In a recent ruling given on preliminary issues, the High Court found an ambiguously worded liability cap to be enforceable following the application of a commercially sensible interpretation. The High Court also distinguished a claim for wasted expenditure from a claim for lost profits, lost revenues and lost savings.
Royal Devon and Exeter NHS Foundation Trust (the Trust) v ATOS IT Services (ATOS): The facts
The Trust engaged ATOS under an IT project contract, to deliver an Electronic Medical Records (EMR) system enabling electronic document management and scanning. Unhappy with the performance of the EMR system, the Trust terminated the contract alleging a material breach by ATOS on the basis that it had failed to remedy various defects in the system.
Claim for wasted expenditure
The Trust sought damages in the High Court for wasted expenditure incurred in reliance on the anticipated performance of the contract by ATOS. These consisted of costs paid by the Trust to ATOS under the contract including costs for the purchase of hardware and software for the EMR system, scanning payments and internal staff costs. The Trust's case is that it incurred expenditure in reliance on ATOS' promise to provide a functional EMR system. ATOS failed to do so and as a result of ATOS' breach of contract, the Trust's expenditure was wasted (the High Court referred to this as the "reliance" measure of loss).
ATOS argued that the Trust's claim for wasted expenditure should be characterised as a claim for non-recoverable loss of revenue, profits or other savings from the EMR system which would have enabled the Trust to achieve the financial value of the expected contractual benefit (the High Court referred to this as the "expectation" measure of loss).
The High Court held that there was not any loss of revenue, profits or other savings that the Trust planned to generate from the EMR system. This was because the contractual benefit was not a financial gain but rather a non-pecuniary benefit (i.e. the use of the EMR system which was worth at least the expenditure incurred) for which the Trust was prepared to incur expenditure. It was open to ATOS to prove (in order to rebut the Trust's claim) that the expenditure incurred by the Trust exceeded the EMR system's worth as measured through non-financial gains. As regards the staff costs incurred by the Trust, the High Court stated that these should be treated in the same way as other wasted costs (they were, therefore, not excluded from the contract).
Enforceability of limitation of liability provision
ATOS argued that any damages for wasted expenditure would be subject to the liability cap in the contract. The High Court therefore considered the meaning and effect of the liability cap which included the following wording:
"9.2 The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (a) 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 that, due to the liability cap being ambiguously worded, it should be declared unenforceable for uncertainty.
The High Court considered the ambiguity of the liability cap and whether clause 9.2.1 and 9.2.2 provide for:
- one aggregate cap on the liability of ATOS with the level of the cap determined by whether the first default falls within the time specified in clause 9.2.1 or 9.2.2. So for example if the first default fell within the first 12 months of the term, and therefore clause 9.2.1 applied, ATOS' aggregate liability for all contract claims thereafter would not exceed the "Total Contract Price";
- two distinct caps so that ATOS' aggregate liability in the first 12 months would be limited to the Total Contract Price and any defaults arising after this time would in aggregate be limited to the total Contract Charges paid in the 12 months prior to the date of that claim. This would effectively mean ATOS' overall liability could be higher than if one aggregate cap was applied; and
- multiple caps whereby each individual claim would either be limited to the Total Contract Price (if the relevant default occurred within the first 12 months) or the total Contract Charges paid in the 12 months prior to the date of that claim (if the relevant default occurred after the first 12 months of the contract term).
Although the High Court agreed that the limitation of liability provision was not clearly drafted, it stated that it could be read with sufficient clarity and was, therefore, valid and enforceable. It reasoned that one aggregate cap made more commercial sense in this case, particularly as multiple caps could mean the cap level would be so high it would be difficult to consider why the parties would have agreed to it.
In reaching this conclusion, the High Court considered other provisions of the contract and the intentions of the parties. This was done 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 using the language of the contract within its documentary, factual and commercial context.
The High Court acknowledged that, when faced with competing interpretations, it was open to it to accept the one which was commercially sensible.
The non-financial nature of the contract in question was an important consideration in the reasoning of the High Court in relation to the wasted expenditure claim. The High Court made it clear that damages for breach of contract can be calculated by reference to any benefit relied on under a contract (including a non-pecuniary one) and not just by reference to profits, revenues and savings.
The judgment also highlights that the courts will be reluctant to treat a limitation of liability provision as being void for uncertainty and will try to give effect to all contractual terms agreed by the parties where possible. In this case, the High Court (by referring to previous cases including Arnold v Britton  and Wood v Capita Insurance Services Ltd ) sought to determine what a reasonable person would have understood the contract language to mean. This was done by taking account of: any other relevant provisions of the contract; the overall purpose of the clause in question and the contract; the facts and circumstances known or assumed by the parties at the time that the contract was executed; and commercial common sense.