Exclusion and Limitation of Liability Provisions: New TCC Ruling on Categorisation of Losses and Complex Caps

12 September 2017

Rachel Glass

The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Limited [2017] EWHC 2197 (TCC)

The English Technology and Construction Court has examined an unusual argument concerning the meaning of a clause purporting to exclude the recovery of lost profits, lost revenues and lost savings. It has also considered the enforceability of an ambiguous two-tier aggregate cap provision. While the ruling was given on preliminary issues only and the balance of the case remains to be decided, the judgment provides a rare ruling on the court’s approach to damages in the context of a non-profit generating contract, and is a useful reminder of the need for careful drafting in constructing multi-level caps on liability. 

Facts

The Trust engaged ATOS under an IT project contract, the main obligation under which was to implement an Electronic Medical Records (EMR) system. The Trust was unhappy with the system delivered, and terminated three years into the contract alleging a material breach by ATOS on the basis that it had failed to remedy various defects. It subsequently brought a claim for damages of c.£7.9m.  

The issues in dispute between the parties included the meaning and effect of the limitation and exclusion provisions in the contract, which the judgment deals with by way of preliminary issue. The judgment assumes – for the purposes only of deciding these issues – that the Trust will be able in due course to establish its case on both liability and quantum at the final trial.  

The Clauses and the Parties’ Arguments

Exclusion of Liability 

The project contract’s exclusion clause followed a common formulation, as follows: 

8.1.3

(a) Without prejudice to the generality of sub-clause 8.1.1 neither party shall be liable to the other for:

(i) loss of profits, or of business, or of revenue, or of goodwill, or of anticipated savings; and/or
(ii) indirect or consequential loss or damage; and/or
(iii) specific performance of the Contract unless expressly agreed by the parties to be applicable in schedule G
." 

The calculation of damages sought by the Trust was based on its costs incurred in connection with the project, and included sums paid to ATOS, the cost of purchase of hardware and software in connection with the project, procurement costs, and costs of internal IT and specialist contractors. 

ATOS argued that – notwithstanding the Trust's description of its losses - the Trust’s claims (aside from its mitigation costs) should properly be characterised as loss of revenue, profits or other benefits which would have defrayed its project costs; and that the language “loss of profits, or of business, or of revenue, or of goodwill, or of anticipated savings” therefore prevented the Trust from recovering those sums. 

ATOS' argument was a technical one, as follows: 

  • Damages for breach of contract are designed to put the innocent party into the position it would have been in, had the contract been properly performed.  The innocent party frequently seeks damages by reference to the profit, revenues or anticipated savings that it would have made from the contract.  This is often known as “expectation loss” or “loss of benefit”.
  • However, the Trust has used a well-established alternative approach of claiming damages based on its amount of wasted costs.  This is often known as “reliance loss”.  
  • The legal theory underpinning the alternative approaches is that expectation loss and reliance loss are not in fact different measures of damages for breach of contract, rather that they are two ways of measuring the same loss.  Under that theory, a claim for wasted costs is permissible in connection with a breach of contract claim because there is a (rebuttable) presumption that the innocent party must have expected to recover from the contract at least as much benefit as it invested into it (the "Presumption").
  • ATOS argued that this Presumption means that the Trust's claim for wasted costs should properly be characterised as a claim for loss of profit, business or revenue.  

The Cap

9.1 The aggregate liability of [ATOS] in accordance with sub-clause 8.1.2 paragraph (a) shall not exceed the sum of two million pounds.
9.2 The aggregate liability of [ATOS] 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." (Bird & Bird emphasis)

The Trust submitted that the wording of clause 9.2.2 was insufficiently clear and therefore unenforceable. It argued that it was not possible to identify to what the parties were referring as “that claim”, and that it was not clear whether two caps existed (under 9.2.1 and 9.2.2 respectively) for the lifetime of the contract, or one. Both the Trust and ATOS agreed however that the references to “claims” should be construed as references to “Defaults”, a term defined in the contract. 

The Decision 

Part 1: The Exclusion Clause and Wasted Expenditure 

The trial judge, Mrs Justice O'Farrell, ruled that ATOS had not understood the Presumption correctly.  ATOS had wrongly assumed that the Trust's contractual benefit must represent profits, revenues or savings; and noted that in most commercial cases, there would indeed be an expected financial benefit from the contract that would defray the costs incurred. However, the Presumption applied equally to the non-monetary contractual benefit that the Trust expected to receive from the project: in this case, the Presumption was that the EMR was worth (in non-financial terms) at least the money spent.

In other words, the Trust was expecting its expenditure would be repaid in non-financial advantages that it expected to receive from the functionality provided by the EMR system.  

The Presumption could not, therefore, in this instance help ATOS to argue that the Trust's claim for wasted costs should properly be treated as a claim for loss of profits, revenue or savings. On that basis, the contractual exclusion of ATOS' liability for these types of losses did not affect the Trust's claim.  

Part 2: The Enforceability of the Cap 

The judgment reminds parties that when interpreting limitation of liability clauses, provided the words are clear, the court will give effect to the commercial allocation of risk in the contract; but the words used must be clear and unambiguous in order to limit liability. The court will also be reluctant to find that a contract clause is void for uncertainty, and will strive to give it meaning. 

In this case, the limitation language could be read with sufficient clarity. The language of clause 9.2.2 could be made sense of by reading the references to “claims” in the singular. Both parties had already accepted prior to the hearing that “claim” should itself be taken as a reference to a Default (as defined in the contract). 

As regards whether the parties intended there to be one or two caps, the judge found that reading the provision as imposing multiple caps, or caps which were multiples of the contract price, would render it devoid of real purpose and was an uncommercial interpretation. The court is entitled, when faced with an interpretation that makes commercial sense and one which does not, to adopt the commercially reasonable reading. The cap was held to be a single aggregate cap, and the level of the cap was to be determined by the date of the first Default relied upon by the innocent party. 

Key Practice Points 

The judgment does not affect the law on whether damages on the “reliance” basis are available to a claimant. It certainly does not decide that when parties agree to exclude the recovery of lost profits, revenues or anticipated savings they also are agreeing to exclude recovery of wasted costs. However, the reasoning in the judgment is carefully tied to the not-for-profit nature of the contract in question.  It leaves open the question of whether ATOS' argument could succeed in relation to a profit/revenue generating contract. 

The case is also a useful reminder that the courts will be slow to treat a limitation of liability or exclusion clause as unenforceable for uncertainty; and as shown by this judgment, a court will go to some pains to interpret a potentially ambiguous clause and give it a commercially sensible meaning. However, each contract will be interpreted on its own language and in its own context; it therefore remains important to assess at the time of drafting whether the clause is clear enough to be operated in practice without this type of dispute arising. 

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