Get your thinking cap on: liability caps and the importance of clear contract drafting
Liability caps in contracts are important when it comes to mitigating risk, and it's even more important that they are clear and free of ambiguity. Careful thought should be given to the wording to make sure the clause clearly reflects the intention.
The recent case of Drax Energy Solutions Limited v Wipro Limited  EWHC 1342 (TCC) highlighted the importance of clear drafting in liability caps. The Technology and Construction Court considered the specific wording of a liability cap clause in an IT systems master services agreement (MSA) and whether it was a single aggregate liability cap for all claims or a per-claim liability cap.
Depending on the interpretation, the liability would be capped at £11.5 million or potentially £132 million. Drax’s claim was for around £31 million, so the amount of the liability cap would clearly make a significant difference to recovery.
The dispute arose out of an MSA for the provision of an IT system by Wipro to Drax, including the building, testing, and implementation of customer relationship software. The project was delayed, which eventually led to Drax terminating the contract and suing Wipro for damages. The main issue for the court to consider was whether the wording used in the liability cap meant there was a single aggregate cap applying to all claims by Drax or separate caps that could apply to each of the claims made by Drax.
The liability clause said:
“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…”.
Wipro claimed there was a single aggregate cap as the clause referred to its “total liability”. Drax disagreed and claimed there was a per-claim cap because the clause referred to a 12-month period before the “claim first arose” and did not use the word “aggregate” to indicate it was a total, single cap.
What was decided?
The court found in favour of Wipro and ruled that there was a single aggregate liability cap at £11.5 million (being 150% of the relevant 12 months’ charges).
The court considered the natural and ordinary meaning of the language used first. The use of the words “total liability” and the absence of wording referring to “each” claim pointed in favour of a single aggregate cap. However, considerable weight was given to a data protection liability cap elsewhere in the same contract. The data protection clause had very similar wording but referred to “total aggregate liability” and to the charges in the 12 months “from the date the claim first arose”. There was a common understanding between the parties that the data protection clause imposed a single aggregate cap for all claims. The court applied that understanding in interpreting the disputed cap.
Whilst the court favoured a single aggregate liability cap interpretation, it stated both liability cap clauses were poorly drafted, and it relied heavily on the understanding between the parties in relation to the data protection clause to inform its decision.
It may seem the meaning of words or phrases used in any contractual clause is obvious and achieves your intended effect, but care should be taken to make sure. Unclear drafting can easily make a significant difference, as the Wipro case demonstrates.
If you want an overall single cap for all claims, the court will give considerable weight to the use of the word “aggregate”, although that was absent in the disputed Wipro clause. Reference to liability being capped for “any and all claims” will also help. (The court can also look at the commercial context in working out the meaning of a cap, so, for example, by asking whether a particular interpretation would make the cap so high as to make it meaningless.)
Where multiple caps are preferred or agreed, avoid linking the cap to “each claim”: “claim” is open to various interpretations. Consider instead linking the cap to liability arising from an individual breach or set of circumstances. Alternatively, consider a simple overall monetary cap. In Wipro, if the clause had capped total aggregate liability at a stated £11.5 million, there would have been no argument on the amount.
Make sure clauses on liability are consistent or intended differences are made clear. In Wipro the court looked at the drafting in a different liability cap in the same contract to help work out what was intended by the parties in relation to the disputed cap.