We are indeed “lucky enough to live in an age where there is a galaxy of high appellate guidance on how to interpret contracts”, as observed by Lord Justice Jackson in The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Limited  EWCA 2196. Applying such guidance to negotiated clauses which lack clarity nevertheless remains far from straightforward, as evidenced in this case in which the Court of Appeal and the TCC came to very different conclusions on the meaning of a contractual liability cap. At least the two courts agreed that the clause meant something, however, contrary to the claimant’s original arguments.
Facts and TCC decision
We reported on the TCC’s decision in our last Bulletin. Briefly, the parties had entered into a contract for the provision by ATOS of an electronic document management system. The Trust terminated the contract, alleging failures in the system. The contract contained the following clause:
“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 … ; 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 TCC held that this clause was sufficiently certain to be valid and enforceable, but construed the clause as providing for a single aggregate cap on the contractor’s liability. Applying the rules of contract interpretation, that was the interpretation that the TCC felt made commercial sense.
Court of Appeal decision
The Court of Appeal, however, reversed the TCC’s decision on this point and held that the clause imposed two separate caps on liability. Jackson LJ did not agree that the phrase “aggregate liability” pointed to there being one cap only, as it was equally possible that it meant the aggregate of the clause 9.2.1 and 9.2.2 amounts. Similarly, the word “or” between the two sub-clauses could be read conjunctively - each of 9.2.1 and 9.2.2 were mutually exclusive as each referred to a distinct period of time. The wording, in the Court of Appeal’s view, “pointed emphatically” to there being two separate caps. In a contract where the early work was of a higher value, and the consequences of failure correspondingly high, it was not surprising that liability for the failure would also be higher. Even if a catastrophic failure occurred in the first year such that the contractor incurred a liability equal to the full contract amount, it did not follow that the contractor should then have a “free ride” for the remainder of the contract. The natural meaning of the words and business common sense were aligned.
As with many contracts in the oil and gas sector, this was a negotiated provision, and the Court of Appeal acknowledged that this “homemade” clause would yield some “odd results” whichever way it was interpreted. However, as the parties had now accepted (unlike at first instance) that the clause was valid and enforceable, it had to be given a meaning.
Courts will clearly go to some lengths to find meaning in a clause negotiated by sophisticated commercial parties rather than striking it down even if, as here, it involves resorting to the meaning that produces the “least bizarre consequences”. The court will hold the parties to what it interprets their bargain to be based on the language which they have used. Therefore, clarity at the drafting stage is crucial.