Limiting liability: single global cap or multiple caps?

Commercial contracts often require goods or services to be provided over several years – so is it better to have a single global limitation of liability for all claims over the life of the contract? Or should you opt for multiple caps, where the limit effectively "resets" for each year of the contract or for each separate claim? A recent case highlights the potential for disputes: whilst the supplier maintained there was a single cap, limiting recovery to £11.5 million, the customer argued for multiple caps, giving it scope to recover over £130 million. We also look at an earlier Court of Appeal case involving a similar dispute over liability caps.

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Drax v Wipro: single cap vs multiple caps

Drax, an energy supplier, engaged Wipro to supply it with a new customer relationship management system. This was a complex IT project and the contract was expected to last for at least 5 years, with Wipro being paid around £11.5 million over that period, of which £7.5 million was payable in the first 12 months. The project was not a success – Drax claimed that, in addition to repeated delays, it had to spend large sums of money to correct defects in Wipro's work. It eventually terminated for repudiatory breach and brought claims for damages totalling £62.5 million.

Wipro maintained that there was a single liability cap, limiting Drax's recovery to £11.5 million. By contrast, Drax argued that the contract provided for multiple caps depending on when the claim arose and how many different claims were brought, giving it scope to recover over £130 million.

The disputed clause

"[T]he 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"

Drax's arguments in favour of multiple caps

Drax focussed on how the limitation of liability was to be calculated by reference to a figure based on amounts payable in the 12 months before the date "the claim first arose". It argued that this showed that the parties envisaged that there could be multiple claims, each of which would be subject to its own separate cap, rather than a single global cap limiting recovery for all claims in total. It also noted the following:

The contract allowed for further work to be commissioned from Wipro and that, against this background, it made sense for a "fresh" cap to be applicable to any claim arising out of that additional work;
Another sub-clause in the contract provided for a different limitation of liability in relation to data protection claims. This was expressed in language which indicated more strongly that a single cap was intended for this purpose (it referred to the supplier's "total aggregate liability" for "all and any claims" rather than simply using the words "the claim"). Since those words were absent from the disputed clause, Drax argued that this pointed to an intention to allow for multiple caps.

Why the court decided there was a single cap

The court accepted that there were some factors which could be viewed as pointing towards multiple caps. However, on balance, it concluded that the weight of evidence pointed towards a single, global cap. Among other things, it cited the following factors:

The inclusion of the phrase "the total liability" of the Supplier for any claim arising out of or in connection with the Agreement; this was considered to be suggestive of a single cap even though the clause did not use the word "aggregate" or refer to "any and all claims";
The fact that, in another sub-clause, which provided for a separate cap relating to property damage, the drafting had included the phrase "per event" to indicate that multiple caps were intended in that instance; the court noted that this demonstrated the parties' ability to use explicit language, and that the parties "could have done so in respect of [the disputed clause] … but they did not";
There were more similarities than differences between the disputed clause and the data protection cap, which Drax acknowledged led to single cap for that purpose; on balance, the court considered that these similarities pointed more towards the disputed clause giving rise to a single cap; and
Drax's interpretation implied a total cap of over £130 million, which the court regarded as "absurdly high given the charges payable" of around £11.5 million in total; whilst a single cap would exclude a substantial proportion of Drax's total claims, the court observed that "it can hardly be said that £11.5 million is insignificant".

Wider lessons

More generally, this was an agreement between large, well resourced businesses which were professionally advised. In these circumstances, even where there is room for competing interpretations (as here), the courts will still tend to focus more on the language used than on commercial background factors (such as those cited by Drax in support of its arguments). This tendency to favour "literalism" over "contextualism" is consistent with the approach taken in most of the more recent leading cases on contractual interpretation, such as the Supreme Court's ruling in Wood v Capita (2017), which the judge referred to in Drax v Wipro.

Royal Devon v ATOS: similar dispute, different outcome

A similar dispute was considered by the Court of Appeal in 2017. The Royal Devon & Exeter NHS Foundation Trust had engaged ATOS, an IT supplier, to provide and maintain an IT system to hold patients' medical records. The five-year project began in 2011 and was worth £4.9 million. However, the system suffered a number of issues and was never rolled out across the Royal Devon & Exeter hospital. It sued ATOS for multiple breaches of contract – and one of the key issues in the dispute was the correct interpretation of the following liability clause:

Royal Devon: the disputed wording

"9.2 The aggregate liability of the Contractor [….] 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 [….]; 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."

