word ‘or’ at the end of paragraph 9.2.1 could be construed either disjunctively or conjunctively.
What would the position have been if there were defaults in both periods? The Court of Appeal considered the issue and indicated that ATOS’ liability for defaults in the first year was capped at the contract sum (£4.9 million) and for subsequent defaults it was capped at the amount of the contract charges (£2.1 million) paid in the relevant 12-month period, so recovery could be made subject to both caps.
Whilst traditionally a restrictive approach to interpreting exclusion and limitation clauses has been taken by the courts, more recently there has been an increasing willingness to recognise that parties to commercial contracts are entitled to apportion the risk of loss as they see fit and that provisions that limit or exclude liability are in essence no different from other terms and must be construed in the same way.
What are the points to take away from this decision?
- Take care when considering the inclusion of a total cap on liability
- Is the drafting sufficiently unambiguous? Is it capable of alternative interpretations?
- Consider whether the clause makes commercial common sense, what is the natural and ordinary meaning of the words used? As this is the approach that is most likely to be applied in interpreting it