In Drax Energy Solutions Limited v. Wipro Limited,[1] the Technology and Construction Court considered the proper interpretation of a limitation of liability clause. The judgment provides a useful summary of the principles that apply to such an exercise. It is particularly notable that the court gave very little weight in the circumstances to the notion that in the absence of clear words, the court will assume that parties generally do not intend to derogate from the normal rights they would otherwise have.
Background
The parties contracted for the defendant, Wipro, to provide software services to the claimant, Drax.
The project was unsuccessful, and Drax terminated the contract for alleged repudiatory breaches by Wipro, claiming the following:
- £9.8 million for quality issues.
- £9.7 million for delay.
- £12 million for issues arising from termination.
- £31 million in respect of misrepresentation.
The contract contained a limitation of liability clause that stipulated: ‘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 […] 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’.
The claims in respect of the quality issues, the delay and the misrepresentation had arisen in the first year, when the charges were £7,671,118 – 150% of those charges amounts to approximately £11.5 million.
The preliminary issues
The following questions regarding the proper interpretation of the limitation clause were dealt with as preliminary issues:
- Did the limitation clause provide for a single aggregate cap in respect of Wipro’s liability or multiple caps with a separate limit applying to each claim?
- If there were multiple caps, what were the claims to which the caps applied?
Drax contended that:
- There were separate caps for each claim.
- ‘Claim’ in this context meant a ’cause of action’ (of which it claimed to have a total of 16) – or, alternatively, groups of causes of action, such as the four set out above (i.e., the quality claim, delay claim, termination claim and misrepresentation claim).
Wipro contended that:
- The limitation clause imposed a single cap for all claims.
- ‘Claim’ in this context meant total liability established.
The court’s decision
Principles of contractual interpretation
The court started by summarising the now-settled principles of contractual interpretation:
- The relevant words of the contract should be construed in the context and assessed considering:
- The natural and ordinary meaning of the provision.
- Any other relevant provisions of the contract.
- The overall purpose of the provision.
- The facts and circumstances known by the parties at the time.
- Commercial common sense.
- A court can only consider facts or circumstances known or reasonably available to both parties that existed at the time the contract was made.
- Where the parties have used unambiguous language, the court must apply it.
- Where the language is unclear, the court can depart from its natural meaning if the context suggests an alternative meaning is more appropriate.
- If there are two possible constructions, the court is entitled to prefer the construction that is consistent with business common sense.
- Where a party has agreed to a term that appears imprudent, it is not the court’s role to relieve that party from a bad bargain.
The court then considered recent case law on the interpretation of limitation clauses specifically, from which the following principles can be taken:
- There is no special rule of interpretation when dealing with exclusion or limitation clauses.
- Commercial parties are free to make their own bargains and allocate risks as they see fit.
- However, a vital part of the setting in which parties contract is the framework of rights and obligations established by common law.
- Clear words are necessary before a court will hold that a contract has taken away such valuable rights or remedies.
- In the absence of clear words, a court will assume that parties generally do not intend to derogate from the normal rights and obligations they would otherwise have.
- The strength of this assumption will vary depending on the circumstances of the case.
- This is not to be applied mechanistically wherever an ambiguity is identified in an exclusion clause. The court must still use all its tools of linguistic, contextual, purposive and commonsense analysis to discern what the clause really means.
Preliminary issue #1
The court found that ‘on balance’ the language overall favoured the interpretation that the limitation clause imposed a single cap for all claims.
- The wording of the first part of the clause – ‘The Supplier’s total liability to the Customer … shall be limited to’ (emphasis added) – strongly suggests that the cap was for all claims.
- If what follows the first part of the clause is a specific amount rather than a formula, that would clearly indicate a single cap.
- While reference to ‘the claim’ makes the position less clear, the court accepted Wipro’s argument that the absence of words like ‘for each claim’ after the word ‘liability’ also indicates a single cap.
The court found some support for this interpretation in a clause limiting liability for data protection claims, which clearly imposed a single cap, although it accepted that the language of that clause was more emphatic.
The court rejected Drax’s argument that imposing a single cap that would apply to any and all claims arising during the life of the contract made no business sense. The court noted that the contract’s termination provisions allowed for Drax to extricate itself from the contract, thereby limiting its losses. Further, while £11.5 million was approximately just one-third of the value of Drax’s claim, it was hardly insignificant.
Finally, and importantly, while the judge acknowledged that courts should have regard to the notion that parties do not easily give away rights they would otherwise have, he was of the view that that notion did not carry much weight in the circumstances of this case, where the relevant cap was a not insignificant £11.5 million.
Preliminary issue #2
The court rejected Drax’s contention that ‘claim’ was equivalent to ’cause of action’. The judge noted that if that were the case, the cap on the first 12 of Drax’s 16 causes of action would amount to £132 million. This would render the limitation clause practically entirely (or almost entirely) devoid of purpose.
The court also rejected Wipro’s interpretation of ‘claim’ as simply meaning ‘liability’. The normal meaning of the words is different, and there was nothing in the clause or otherwise that would justify treating them as meaning the same.
The court instead agreed with Drax’s alternative interpretation – namely, that ‘claim’ meant a group of causes of action, such as the four pleaded by Drax (i.e., the quality claim, delay claim, termination claim and misrepresentation claim). The judge noted that this interpretation corresponded to a commonsense view of what claims were being made in the case.
Takeaways
As the judge noted, the limitation clause was not well drafted, and its meaning was in the balance. In the absence of clear wording, one reasonably may have expected the court to have viewed Drax’s position more favourably. The fact that it did not – and was of the view that the notion that parties do not easily give away rights did not carry much weight in these circumstances – should serve as a warning to those engaged in negotiating and drafting exclusion and limitation clauses: Ambiguity will not necessarily be determined in favour of the party giving up its rights and remedies.
[1] [2023] EWHC 1342 (TCC).
Contributors
Victoria Barlow