A decision of the High Court of the United Kingdom earlier this year is an important reminder that the limitation of liability clause remains a crucial piece of any high value or complex contractual arrangement. The importance of such a clause seeking to restrict a party’s financial exposure in the event of a lawsuit or other claim is that, when enforceable, it can “cap” the amount of potential damages incurred. The issue considered in the High Court’s decision was whether a party could rely on a single liability cap rather than being subject to multiple liability caps for multiple claims. The decision hinged largely on the wording of the contract clauses and serves to remind us of key considerations when drafting limitation of liability clauses.
Drax Energy Solutions Ltd v Wipro Ltd [2023] EWHC 1342 (TCC) is of particular interest to IT lawyers as it discusses the construction of liability caps in IT contracts, specifically with regard to caps that are tied to the fees over a rolling period.
Background
In Drax v Wipro, Wipro was engaged by Drax to provide a wide range of software services under a master services agreement (MSA). The services themselves were provided by Wipro pursuant to six separate statements of work (SOWs) that were governed by the MSA. The SOWs had varying durations between three to five years, and with values ranging from £250,000 to £4.8 million.
The project was not a success, and the MSA was terminated by Drax for repudiatory breaches on the part of Wipro. Drax’s claim against Wipro was substantial, and covered misrepresentation claims, quality of work claims, delay claims and claims relating to termination—the largest quantified claim was for approximately £31 million. Wipro issued a counterclaim of around £10 million for damages for wrongful termination, prolongation costs, unpaid invoices and termination claims.
A single aggregate cap, or multiple caps with separate financial limits?
The High Court considered whether the limitation of liability clause in the MSA provided for a single aggregate cap that applied to Wipro’s liability for Drax’s claims, or whether there were multiple caps with a separate financial limit applying to each of Drax’s claims.
In making its determination, the High Court carefully considered the various components of the limitation of liability clause. The clause set out a type of liability cap commonly used in IT contracts where the cap on general damages would flex up or down depending on the date on which the claim arose. The clause also contained a “super cap” for specific breaches of the parties’ data protection obligations set out in a specific clause of the MSA.
Drax argued that the clause imposed separate liability caps on each of its numerous claims, whereas Wipro’s position was that the clause imposed a single cap for all claims.
The High Court agreed with Wipro and found that a single aggregate liability cap applied to Wipro’s liability. The High Court criticized the drafting of the contract clauses as not being well drafted, and based its decision on the following considerations:
- Specific wording used: Using the wording “limited to” and “total liability” indicated that a single cap applied. There was no explicit use of the words “per claim” or “per event” which would have supported Drax’s argument.
- Inconsistency of wording used: A distinction was made between the data protection super cap stating that Wipro’s “total aggregate liability” for “any and all claims” relating to a breach of the data protection clause was capped at a specified level, and the general damages cap which did not include references to “aggregate” or “for all and any claims.” Here, the High Court stated that this absent wording suggests that it is not clear that a single cap applies for all claims contemplated by the limitation of liability clause as a whole.
- Conflicting caps: The general damages cap was stated as being “subject to” the data protection super cap. Here, as the super cap was higher than the general damages cap the High Court stated that it did not make sense to say that the general damages cap was subject to the data protection super cap.
- Disregard of commercial considerations: The High Court did not consider that there are any commercial considerations which weigh against the interpretive outcome suggested by the language of the limitation of liability clause.
Lessons learnt
The Drax v Wipro judgment shows that drafters of liability caps should exercise caution, and above all, be consistent and specific with the language used, to ensure that there is very limited room for ambiguity with such provisions. In particular where the construct of having liability caps tied to fees over a rolling period is used, the following considerations should be taken into account when drafting and negotiating liability caps:
- Where a cap flexes during the term of the contract, it is critical to set out specifically when any rolling periods (for example, a number of months) commence in relation to when a claim arises.
- Language that is clear and consistent across all sub-clauses must be used.
- Avoid conflicts with other liability provisions that deal with specific types of losses, or inadvertently including overlapping caps where a single aggregate cap was intended.
- Consider using fixed liability caps to avoid argument when calculating percentages of the fees paid and/or payable with reference to a rolling period.