Recent case offers lesson on liability limits

Parties to construction contracts in England and Wales have considerable freedom to limit or exclude altogether their liability for matters other than personal injuries or death, subject to certain common law and statutory constraints such as those imposed by the Unfair Contract Terms Act 1977 and section 6 of the Defective Premises Act 1972.

Such limitation and exclusion may take many forms. For example, parties may use clauses to restrict their liability for certain categories of loss.

These include indirect or consequential losses corresponding to the kind of special losses falling under the second part of the decision in the landmark Victorian case of Hadley v Baxendale (1854) 9 Exch 341.

Hadley drew a still-important distinction between losses arising in the usual course of things as the natural result of the breach of contract – called direct losses – and those that are only recoverable as damages if, on entering into the contract, the defaulting party had sufficient knowledge of the particular circumstances that might lead to such losses arising from the breach – referred to as indirect or special losses.

However, such clauses often define indirect loss more widely so as to draw in certain specified losses that, properly analysed, would be regarded as species of direct costs; for example, claims for many types of loss of profit.

Just as common are clauses that seek to limit a defaulting party's liability by reference to a stated maximum financial limit or cap. This cap may be expressed outright – for instance, up to a limit of so many million pounds – or as a percentage of the agreed contract sum, or otherwise.

Such clauses are frequently designed to dovetail with others in a contract, for example liquidated damages provisions stipulating daily or weekly rates for damages for delay-related losses up to a stated maximum.

Among other features, the cap might be expressed as applying to individual sections of works, or the works as a whole.

Alternatively, as in the case of option X18 of the NEC4 form, there might be individual liability cap options for several different types of loss or a total cap for all matters arising under the contract, other than any excluded items.

Accordingly, there are a number of moving parts to consider if one wishes to put in place effective limitations of liability. The recent case of Drax Energy Solutions Limited v Wipro Limited [2023] EWHC 1342 (TCC) is a good example of the kind of issues that might arise if the drafting involved is even a little off.

As the sums at stake in such cases are often considerable, much can turn on the particular phrasing employed and any linguistic quirks in the drafting.

Following a number of missed milestones and delayed deliveries – responsibility for which remains disputed – Drax terminated the MSA on 7 August 2019, alleging repudiatory breach of contract; that is, a breach that goes to the heart of the contract and entitles the innocent party to accept this breach and bring the contract to an end.

On 2 September 2021, Drax issued proceedings against Wipro, claiming damages totalling £31.6m for misrepresentation, quality issues, delay and losses following the termination. Wipro counterclaimed around £10m for wrongful termination, prolongation costs, unpaid invoices and termination.

In advance of the main trial, the court was asked to deal with two preliminary issues concerning the interpretation of a limitation of liability clause in the MSA, with profound implications for the maximum extent of any underlying liability that might ultimately be established at trial.

Clause 33.2 of the MSA stated: 'Subject to clauses 33.1, 33.3, 33.5 and 33.6, 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. If the claim arises in the first contract year, then the amount shall be calculated as 150% of an estimate of the charges paid and payable for a full twelve months.'

Further, clause 33.3 provided: 'The supplier's total aggregate liability arising out of or in relation to this agreement for any and all claims related to breach of any provision of clause 21 … shall in no event exceed 200% of the charges paid or payable in the preceding twelve months from the date the claim first arose or £20m (whichever is greater).'

Drax argued that clause 33.2 imposed a separate liability cap on each of its claims, such that Wipro's maximum liability under the MSA could be as much as £23m.

In contrast, Wipro contended that clause 33.2 imposed a single cap for all claims, and – given Drax's relevant claims had arisen within the first year of the contract and 150% of the charges paid or payable in the preceding 12 months totalled around £11.5m – that was its maximum possible liability.

In doing so, the judge drew on the key principles set out in Triple Point Technology v PTT [2021] AC 1148 and reasoned as follows.

• The language of clause 33.2, and specifically the presence of words such as 'limited to' and 'total liability' supported the interpretation that a single aggregate cap applied.
• Had the intention been to create a number of individual caps, the parties could have included express wording to that effect, but in this case they did not do so. The absence of the phrase 'for each claim' after the word 'liability' also supported this interpretation.
• Clause 33.3 contained the expression 'the claim first arose', which meant when the first of the claims first arose even though this was not explicitly stated. The same expression was contained in clause 33.2 and the same interpretation applied. This again supported the view that clause 33.2 imposed a single cap.
• Clause 33.2 was expressly stated to be 'subject to' clause 33.3. This allowed for a much greater cap for only one group of claims relating to data protection, the liability for which 'shall in no event exceed' £20m. It did not make sense for clause 33.2 to impose a single maximum cap of around £11.5m if it was 'subject to' clause 33.3, which allowed for a much greater cap for only one group of claims.

Given his finding that clause 33.2 imposed a single cap, it was not strictly necessary for the judge to consider what, had there been multiple caps, were each of Drax's claims to which these caps would apply. He nevertheless dealt with this point and concluded as follows.

• Drax's primary position that 'claim' in clause 33.2 of the MSA meant 'cause of action' was rejected. There was no support for this interpretation. Indeed, the consequences of Drax's proposed interpretation would have meant the total cap applicable to the MSA would have been around £132m, which would have made clause 33.2 void.
• Wipro's argument that 'claim' meant 'liability' was also rejected, as this would mean there could never be more than one operative claim. Here, there were clearly four separate claims, although the one for misrepresentation overlapped with the others in terms of the losses arising.

Where a party intends to put in place a single aggregate cap on liability across a number of potential claims, this needs to be clearly stated to avoid the kind of arguments that arose in this case.

Care should also be taken in distinguishing, as necessary, between claims, causes of action and liabilities when embarking on any bespoke drafting.

The courts will not be sympathetic to parties that fail to draft their contracts with sufficient specificity, especially in cases such as this where the parties are large corporations and had sought professional advice when drafting their contract.

Another issue lawyers frequently encounter arises in relation to those limitation and exclusion clauses that seek to restrict liability by reference to certain types of loss. Contrary to popular belief, most losses in commercial contracts fall under the usual, predictable outcome of a breach, and as such are classed as direct.

A common example is claims for many types of loss of profit, which are often wrongly considered to be indirect losses. The effect of this popular misconception can be compounded by another common misunderstanding as to what the term 'consequential' loss is taken to mean in a legal context.

At law, the term is generally held to be synonymous with 'indirect' loss, with the result that the category of excluded losses might be far narrower than perhaps intended.

Best practice drafting to avoid pitfalls such as these might involve the following:

• listing the specific heads of excluded loss, such as loss of profit or loss of use, then adding indirect loss as a further category to the list
• using clear, express language if one wishes to exclude a particular category of loss, rather than seeking to obscure it in vague terms that may not mean what one thinks
• if one wishes to be able to recover a specific type of loss, considering the inclusion of a clause expressly acknowledging that the parties are aware of the potential loss and that it is to be recoverable.