Similarities to Drax v Wipro

The reference to "any claim" (rather than "claims") in clause 9.2.1 could – in theory at least – have been interpreted as giving rise to a separate cap for each claim brought by Royal Devon. This is similar to Drax v Wipro, where the clause also referred to "the claim" in the singular, which Drax argued could be interpreted as referring to multiple claims. However, the trial judge in Royal Devon rejected this, primarily because – again, as in Drax v Wipro – it would have given rise to an overall cap many times the amount of the contract price. Although the same point was not argued before the Court of Appeal, it did not take issue with the judge's reasoning on this aspect. To that extent, the two cases are similar in that they suggest that, in the absence of clear wording such as "per event", the courts will generally be sceptical of arguments that a cap "resets" in relation to each individual claim that could be brought by the innocent party.

Points of difference: the approach to time periods

Where the Royal Devon case differs from Drax v Wipro is on the question of whether there were multiple caps based on the timing of the supplier's breach.

The Court of Appeal ruled that the parties had intended different caps to apply, depending on when claims arose. In particular, it concluded that it made sense for a larger cap to apply to breaches committed in the first year, given that the bulk of the work was expected to be done during this period. However, unlike the judge at first instance, it did not agree that the timing of the first breach determined which of the two caps would apply (so that if breaches occurred in Years 1, 3 and 5, the cap for all these would be £4.9 million – whereas if the breaches occurred in Years 2, 3 and 5, the cap for all these would be limited to the charges payable in the 12 months before the first breach i.e. in Year 2).

The Court of Appeal took the view that the parties had intended the caps to work rather more straightforwardly, concluding that for claims relating to Year 1, the cap would be £4.9 million – and for claims relating to subsequent years, the cap would be 12 months' charges. This meant that if there were breaches in Years 1, 3 and 5, the supplier's liability would be limited by separate caps as follows:

Year 1 claims: up to £4.9 million
Year 3 and 5 claims: up to level of charges in the 12 months preceding the Year 3 breach

The Court of Appeal's reasoning

The Court of Appeal did not think that "aggregate liability" ruled out multiple caps and noted that there are many instances where the word "or" in clause 9.2 (see above) can be interpreted "conjunctively" i.e. in a way which allowed both caps to be in play during the life of the contract. Ultimately in this case, the Court of Appeal concluded that both the natural meaning of the words and business common sense pointed to a "high cap for defaults occurring in the first year and a separate, lower cap for defaults occurring in subsequent years."

Which is better: a single, global cap or multiple caps on a yearly or "per event" basis?

Whether you go for a single global cap or multiple, yearly caps – or even "per event" caps - depends on a variety of factors and there is no universal "right answer". A single global cap applying to all claims over the life of the contract will typically be simpler – but from a customer perspective, there may be more of a risk that a large proportion of the cap gets "eaten up" by a major claim in the earlier stages of the contract, leaving only limited "headroom" for later claims. That said, it does not follow that a single global cap is always better for the supplier; in particular, customers may push for a higher limit, precisely because they are concerned about needing to claim several times during the life of the contract. If that happens, suppliers may be better off with a lower, yearly cap.

Year 1 vs subsequent years

Whatever solution you adopt, however, the cases discussed in this briefing highlight the need for careful drafting to ensure that you achieve the outcome that you actually intend. In particular, if opting for a cap by reference to fees paid in the previous year, you will usually need separate drafting for year 1 (because no fees will have been paid in the previous year). The parties in both cases attempted to address this but left room for disputes over whether a single or multiple caps were intended. Customers should also consider inserting an alternative absolute figure e.g. "or £X million, whichever is higher" – because without that, there is a danger that you get a year where the cap is very low because very little happens to have been paid in the previous year. From the perspective of suppliers, such an approach is also likely to reduce the risk of a successful challenge to the clause under the Unfair Contract Terms Act 1977 ( UCTA) on the basis that it results in an unreasonably low cap – for more detail, see our video briefing.

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