You see clauses that set caps limiting liability for poor performance everywhere. They are usually hidden away in the small print at the end of a contract.
Here is a short quiz about a clause in a Master Supply Contract where IT services were called off on Statements of Work. The supplier’s liability was tied to a formula based on its charges for the services. That is very common.
Let’s hypothetically say that the supplier invoiced the customer £7.66m in the last year. What does this clause mean?
"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 (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."
Answer:
A. No idea what it means!
B. Whatever the supplier did wrong, it can never get sued for more than one and half times what it invoiced the customer in the last year. So, in this case, there is one cap and the supplier’s total liability can never exceed £11.5m.
C. For every individual claim the customer makes, there is a limit of £11.5m. So, in this case, there are multiple caps and the supplier’s total liability is unpredictable as it depends on how many things it did wrong which result in separate claims.
Honestly, this is not a trick question and those are not trick answers. That innocuous little clause ended up in a major court case in which millions were at stake when the contract ended in tears and the customer sued the supplier, making multiple claims of breach of contract for a lot more than £11.5m.
This was essentially the matter at hand in the case of Drax Energy Solutions Ltd v Wipro Ltd [2023] EWHC 1342 (TCC).
We were nowhere near it. We did not act for the customer or the supplier, or in the High Court case. We had no dog in this fight.
If you answered A, you get a silver star. If you answered B, you get a gold star. If you answered C, see me.
This case attracted quite a lot of comments from legal commentators and nearly all of them say the clause was “poorly drafted” or even “incoherent”. That is a bit cruel. The eye could easily pass over the wording assuming it meant either B or C, and you might be forgiven for that tired moment, having already ploughed through 30 clauses before even getting to the Schedules.
A lot of lawyer’s time was spent arguing for either B or C. Naturally, the supplier was all in for B and the customer had no doubt at all that C applied. But the fact that a High Court judge had to unpick the arguments and choose between the two contenders in a long judgment means that answer A is still a shrewd answer.
This case was all about how to interpret words in a contract. The starting point was the natural and ordinary meaning of the language in the clause. The judge eventually decided, based on the wording of the clause itself, an interpretation as a single cap was, on balance, what was meant and what the parties had agreed (whether they knew it or not).
What about commercial common sense? Why on earth would the customer have agreed to such a low liability limit? Strike it out, because if anyone thought about what it might mean they would not have agreed to it. Tough luck with that one. The basic approach the courts take is that the parties are free to make their own bargains, even bad ones. The fact that the customer had very limited protection was not the same as saying that the limitation made no commercial sense.
Have a guess at the missing words which would have avoided the court case.
Hint: if you add “for any and all claims” or “for each claim” in the right place, you win the prize, depending of course on whether you are the supplier or the customer.
The lesson is that great care is needed when considering formula-based liability caps.
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