Limitation of liability clauses are commonly used by suppliers and contractors as a risk control mechanism, particularly where the potential exposure to claims is out of proportion to the value of the work or goods contracted for.
The contract is the parties’ opportunity to set out the arrangements they intend to apply to the transaction. In the event of a dispute, a court will not have regard to what the parties say their subjective intentions were. The court will establish what was intended from the words used and relevant background information. Words are important and particularly so when the intention is to protect a business from potentially devastating risks.
Where significant claims arise, limitation of liability clauses come under the microscope and both parties have a lot to lose. Where the relevant clause is not crystal clear, it may fall to a court to decide what the clause means, as was the case recently in Drax Energy Solutions Limited v Wipro. Depending on the interpretation on the limitation of liability in the contract in that case, the claims were worth as much as £31.6 million or no more than £11.5 million.
The relevant clause read as follow:
33.2 Subject to clauses 33.1, 33.3, 33.5 and 33.6, 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 amount of the limitation was approximately £11.5m. Drax contended that the limit applied separately to each of the claims it had. Wipro contended that it was an overall cap which applied an aggregate maximum, regardless of how many clams Drax had. With a little more thought and care, it would have been fairly straightforward to have drafted the clause in a way that was clear one way or the other.
The court considered the words ‘limited to’ strongly suggested that it was an aggregate cap for all claims. The phrase ‘total liability’ reinforced that reading. The court also had regard to what was not said - the absence of words like ‘for each claim’after the word ‘liability’ further supported the notion this was a single aggregate cap.
The court also looked at other clauses in the contract and one in particular that used some of the same language but made it clearer that it was an overall aggregate cap. The court considered that the same words should be given the same meaning in both clauses.
Although the court acknowledged that parties do not easily give up significant rights and that if this was an aggregate limit, one party here had done so, the courts have made it clear many times that it is not their job to save parties from what might in hindsight look like a bad deal.
Although it might be thought that the wording in this case was not particularly unclear, it could have been clearer. It is important to take time and great care when drafting contract clauses, choosing words carefully and testing them by considering how, in the event of a dispute, an opponent might argue that the clause does not mean what you intended. Better still, ask a colleague to do so. Remember that courts do not construe clauses in isolation, they do so as part of the contract as a whole. It is important to ensure consistency in your drafting across the contract.
One final thought to leave you with – if the clause had been intended to apply a cap separately to each claim, what would constitute a claim for that purpose? How would one determine if sums claimed were separate claims or all part on one claim? It would be best to define what is meant by ‘claim’, but that is not as easy as it may sound.