Limiting Liability in Tech Contracts: Court of Appeal Judgment

December 21, 2017

In Royal Devon & Exeter NHS Foundation Trust v Atos IT Services UK Ltd [2017]
EWCA Civ 2196
 the Court of Appeal has given its views on the effect of the contract terms which sought to limit liability in cases of disputes between these parties. The first instance judgment on the crucial preliminary issue of limitation of liability from Mrs Justice O’Farrell DBE is reported here  and all the relevant contract terms are set out there. Clause 9.2 was the main focus in the Court of Appeal and this reads:

9.2 The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (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.

Lord Justice Rupert Jackson, who gave the judgment of the Court of Appeal with which Lewison LJ agreed, opened by noting that the central issue was what was the natural meaning of the words used, applying the test of a reasonable person who had all the background knowledge of the parties, and that both parties were well-resourced, commercial organisations with ready access to legal advice. He said: ‘The term itself, although poorly drafted, is perfectly rational. There is no reason for the court to depart from the natural meaning of the words used, once that natural meaning has been ascertained’.

Royal Devon had been aggrieved by the first instance conclusion that clause 8.1.2(b) and paragraph 9.2 of Schedule G, taken together, provided a valid and enforceable limitation of liability so that there was one aggregate cap on the liability of ATOS for all defaults encompassed by clause 8.1.2(b), namely either the total contract price or the amount paid in the preceding 12 months. On appeal, it took a different tack to that taken at first instance – a switch so fundamental that there was some question as to whether it was allowable on appeal but that switch was permitted. Whereas it had challenged the effect of para 9.2 as a whole, it argued that, of the two interpretations of para 9.2 which the defendant had canvassed below, the judge ought to have adopted the second alternative, rather than the first alternative.

Lord Justice Rupert Jackson stated:

40. It seems to me that the language of paragraph 9.2 points emphatically towards there being two separate caps. For any default or defaults occurring in the first year of the contract, the defendant’s liability is capped at the amount of the contract sum (£4,939,207.00). For any default or defaults occurring in the years 2, 3, 4 or 5, the defendant’s liability is capped at a lower sum, namely the amount of the contract charges paid in the previous twelve months. If there are defaults in both periods, then the defendant’s liability for defaults before 7th November 2012 is capped at the amount of the contract sum; the defendant’s liability for subsequent defaults is capped at the amount of the contract charges paid in the relevant twelve month period.

41. There is nothing surprising about that arrangement. The defendant was doing the high value work in the first twelve months, when defaults could have very expensive consequences. The defendant was doing lower value work in years 2, 3, 4 and 5 when defaults would have less expensive consequences.

42. If a major default occurred during year 1, which “used up” the whole cap under paragraph 9.2.1, there is no reason why the defendant should have a free ride in years 2, 3, 4 and 5. The defendant’s liability for defaults in years 2, 3, 4 and 5 should be capped at the separate (lower) sum set out in paragraph 9.2.2.

43. The judge’s analysis runs into difficulties if there are separate defaults in the first year and in subsequent years. If there is only one cap, which is it to be? 9.2.1 or 9.2.2? The judge recognised this problem and suggested an ingenious solution, namely that the choice of cap is determined by the date of the first default. The difficulty with this solution is, as Mr Charlton points out, that there is nothing in paragraph 9.2 which makes the date of the first default a critical factor in choosing between two caps. Although the date of the first default cannot be a tool for choosing between two caps, different considerations arise when it comes to the operation of paragraph 9.2.2.  The date of the defendant’s first default after the end of year one must be the date used for calculating the cap under paragraph 9.2.2 (subject to the issues raised by the cross-appeal, which I shall address in Part 7 below).

44. Both counsel in the course of their submissions suggested hypothetical scenarios in which their opponent’s construction would lead to odd results. I accept that. Paragraph 9.2 of schedule G is a homemade clause which, however it is interpreted, will yield some odd results. It is now common ground (although it was not so before the judge) that paragraph 9.2 is valid and enforceable. Therefore it must have a meaning. The natural meaning, and the meaning which yields the least bizarre consequences, is that paragraph 9.2 imposes two separate caps, namely a high cap for defaults occurring in the first year and a separate, lower cap for defaults occurring in subsequent years.

45. We are lucky enough to live in an age when there is a galaxy of high appellate guidance on how to interpret contracts. Each new pronouncement helpfully re-explains what the previous decisions meant. In this case, however, there is no need for me to embark upon an Odyssey through all that material. The natural meaning of the words used accords with business common sense.

46. I would therefore allow the appeal and grant a declaration as sought by the claimant. 

He then went on to deal with the cross-appeal, in which the defendants contended that the 12-month period referred to in para 9.2.2 ends not on the date of the default, but on the date when the claimant communicates to the defendant in writing a claim in respect of that default. Lord Justice Rupert Jackson pointed out that, on this analysis, the relevant date is arbitrary and, where the claimant first communicates the claim in writing after the end of the contract period, the cap might be very low or nil. That cross-appeal was dismissed.