Interpretation of liability clause reconsidered
ROYAL DEVON AND EXETER NHS FOUNDATION TRUST v ATOS (CA) [2017]
The Court of Appeal (“CA”) reconsidered the interpretation of a clause seeking to limit liability and reversed the original Court’s decision. It found that a contractor's liability clause imposed two separate caps on liability rather than a single limit.
Facts:
- The facts are as outlined in our earlier case report but in summary The Royal Devon and Exeter NHS Foundation Trust (“T”) entered into a contract with ATOS (“A”) in November 2011 for the provision of various services relating to health records (“Contract”). The price was almost exactly £5million (“Total Contract Price”) and the term was 5 years. After several years of being dissatisfied with the performance of the computer system used to provide the services, T gave notice to A to end the Contract and claimed compensation approaching £7.9million. The year one payment was due to be around £2.8million with payments each year thereafter of about £500,000.
- The key wording was:
“9.2 The aggregate liability of the Contractor … 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; 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”.
- Interestingly, both parties agreed that the phrase “any claim arising" in clause 9.2.1 meant ‘any default occurring’. The parties also agreed that the words “claims arising” at the beginning of clause 9.2.2 meant ‘defaults occurring’. It was therefore the timing of the default in question which was critical not the time when any claim was formally notified, although A sought to argue that the final reference to ‘claim’ at the end of clause 9.2.2 meant the date the claim was actually notified. The CA dismissed that argument and said that the reference was also to when the default in question occurred.
- The original Court found that the Contract imposed a single cap on liability, which, depending on the circumstances, would be either that set out in clause 9.2.1 or that set out in clause 9.2.2. The judge said, “In my judgment, clause 9.2 imposes one aggregate cap on the liability of [A] for all defaults. The level of the cap is determined by the timing of the first default. If a default occurs in the first twelve months of the Contract, the level of the cap is the Total Contract Price. If no default occurs during the first twelve months of the Contract, the level of the cap is the total Contract Charges paid in a twelve month period prior to the first default”.
- T appealed. It submitted that clause 9.2 imposed two caps, the first in respect of defaults occurring in the first 12 months of the Contract and the second in respect of subsequent defaults.
Decision:
- The appeal was allowed. The CA found that the cap in clause 9.2 pointed emphatically towards two separate caps:
- for any default(s) occurring in the first year of the Contract, A's liability was capped at the Total Contract Price;
- for any default(s) occurring in subsequent years, A's liability was capped at a lower sum, namely the amount of the Contract Charges paid in the previous 12 months.
- If there were defaults in both periods, A's liability for defaults in the first year was capped at the Total Contract Price and for subsequent defaults it was capped at the amount of the Contract Charges paid in the relevant 12 month period. This interpretation was said to be consistent with commercial common sense. A was doing high value work in the first year of the Contract, when defaults could have very expensive consequences. It was doing lower value work in subsequent years, when according to the judges, the consequences of default would be less expensive.
- The CA placed less emphasis on the phrase ‘aggregate liability’ saying that this could perfectly well be referring to an aggregate of the caps under clauses 9.2.1 and 9.2.2. It also refused to give significance to the use of ‘or’ at the end of clause 9.2.1, saying that it did not necessarily mean two discrete alternatives which could not both apply. Instead, the word was being used to signify two scenarios, both of which could apply. The two alternatives were said to be mutually exclusive only in the sense that they referred to two discrete periods of time which did not overlap.
Points to note:
- In our comment on the original decision we said, “query whether another Court would be quite so lenient and it remains to be seen whether the judgment will be appealed ”. Well it was appealed and the CA was not so lenient!
- As a result of the CA’s decision, theoretically A could be liable for damages totalling double the Total Contract Price. Whereas the original Court judge said that such an interpretation would render the limitation “devoid of any real purpose”, the CA had no such problem and viewed its interpretation as being fully in accordance with business common sense.
- Both parties were said to be ‘well-resourced, commercial organisations with ready access to legal advice’.The relevant wording was, unlike much of the remainder of the Contract, specifically negotiated between the parties and was not part of the standard form contract. These are typically factors which affect the willingness of the Courts to intervene and depart from just interpreting the express words used in the written contract.
- We believe the CA’s decision is more consistent with the words that the parties had actually used and on that basis is to be welcomed. However, it does highlight the issues which arise in trying to craft a limitation of liability of this type. The lead judge in the CA described the clause as ‘a homemade clause’ which was a bit harsh! It clearly was not perfect but how many can claim their drafting is perfect?
- Both Courts seemed to envisage that all defaults are easily identified as to exactly when they occurred and they are self-contained. They do not appear to foresee any possibility that defaults can be multiple and ongoing, potentially spanning two or more liability periods.
- We also fail to see quite why both Courts dismissed the notion that the clauses created multiple caps rather than just two. It seems to us that there was certainly an argument that the wording actually created caps for each of the five years of the Contract term.