Are legal costs within a contractual cap on liability?
Equitix Biomass v Fox (High Court) [2021]
Legal costs are always a critical factor in the decision whether or not to litigate. It is therefore, perhaps surprising that, to our knowledge, no case has, until now, ever considered the question as to whether a limit of liability applies only to the damages awarded or includes any award of legal costs.
Facts:
The High Court was asked to consider whether a contractual cap on liability for warranty claims under a share purchase agreement (SPA) applied to damages only, or whether it also captured other ancillary liabilities, including an award of interest and costs arising from a warranty claim. The £11million contractual cap was expressed as applying to liability "in respect of" any claim under the SPA for breach of warranty. The seller submitted that this imposed an aggregate financial limit which included not just damages but also interest and costs. It argued that the parties could not be taken to have intended that those ancillary obligations would remain at large and uncapped, and that such an interpretation was inconsistent with the broad words "in respect of".
The buyer contended that the language, properly construed, applied to damages only. A ‘claim’ was defined as "any claim under [the SPA] for breach of the Warranties".
Decision:
The court preferred the buyer's construction. The limitation applied "in respect of" a "claim under [the SPA]" and this did not extend to claims for interest or costs, the award of which would be made pursuant to the court's jurisdiction to make ancillary orders, rather being made under the SPA itself. Although the phrase "in respect of" was wide, the court considered that it was not as broad as the phrase "arising out of or in connection with", and it would have expected interest and costs to be mentioned expressly in the liability cap if the parties had intended that important litigation rights were being foregone. Rather unhelpfully, the court did not go on to offer any guidance as to whether the outcome would have been any different had the limitation used the "arising out of or in connection with" phraseology.
Points to Note:
- Contracts use a range of phraseology to limit liability as the following phrases taken from widely used public sector contracts published by Crown Commercial Services illustrate.
- • “liability in each Contract Year under this Contract (whether in tort, contract or otherwise) [shall not exceed]” [DOS 5 Framework]. This is probably the narrowest limitation (in the sense of being very unlikely to include any award of legal fees) because of the ‘under this Contract’ language. Having said that, use of the words ‘or otherwise’ does leave room for some argument;
- • “each Party's total liability for Defaults under or in connection with this Call-Off Contract [shall not exceed]” [G Cloud 12]. This contract follows quite closely the wording commented on by the judge as being a potentially broader formulation. How the phrase would be interpreted by a court is, however, still open to question. Our suspicion is that a court would still be more likely to say that any recovery of legal costs was additional to the cap;
- • “the Supplier's aggregate liability in respect of all other Losses incurred by the Authority under or in connection with this Agreement as a result of Defaults by the Supplier shall in no event exceed…” [CCS Model Services Contract]. Again, a potentially broad limitation but with an interesting twist. The CCS Model Services Contract explicitly defines ‘Losses’ as “losses, liabilities, damages, costs and expenses including legal fees on a solicitor/client basis) and disbursements and costs of investigation, litigation, settlement, judgment interest and penalties whether arising in contract, tort (including negligence), breach of statutory duty or otherwise”. By including the proverbial ‘kitchen sink’ the CCS may have inadvertently shot themselves in the foot, since there would seem to be little doubt that any liability for legal fees and interest would be within the ambit of the cap as formulated;
- This judgment may cause both suppliers and buyers to scrutinise the exact wording of their limitations more carefully. Query whether drafters will start to expressly include / exclude any award of or liability for legal costs from the liability cap? Query also whether buyers would accept any suggestion that an award of legal costs should be within a contractual cap on liability?