The importance of clear drafting in Liability Limitation Clauses – a reminder from the English High Court

Introduction

A recent English High Court decision, Drax Energy Solutions Limited v WIPRO Limited,¹ has provided a helpful reminder on the importance of clear drafting when agreeing the liability limitation provisions of commercial contracts and gives a good indication of the approach that courts will take in interpreting ambiguity in such clauses.

 

Facts of the case

WIPRO agreed to provide software services to Drax, an energy supplier, under a master services agreement (MSA). The service involved a series of implementation projects to configure and implement the software. After a series of missed implementation milestones, revised dates and delayed deliveries, Drax terminated the MSA early and brought a damages claim.

 

The issue

The key issue of contention between the parties was the MSA’s provision setting out the financial limit that WIPRO could be successfully sued for. Drax’s position was that its losses for which WIPRO was liable were GBP31.7 million and it argued that the limitation of liability clause in the MSA was structured so that WIPRO’s liability would be capped on a per claim basis so that WIPRO could be sued for and have to pay out around GBP23 million in total. WIPRO, by contrast, argued that the same clause imposed a single cap for all claims limiting its total liability to around GBP11.5 million.

Clearly, there was a significant difference of interpretation on how the contract limited WIPRO’s liability. The Court had to examine the liability clause in the MSA in detail and decide which interpretation was correct.

 

The clause in question?

Clause 33.2 was the clause at issue and it limited the liability of WIPRO (as Supplier) for all of WIPRO’s liability under the MSA that was not covered (a) in one of the standalone, liability ‘supercaps’ for WIPRO’s liability for tangible property damage or breaches of clause 21 which are covered in clauses 33.1 and 33.3 respectively or (b) by one of the agreed categories of loss for which there will be unlimited liability set out in clause 33.6.

In order to interpret that clause, the Court considered all of clause 33 and a reading of the key sections of that clause in its entirety is required in order to fully understand the issue here.

33. Liability

33.1 Subject to clauses 33.5 and 33.6, the Supplier’s liability to the Customer, whether in contract, tort (including negligence) for breach of statutory duty or otherwise, for loss or damage to tangible property arising out of or in connection with this Agreement (including all Statements of Work) shall be limited to GBP20 million per event or series of connected events.

33.2 Subject to clauses 33.1, 33.3, 33.5 and 33.6, the Supplier’s total liability to the Customer, whether in contract, tort (including negligence), for breach of statutory duty or otherwise, 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.

33.3 The Supplier’s total aggregate liability arising out of or in relation to this Agreement for any and all claims related to breach of any provision of clause 21 whether arising in contract (including under an indemnity), tort (including negligence), breach of statutory duty, laws or otherwise, shall in no event exceed 200% of the Charges paid or payable in the preceding twelve months from the date the claim first arose or GBP20m (whichever is greater).

 

Aggregate or per claim cap

The Court pointed out that if clause 33.2 was to be read only as far as the word “payable” on the fourth line then it would be quite clear that the parties had agreed that the liability cap set out in clause 33.2 was intended to be a single cap for all claims through the use of the word ‘total’. However, the addition of the wording “in the preceding twelve months from the date the claim first arose” introduces confusion as such wording is more typically associated with a liability cap that is capping liability on a per claim basis. Conceptually, it is difficult to reconcile a ‘total’ liability cap which would be typically read to mean a cap for the lifetime of the contract with reference to the amount of such cap being calculated by the charges paid or payable in the twelve months preceding the applicable claim. That latter wording appears to contemplate the possibility that the actual cap could be a multiple of such amount as there could be several distinct claims, each capped at the amount of fees paid or payable in the preceding twelve months.

In contrast to clause 33.2, the Court emphasised that clauses 33.1 and 33.3 each set out an example of clearer drafting that has been used to set out:

• in clause 33.1, a liability cap structured on a per claim basis with the liability cap of GBP20 million being expressly stated to limit liability “per event or series of connected events”; and
• in clause 33.2, a liability cap structured on a single cap for all claims basis with the liability cap of the greater of 200% of the Charges or GBP20 million being for “any and all claims”.

