Limitation of liability clauses are an important tool for balancing risk in all contracts, including construction contracts. Parties looking to adopt such clauses should ensure that they are drafted clearly and without ambiguity.
In a recent decision, the TCC provided a useful reminder of the court's approach to interpretation of limitation of liability clauses.
Drax Energy Solutions Limited v Wipro Limited [2023] EWHC 1342 (TCC)
The dispute arose out of a master services agreement dated 20 January 2017 for the provision of customer relationship software services by Wipro to Drax. Wipro was engaged to provide these services over a five year period through a number of statements of work which would be entered on specified dates each with a go-live date and agreed charges,
The project ran into delay with milestones missed, re-arranged and missed again. These difficulties led eventually to the termination of the contract by Drax on 7 August 2019 for repudiatory breach of contract.
Drax claimed damages for misrepresentation, quality defects, delay and termination of some £31 million; in turn Wipro counterclaimed for around £10 million for wrongful termination, prolongation costs, unpaid invoices and termination claims.
The central issue for the court to consider as a preliminary issue, was whether the limitation of liability clause meant that there was one cap applying to all claims by Drax (as contended by Wipro), or whether there were separate caps that could apply to each of the claims made by Drax (as contended by Drax).
The relevant clause (clause 33.2) provided:
“ … 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 …"
Approach to interpretation
The court provided a useful analysis of the approach to contractual interpretation of contracts and limitation of liability clauses pointing out that:
- Contract provisions are to be construed using the natural and ordinary meaning of the words used, based on the facts and circumstances known to the parties at the time the contract was made and commercial common sense.
- Where the language is unambiguous the court must apply it, but where the language is unclear the court can suggest an alternative meaning to reflect what a reasonable person objectively would conclude the parties meant.
- If there are two possible constructions, the court can prefer the construction consistent with business common sense (but only to the extent of how matters would have been perceived by reasonable people in the position of the parties when the contract was made).
- The natural meaning of the words should not be rejected because it appears to be imprudent as the court will not relieve a party of a bad bargain.
- In relation to limitation of liability clauses in particular, the modern view is to recognise that commercial parties are free to make their own bargains and to allocate risks as they think fit but that in the absence of clear words, it is to be assumed that parties did not intend to give away rights or remedies which they would otherwise have under the general common law or statute (Triple Point Technology v PTT (2021).
Decision
As a matter of language, the court considered that the wording of the limitation clause "despite some linguistic quirks" provided for a single not multiple caps for all claims. The court analysed the wording such as the use of the term "total liability" and the absence of wording referring to "for each claim" to reach its decision. A comparison of the language used in a further limitation of liability at clause 33.3 also assisted the court's interpretation.
The court did not consider that the language was ultimately ambiguous despite accepting Drax's interpretation was possible and commercial considerations did not alter the court's interpretation of the language used in the clause.
Additionally in the circumstances of the case the court did not think that the Triple Point considerations, namely that parties generally do not give way rights which they would otherwise have under the general law, carried much weight.
The court also rejected the suggestion by Drax that "claim" meant "cause of action" or liability and went on to conclude that had there been separate multiple caps then the claims to which those caps applied would have related to the four categories of claim used by Drax.
Summary
The case provides a useful reminder that limitation clauses should be drafted with care and without ambiguity. When interpreting the meaning of a limitation clause, a textual analysis will usually be the starting point unless a provision "lacks clarity or is apparently illogical or incoherent" (Wood v Capita Insurance, 2017).
