Contractual interpretation / limitation of liability

How will the Court interpret limitation of liability clauses?

The facts

An NHS Trust and ATOS entered into a contract for ATOS to provide an IT system which would allow for electronic document management and scanning.  The NHS Trust later terminated the contract, alleging defects with the system which ATOS had failed to remedy.  The NHS Trust alleged that the limitation of liability clause contained in the contract was unenforceable, as it was ambiguous or uncertain. 

The relevant clause stated:

"9.2 The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:

9.2.1  for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price as set out in section 1.1; or

9.2.2  for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim."

The High Court ruled in ATOS' favour and dismissed the NHS Trust's claim that paragraph 9.2 was not capable of being construed.  The Court also concluded that the commercially sensible interpretation of the clause was to impose a single cap on liability.  This cap could be either the cap in 9.2.1 or the cap in 9.2.2 depending on the circumstances, ie when the claim arose.

The NHS Trust appealed the second point, arguing that paragraph 9.2 in fact imposed two caps.

The decision

The Court of Appeal found in favour of the NHS Trust and allowed the appeal.  The Court stated that clause 9.2 contained two separate caps because:

• although the High Court considered the phrase "aggregate liability" pointed towards one cap on liability rather than two, this was not necessarily the case.It could also mean the aggregate of the sums under paragraphs 9.2.1 and 9.2.2;
• the word "or" at the end of paragraph 9.2.1 could be read disjunctively or conjunctively;
• the language of the clause strongly emphasised that there were two separate caps.For any default occurring in the first year of the contract, ATOS' liability was capped at the contract sum.For any default after that, ATOS' liability was capped at the amount of contract charges paid in the previous 12 months.If there were defaults in each period, then ATOS' liability for the default in the first 12 months was capped at the contract price, and for subsequent defaults it was capped at the amount of contract charges paid in the relevant 12 month period;
• this interpretation made the most sense commercially.ATOS' work in the first 12 months was high value with potentially very expensive consequences.Its work after that period for the NHS Trust was lower value work with less expensive potential consequences.

Why is this important?

This case demonstrates how precisely limitation clauses must be drafted.  The dispute arose from the lack of clarity in one paragraph of the clause which allowed for multiple interpretations.

It also highlights the risk of leaving the Court to interpret a clause by reference to commercial sense.  The High Court came to its decision because it believed that imposing one cap made the most commercial sense.  However, the Court of Appeal came to the opposite opinion by applying what it considered to be the clear direction of the drafting and an outcome it said was consistent with commercial common sense.

Any practical tips?

Be extra careful with drafting exclusion and limitation clauses! 

Limitation clauses that deal with aggregate financial caps, different caps for different claims, the timing of when claims "arise" and connected claims are often problematic.  Consider stress-testing key clauses with hypothetical disputes and claims to see how they operate in practice.  If in any doubt, seek a legal colleague's opinion or specific advice…it could prove (very) expensive not to.