Courts Show Increased Willingness to Give 'Common Sense' Interpretation to Liability Clauses - But Which One?
When there is a dispute over a commercial contract, inevitably the discussion centres around how much one party can claim against the alleged wrongdoer...
...and whether the exclusion or limitation of liability clause cuts down or cuts out the wrongdoer's liability.
There have been many cases on this issue. The recent Court of Appeal case of The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd has given more food for thought. It has progressed a recent trend to look to the intended commercial common sense meaning that the parties would have intended, rather than other special rules of interpretation that used to apply to liability clauses; however, the High Court and Court of Appeal came to different conclusions on what had been intended.
Background Law on Liability Clauses
In order to be enforceable, a liability clause has to be:
- Properly incorporated as a term in the contract
- Sufficient clear and unambiguous to exclude or limit the relevant liability, so it is not void for uncertainty
- "Reasonable", if the Unfair Contract Terms Act applies
Some types of liability cannot be excluded or limited at all, such as: fraud; death or personal injury caused by negligence; or breach of statutory condition to have title to supply goods.
Other rules of interpretation have traditionally applied to liability clauses, such as liability for negligence only being able to be limited or excluded if the word "negligence" is expressly used in the clause, and the wording being interpreted strictly against the party looking to rely on the clause (the contra proferentum rule). These strict rules have been softened by court judgments in recent months, leading to a general position that courts will give effect to a commercial common sense interpretation of the clause if the parties are of equal bargaining power.
Facts
In this latest case, ATOS supplied the Royal Devon and Exeter NHS Foundation Trust with an electronic medical records (EMR) system and associated support and maintenance services. The EMR system went live in 2012, but the Trust was never happy with it, and eventually terminated the contract in 2016 and claimed damages, making multiple claims for the previous years' breaches.
The dispute naturally turned to an interpretation of the liability clause. There was an exclusion of liability clause (excluding liability for lost profits, revenues, etc) and a limit on liability. The limitation of liability provision stated:
"…the aggregate liability of ATOS…would not exceed:
(a) For any claim arising in the first 12 months of the term of the contract, the total contract price…; or
(b) For any 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."
There were a number of uncertainties with the wording, but the parties and the courts agreed in the end that the clause should be upheld and given a meaning. However, the different interpretations could give rise to different results. The difficulties around the meaning included:
- In (b), there was use of "claims" (plural) and "that claim" (singular) - did it mean each claim or claims in total?
- What was meant by "claims arising"? The parties agreed in the end, though, that this would mean the date on which a breach or default occurred.
- If there was more than one claim arising, should there be a single cap on liability by reference to the claim, or separate caps in relation to each claim? If one cap only, then how to resolve whether it is the claim arising in (a) or in (b)? Or if multiple caps, then what would be the point of the liability clause?
High Court Decision
The High Court ruled that the clause was capable of being construed and courts will strive to give effect to all contractual terms agreed where possible. In the context of the contract as a whole, the High Court ruled that there was only one sensible interpretation - there was intended to be a single aggregate cap. The level of the cap would be determined by the timing of the default. If the default occurred in the first 12 months, the cap would be the total contract price, but if it did not occur until after the first 12 months it would be the total contract charges paid in the 12 months before the first default.
Court of Appeal Decision
On appeal, the Court of Appeal agreed with the High Court that the relevant provision, while not clearly drafted, should be enforced and commercial common sense should be considered. However, it came to a different conclusion from the High Court. It ruled that there were two caps. One cap applied for claims arising in the first 12 months, and a second cap applied to all claims arising after the first 12 months. The words "aggregate liability" before (a) and (b) did not mean that it was (a) and (b) combined in aggregate.
It said this two-cap interpretation made commercial common sense, as ATOS provided high value work in the first 12 months with expensive consequences, and lower value work after that. The Court of Appeal said, if there was a major default in the first 12 months, there was no reason why ATOS could get a "free ride" after that if the liability cap in (a) had already been used up.
Comment
It is good to get clarity on the principle that courts will look to give effect to liability clauses and apply commercial common sense to interpreting them. What this case shows, though, is that different people deciding may have different ideas about what the common sense interpretation is. Based on the Court of Appeal's reasoning, I question why they did not come to a different conclusion - that there could be a separate 12 month cap for each claim from year two onwards, on the basis that a claim in year two could otherwise (according to the Court of Appeal's interpretation) mean that ATOS could get a free ride after then too.
One clause. Two separate judicial interpretations. Probably more. So, where to go from here?
The answer is simple - have a well-drafted liability clause to leave nothing to doubt, and use practical examples to help to show the parties' intentions.