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The importance of appropriate liability caps

A recent High Court decision is a reminder of the importance of agreeing appropriate liability caps when negotiating contracts.

The contract in Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) was for the digital transformation of the services of a public body. Unfortunately, the project suffered delays as a result of challenges with the work and alleged defects in the system. As the dispute escalated, the limitation of liability provisions in the contract became centre stage.

The liability clause provided that the “aggregate liability” of the contractor:

“in respect of all other claims, losses or damages, shall in no event exceed £10,000,000 (subject to indexation) or, if greater, an amount equivalent to 100% of the Charges paid under this Agreement during the 12 month period immediately preceding the date of the event giving rise to the claim under consideration less in all circumstances any amounts previously paid (as at the date of satisfaction of such liability) by the CONTRACTOR to the AUTHORITY in satisfaction of any liability under this Agreement.”

The Court had to determine whether this wording meant there was a single, aggregate cap which applied to all claims rather than multiple, separate caps. The latter finding would open the contractor’s liability to much larger sums than would have been envisaged if the former position was the intended cap.

The judge found that although the liability clause was far from a model of clarity, it provided for a single, aggregate cap that applied to all claims rather than multiple caps. The Court’s judgment was based on the following:

  1. The words “aggregate liability” referred to the contractor’s total liability no matter how many claims arose under the contract.
  2. In contrast, there was no simple “per claim” wording to support an argument that this was not a single, aggregate cap.
  3. Finally, the clause indicated that should there be multiple claims, the liability was cumulative – the liability was capped at an amount equal to the total charges in the 12 months before “the claim under consideration less any amounts previously paid… in satisfaction of any liability…”.

This decision is similar to Drax Energy Solutions Ltd v Wipro Ltd in which a similar clause was found to amount to a single cap.

In that case the clause provided that “the supplier’s total liability… shall be limited to an amount equivalent to 150% of the Charges paid or payable in the preceding 12 months from the date the claim first arose…”  The supplier argued that the reference to total liability was indicative of an single, aggregate cap. The Court accepted there was a single cap, even though there was no mention of aggregate liability. The Court seems to have given the words their natural meanings and did not find that liability was capped on a “per claim” basis in circumstances where language such as “each claim” or “any claim” had not been used.

Although cases like these will always depend on the exact wording of the clause in question, they are a reminder of the importance of careful drafting, and the potential adverse consequences should a contract not be sufficiently clear. A limitation of liability provision is often the “last line of defence” when a breach of contract claim is made so particular care should be taken when negotiating a contract to ensure the clause actually reflects the parties’ intentions.

The Commercial & Technology team at FSP have a great wealth of experience in drafting and advising on contracts. If you would like further information or have any questions as a result of this article, please contact [email protected].