Clarity required when drafting liability caps

In the recent High Court case relating to an IT contract Drax Energy Solutions Limited v Wipro Limited [2023] EWHC 1342 (TCC), the courts looked closely at the drafting of a clause capping liability.

The court’s decision on the proper construction of a contractual liability cap reminds us of the importance of clear and coherent drafting both within a clause and across the contract as a whole.

Disputed liability cap

The disputed liability cap read as follows:

“the Supplier’s total liability to the Customer… arising out of or in connection with this Agreement (including all Statements of Work) shall be limited to an amount equivalent to 150% of the Charges paid or payable in the preceding twelve months from the date the claim first arose. If the claim arises in the first Contract Year then the amount shall be calculated as 150% of an estimate of the Charges paid and payable for a full twelve months.”

The issue in dispute was whether the relevant clause imposed: (i) an aggregate cap applicable to all claims brought by the claimant; or (ii) multiple caps applicable to each claim.

The relevant clause had not been well-drafted. The court considered that there was language in it that supported both interpretations and, conversely, that both interpretations would require a strained reading of some contractual language. Ultimately, the court drew on the drafting of other clauses in the agreement to inform the meaning of the relevant clause.

Background

The case concerned Drax’s (“the claimant”) claims against Wipro (“the defendant”) relating to alleged misrepresentations, lack of quality, delay and the termination of the IT contract.

The claimant was seeking to recover £31 million.

The defendant claimed that the wording of the liability cap created a single aggregate cap on liability of just over £11.5 million (which equated to 150% of the first year’s charges).

However, the claimant believed that separate caps of £11.5 million applied to each claim and given the number of claims that it had against the defendant, the liability cap would only kick in at £132 million, a figure far in excess of the sums it was claiming.

Therefore, it was plain to see that the difference in interpretations of the liability cap would make a big difference in respect of how whether the claimant would be entitled to recover the full amount of £31 million or not.

Analysis

When interpreting the cap, the court took into consideration various factors to make its decision.

The court identified that certain elements of the language used in the clause pointed in favour of a single cap. This included the use of the term “total liability” and the absence of wording referring to “each” claim. Further, the court added weight to the drafting of another liability clause within the data protection clause which imposed a single cap for all claims for breaches of the data protection clause. Therefore, the court found that on the wording of the liability cap clause itself, an interpretation as a single cap was, on balance, to be favoured.

The court also referred to the recent Supreme Court decision in Triple Point Technology v PTT [2021] highlighting that in relation to clauses seeking to impose a cap on a party’s liability:

• it is legitimate to also consider commercial considerations, such as whether one party’s interpretation would “deprive the relevant limitation clause of any real purpose because the operative cap would be so high”; and
• the court may have to choose the interpretation which yields the “least bizarre” results when neither interpretation makes complete sense or is free from unusual consequences.

With regards to the meaning of a ‘claim’, the court concluded that it could be interpreted in a number of ways and there was no decided case law which supported it to conclude in favour of either interpretation. Given the court’s decision below, it did not need to consider this secondary issue in any detail (although it did proceed to consider the issue obiter) but it does show that a ‘per claim’ cap is always at risk of debate. Therefore, an aggregate limit tied to a single financial cap is more likely to be enforceable.

Decision

The court’s conclusion was that on balance the defendant’s interpretation was correct – the clause imposed a single aggregate cap determined by the charges paid or payable in the previous 12 months. This meant that the maximum cap was £11.5 million. This was even though the court commented that the clause was not well drafted.

If you have any queries on this article or require any advice in respect of any commercial contracts, please do not hesitate to contact a member of the Commercial team.