Careful drafting is key when it comes to financial caps on liability provisions. These are often included in construction contracts (consultant appointments, building contracts and collateral warranties) to limit the financial liability of a contractor or consultant in the event of a claim being made against them.

A contractor or consultant’s liability may be capped at a fixed amount, which may be done by reference to a set figure or the required level of professional indemnity insurance or by reference to the contract sum or fee. Particularly when relating to the required level of professional indemnity insurance, the cap may be on an each-and-every-claim basis or in the aggregate. The financial limitation cap which is set in a contract will all depend on the outcome of negotiations between the parties and such caps are one of the most frequently debated commercial points in any construction contract.

The importance of precise drafting of caps on liability was highlighted in the fairly recent case of Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWCA Civ 2196, which, although not a construction case, serves as a useful reminder on this point.

The issue considered in this case was the meaning and effect of limitation of liability provisions in a contract (“the Contract”) between Royal Devon and Exeter NHS Foundation Trust (“the Trust”) and ATOS IT Services UK Ltd (“the Contractor”), for the Contractor to provide the Trust with an electronic document management system and associated IT Services for patient records. The project did not progress as planned and the Trust terminated the Contract and claimed damages against the Contractor for various alleged breaches.

The financial cap on the Contractor’s liability in the Contract was drafted as follows:

“9.2 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 question was whether a single cap on liability was imposed, which, depending on the circumstances, would be either that set out in paragraph 9.2.1 or that set out in paragraph 9.2.2 or whether two separate caps on liability were imposed, the first in respect of defaults occurring in the first 12 months and the second in respect of subsequent defaults.

The Court of Appeal (“COA”) overturned the Technology and Construction Court (“TCC”) judgment and held that the clause limiting the Contractor's liability imposed two separate caps on liability rather than a single cap. The COA held that this drafting pointed to two separate caps on liability and that any default or defaults occurring in the first year of the Contract would be capped at the contract sum (which was £4.9million) and any defaults in year two onwards would be capped at the charges paid in the previous 12 months. Where there were defaults in both of these periods, the caps would apply separately as appropriate to such defaults. If a major default occurred in year one, which used up the whole cap under paragraph 9.2.1, there would be no reason for the Contractor to get a “free ride” and their liability from year two onwards should be capped at the separate lower sum set out in paragraph 9.2.2. The reasoning behind the COA’s decision was that having two separate caps was commercially sensible as the Contractor was doing high value work in the first year of the Contract (providing the IT system), when defaults could have very expensive consequences, but then was doing lower value work in the subsequent years (dealing with maintenance, training and scanning services), when the consequences of default would be less expensive.

While a court may construe ambiguous drafting in the way that most accords with “commercial sense” this case highlights the importance of careful and unambiguous drafting in relation to caps on liability to ensure that the drafting reflects the agreed position between the parties to avoid the potentially long and costly consequences of having to litigate on the meaning of the provisions, should a dispute arise.