Unclear liability clause enforceable
ROYAL DEVON AND EXETER NHS FOUNDATION TRUST v ATOS [2017]
In this case the Court considered whether an unclear limitation of liability clause was enforceable and also whether a claim for wasted expenditure amounted to a claim for loss of profit or revenue which was excluded under the contract.
Facts:
- The Royal Devon and Exeter NHS Foundation Trust (“T”) entered into a contract with ATOS (“A”) for the provision of various services relating to health records (“Contract”). The Contract price was almost exactly £5million and the term was 5 years.
- After several years of being dissatisfied with the performance of the system used to provide the services, T gave notice to A to end the Contract and claimed compensation approaching £7.9million.
- There were two initial issues to be decided by the Court:
- whether a claim by T for so-called ‘wasted expenditure’ was precluded from being claimed by the wording of the Contract; and
- what the impact of the limitation of liability clause was on the claim.
- The Contract contained a number of limitations on and exclusions from liability:
- clause 8.1.2(b): “the aggregate liability of either party … for all Defaults, [other than for damage to tangible property], shall not exceed the amount stated in Schedule G …”;
- clause 8.1.3(a): “… 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 …”;
- clause 8.1.3(b): “… 8.1.3(a) shall not be taken as excluding or limiting [T’s] right … to claim for … costs and expenses which would not otherwise have been incurred …”;
- Schedule G provided: “9.2 The aggregate liability of [A] in accordance with sub-clause 8.1.2(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”.
- T’s claim for damages included nearly £2million in respect of “costs of internal IT, projects and health records staff at the Trust [who worked on the project] who would otherwise have been employed in work of benefit to the Trust”.
- A submitted that claims for wasted employee costs were properly framed as ‘loss of revenue’ ie for revenue which would have been generated by T’s employees if they had not been diverted from their normal duties by A's breach. This line of reasoning followed the case of Aerospace Publishing v Thames Water Utilities [2007]. Interestingly, back in 2007 when commenting on this case, we said, “One point worthy of note for those involved in drafting or negotiating contracts. Any claim for wasted management time seemingly has to be pleaded as a claim for loss of revenue. As such a typical contractual exclusion of liability for loss of revenue may therefore preclude such a claim. Customers in particular should therefore consider whether to insist upon the incorporation of an express carve out which makes it clear that any loss of revenue exclusion does not preclude recovery for wasted management time”.
- It was almost inevitable that a Court would, at some point, be asked to decide on the impact of just such an exclusion in relation to a claim for wasted management time. In the event it has taken a full 10 years before the Courts were asked to consider the issue.
Decision:
Limitation of liability
- The liability clause established two distinct liability limits - which one applied depended on the precise point at which the claim (or multiple claims) arose. Both parties agreed that ‘arising’ meant the date on which the relevant default occurred and not the point in time when the claim was actually made.
- The Court reviewed the potential ambiguity inherent in paragraph 9.2.2 because of the reference to both ‘claims’ and ‘claim’. It resolved this by stating that all references to ‘claim’ should be interpreted in the singular.
- Whether the mechanism set out in the Contract was intended to establish one, two or multiple caps was also looked at. The Court decided in favour of A by finding that the introductory words in paragraph 9.2, “aggregate liability … shall not exceed” indicated that the intention was to limit A’s total liability. Those words read together with the reference to “or” between paragraphs 9.2.1 and 9.2.2 showed that the parties intended to agree one cap that would apply, the level of which would be determined in accordance with the sub-paragraph into which the relevant default fell.
- The judge said that if paragraph 9.2 was intended to provide for multiple caps where there were multiple claims, both sub-paragraphs would have to be read on that basis. That could lead to a liability cap that was a multiple of the Total Contract Price if there were several defaults during the relevant period.
- The Court also considered a scenario involving two breaches, one occurring during the first 12 months and one occurring 12 months and 1 day after the Contract was entered into. If interpreted so that each sub-paragraph was a separate cap to apply one on top of the other, it was acknowledged that the aggregate level of the cap would approach double the Total Contract Price. The Court thought it was very unlikely that the parties would have contemplated or agreed to such a term because the potential level of the cap would render it, “devoid of any real purpose”.
- It was therefore decided that the liability limit mechanism established one aggregate cap on A’s liability for all defaults (excluding claims for personal injury or property damage). The level of the cap was determined by the timing of the first default in question:
- if a default occurred in the first 12 months of the Contract, the level of the cap was the Total Contract Price;
- if no Default occurred during the first 12 months, the level of the cap became the total Contract Charges paid in the 12 month period prior to the first default.
Wasted expenditure
- The Court referred to some general principles about making a claim for wasted expenditure:
- the general rule is that damages are to compensate for loss or injury. In a claim for breach of contract, the damages should be to place the injured party in the position it would have been in if the contract had been performed;
- the amount of damages awarded should reflect the value of the contractual bargain which the injured party has been deprived of as a result of the defaulting party's breach;
- in a commercial contract, the value of such damages is usually measured by reference to the additional amount of money that the injured party would need to achieve the financial value of the expected contractual benefit, such as the amount of lost profit (‘the expectation basis’);
- an injured party may choose to claim damages on an alternative basis by reference to costs incurred when relying on the defaulting party's promise, such as sums paid to the defaulting party or other wasted expenditure (‘the reliance basis’).
- The Court stated that a claim for wasted costs can be made on the reliance basis.
- A acknowledged that it would have been possible for T to have claimed damages based on costs and expenses that were incurred as a result of its breach as these were expressly preserved by clause 8.1.3(b). However, T chose not to pursue its claims on that ‘expectation’ basis.
- The Court distinguished the Aerospace case on the basis that it and other similar decisions were concerned with the costs of diverted staff resources incurred after and as a consequence of the relevant breach in order to remedy the damage suffered. As such, they were properly characterised as ‘lost revenues’ caused by the breach (and would presumably be precluded by an exclusion of loss of revenue). The Court said they can be differentiated from the internal staff costs in this case, which form part of the costs incurred in performing the Contract and should be treated in the same way as other wasted costs.
- T’s claim was therefore not excluded by the exclusion of liability for loss of revenue.
Points to note:
- In relation to the limitation of liability aspect, clauses with split limits such as these are incredibly difficult to craft with absolute precision since they do raise a number of questions. This part of the judgment reflects a trend evident from a number of recent cases which have tended to give the benefit of the doubt to clauses limiting liability. The Courts now seem to regard such clauses as having ‘a reasonable and commercially sensible effect’.
- This position on liability caps is in stark contrast to some of the decisions which appeared 25 years or so ago which viewed limits of liability with great suspicion and which took advantage of any weaknesses in the drafting to reduce their impact. On that basis, the outcome of this case will be welcomed by suppliers and service providers but query whether another Court would be quite so lenient and it remains to be seen whether the judgment will be appealed.
- The conclusion on claiming wasted expenditure is a welcome clarification and, frankly, not a huge surprise since it seems somewhat artificial to regard wasted expenditure as ‘revenue’.
- This decision was overturned by the Court of Appeal at the end of 2017.