 

Notes of caution

Beware of adding drafting from multiple sources

The Court was critical of the drafting of clause 33, pointing out, in particular, the lack of consistency in the language used in clauses 33.1 to 33.3 when the parties must have intended that two of the clauses either have a liability cap structured on a per claim basis or a liability cap structured on a single cap for all claims basis and yet three distinct sets of wording are used to do this.

Approach to Interpretation

The Court reiterated that the general rule when interpreting an ambiguous clause in a commercial contract is to apply the test for contractual interpretation of construing the relevant words in their documentary, factual and commercial context² – in other words, by assessing the words through the following six factors:

• the natural and ordinary meaning of the words;
• any other relevant provisions of the contract being construed;
• the overall purpose of the provision being construed and the contract in which it is contained;
• the facts and circumstances known or assumed by the parties at the time the document was executed;
• commercial common sense;
• while disregarding subjective evidence of any party’s intention.

The Court went on to examine/apply the dicta of a recent English Supreme Court case³ which examined whether liability limitation/exclusion clauses have distinct rules around interpretation beyond the usual rules set out above. Lord Leggatt in that decision held that the task of the court in interpreting such clauses is to interpret the words of such clauses applying the ordinary methods of contractual interpretation (ie the six factors listed above) but in so doing, particular emphasis needs to be placed on factor three above – that the fact that the clause in question is limiting the parties’ liability needs to be borne in mind when considering what the parties are to have taken to have intended objectively.⁴ One way that this manifests itself is that the court should start from an assumption that, in the absence of clear words to the contrary, the parties did not intend to derogate from normal rights and obligations that they would normally have (under, for example, the common law or statute⁵).

The Court in the present case cited that Supreme Court decision in conjunction with an earlier English Court of Appeal decision⁶ which recognised that even when applying the above modern approach to contractual interpretation there remains a principle that an ambiguity in a limitation of liability clause should be resolved by a preference to the narrower construction provided that all of the other factors above do not present a clear answer as to what the clause means.⁷

Decision as to whether single or per event cap

The Court then applied the above interpretation approach to clause 33. In so doing, it paid particular attention to the contrast between the drafting of clause 33.2 on one hand and clauses 33.1 and 33.3. The Court placed particular emphasis on two factors.

That when the parties wanted to create a per claim cap they were quite capable of using explicit and unambiguous language like “per event” in clause 33.1 to do so; and the use of the word ‘total’ preceding ‘liability’ in clause 33.2.

On the basis of the consideration of the above contractual interpretation factors and the above two points in particular, the Court held that clause 33.2 imposed a single, overall liability cap for the lifetime of the contract.

 

Lessons from this decision

This decision illustrates three important lessons:

• avoid overly complex structures and language. Draft it as you mean to say it;
• note the potential danger of over-reliance on or reusing language for important clauses such as liability limitations from previous agreements/precedents;
• that three different sets of language were used in clauses 33.1 to 33.3 to set out what could only be two different liability structures suggested to the Court that the drafters of this particular agreement may have been guilty of ‘cherry picking’ of language from different agreements which had different liability structures and then attempting, unsuccessfully, to marry them together;
• explain and test the structure/limits with the relevant business stakeholders/decision makers. It may be helpful to break down the distinction between the aggregate and per claim structures with real world, worked examples.

 

This article was first published in the Commercial Law Practitioner in October 2023. 

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¹[2023] EWHC 1342 (TCC)
² Based on a series of well known cases in the English House of Lords and Supreme Court culminating in Wood v Capita [2017] UKSC 24 which was summarised (and that summary cited in this case) by the then Chancellor, Sir Geoffrey Vos in Lamesa v Cynergy [2020] EWCA Civ 821.
³ Triple Point Technology v PTT [2021] AC 1148.
⁴ Ibid, 108.
⁵ Ibid.
⁶ Nobahar-Cookson v Hut Group [2016] EWCA Civ 128.
⁷ This being distinct from the older contractual interpretation tools such as the contra proferentem rule as it only applies where the above six factors have been applied and there is still no clear answer with contra proferentem being generally accepted as now having been effectively discarded by English courts as per Lord Hoffman in Investors Compensation Scheme v West Bromwich Building Society [1998] WLR 896, 912 where he stated “almost all the old intellectual baggage of legal interpretation has been discarded”.