Interesting English judgement on the interpretation of limitation of liability clause

A recent UK judgement from the Technology and Construction Court of England and Wales sets out a number of principles for the interpretation of limitation of liability clauses.

The case

The case concerns the interpretation of a limitation of liability clause in a contract between energy supplier Drax Energy Solutions Ltd ("Drax") and software supplier Wipro Ltd ("Wipro") for a failed software development project.

Following the cancellation of the contract, Drax commenced proceedings against Wipro for a total of approximately £31 million, split into the following 4 different types of claims:

1. Claims arising from misleading information provided during contract negotiations
2. Claims arising from quality deficiencies
3. Claims related to project delays
4. Claims arising from the cancellation

Drax argued during the proceedings that one liability cap applied to each of the different types of claims, totalling approximately £31 million.

Wipro, on the other hand, argued that a single aggregate cap applied to all claims, limiting the total liability to approximately £11.5 million.

The main trial is expected to begin on 1 October 2024 and is scheduled to last 36 court days

The court's judgement

The contract's limitation of liability clause reads as follows (with our underlining):
"33. LIABILITY
[...]
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."

Drax's claim arose in the first year when the Charges to the supplier totalled approximately £7.6 million. 150% of this amount equates to approximately £11.5 million, which, as mentioned, Wipro believed to be the maximum number of damages.

The court was asked to consider the following two questions:

1. Should the limitation of liability clause be interpreted as containing an overall cap on Wipro's liability to Drax, or as a per claim cap?
2. If the Court finds that there are separate limits of liability for each claim, how do they apply to Drax's claims?

On the interpretation of the word "claim"

Drax argued that the word "claim" should be interpreted to include all causes of action, while Wipro argued that the word "claim" should be interpreted as the overall responsibility.

On the interpretation of the size of the claim

As mentioned, Drax argued that the limitation of liability clause should be interpreted to mean that a per claim cap was agreed - i.e. that the £11.5 million limitation of liability applied per claim.

Wipro argued that the limitation of liability clause amounted to a total cap of £11.5 million, regardless of the number of claims.

The judge began with a linguistic interpretation of the limitation of liability clause. The judge found that looking at the first three lines and the words "limited to" in isolation, the language strongly suggests that there is a single cap for all claims combined. The phrase "total liability" further supported this reading, as did the absence of qualifiers such as "for each claim" after the word "liability".

Relatedly, the judge pointed out that had there been a specific sum after the words "limited to", the language would have even more clearly indicated a single cap.

However, the judge considered that if one looked at the word "claim", the reference to when "the claim first arose" actually meant when the first (of the various) claims arose. With this interpretation, even if multiple claims are found to be in play, the stated cap still applies to the sum of these claims, and the time of the first of these claims becomes the relevant time.

On the language of clause 33.2 of the limitation of liability clause, the judge summarised that this generally supports Wipro's interpretation over Drax's, i.e. that the limitation of liability clause contained an overall cap of £11.5 million, regardless of the number of claims.

The judge then sought further clarity by analysing the wording of other provisions of the contract. For example, the judge highlighted clause 33.3 of the contract, which contained a single overall cap on claims for non-compliance with the contract's data protection terms. This provision referred to the date on which "the claim first arose". In addition, this section addressed the fact that there could be more than one claim ("any and all claims"), stating that a single cap would apply to the sum of these claims.

According to the judge, clause 33.2 of the limitation of liability clause had to be interpreted in accordance with the more specific wording of clause 33.3, as the same words are largely used in both clauses. This gave additional support to the view that clause 33.2 of the limitation of liability clause should be interpreted as one overall cap on the sum of the claims.

Overall, the judge found that, despite some "linguistic quirks", the correct interpretation of the limitation of liability clause was that, as Wipro argued, a single cap was agreed, not separate caps for each claim, and that question 2 was therefore not relevant. The judge further noted that context was given importance, in particular that both parties are companies of a significant size who had clearly had professional advice and assistance in the drafting of the contract.

Perspectives

Limitation of liability clauses aim to safeguard the potential exposure of the contracting parties to pay damages (and possibly other forms of financial compensation) to the other party in the event of a breach of contract. It is therefore important that such provisions are drafted clearly and precisely.

This is of course equally true in a Danish context, where doubts can - and often do - arise about the scope of a limitation of liability clause, including the types of claims to which it applies, how a liability cap should be calculated (unless a specific amount is specified) and - as in this case - whether it is a total liability cap or whether the cap applies to each individual claim arising under the contract.

It is therefore useful to keep the following recommendations in mind when drafting this type of contract clause:

1. Keep limitation of liability clauses short and simple to avoid ambiguity in interpretation.
2. Use words such as "collectively" if the intention is that the limitation of liability applies to the sum of claims, or conversely use phrases such as "each claim" where the intention is the opposite.
3. Being consistent in contractual wording. The court looked at the wording of another financial liability limitation in the contract (relating to data protection) to seek clarity on the interpretation of the provision.