New High Court Judgment on Limited Liability

The High Court has given judgment on preliminary issues affecting terms of a contract for IT services which sought to limit liability. The judge’s views on the limitation of liability clauses might tempt readers to tighten up their drafting.

In The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWHC 2197 (TCC) Mrs Justice O’Farrell DBE addressed two preliminary issues in a dispute regarding a contract for the provision of health record scanning, electronic document management and associated services. The contract was worth almost £5m and was to run for five years.

The Royal Devon and Exeter NHS Trust was unhappy with the system performance and, three years into the contract, invoked the dispute resolution process, eventually terminating ATOS’s services and claiming £7.9 million in damages for breach of contract. The Trust claims that it is entitled to claim damages for wasted expenditure consequent on its acceptance of ATOS's repudiatory breach and the contractual provision limiting the liability of the parties is unenforceable for ambiguity or uncertainty. ATOS's case is that damages for wasted expenditure are expressly or impliedly excluded by the contract, as lost profits, business, anticipated savings, or indirect or consequential loss or damage and that any damages are subject to a valid and enforceable liability. Any liability on the part of ATOS was disputed as was quantum but, for the purpose of determining the preliminary issues, it was assumed that the Trust could make its case in other respects.

The judge set out the agreed preliminary issues as follows:

Issue 1 – wasted expenditure claims

i) Whether as the defendant contends, the defendant is under no liability in respect of each of the claimant's claims to recover wasted expenditure made in paragraphs 102 to 110 of the Particulars of Claim because:

a) liability for each such claim is expressly or by necessary implication excluded by the terms of clause 8.1.3(a) of the Contract; and/or

b) the claims represent an illegitimate attempt to evade the effect of that clause by seeking recovery of heads of loss which are expressly excluded by the clause

OR

ii) whether, as the claimant contends, clause 8.1.3(a) of the Contract does not exclude and is no bar to the claims it makes for wasted expenditure on a reliance loss basis.

Issue 2 – Limitation of liability

iii) What is the meaning and effect of the limitation of liability at clause 8.1.2(b) of the contract and paragraph 9.2.2 of Schedule G?

iv) Whether, as the claimant contends, the limitation of liability at clause 8.1.2(b) of the Contract and paragraph 9.2.2 of Schedule G is ineffective and it is entitled to a declaration to that effect

OR

v) whether, as the defendant contends, the limitation of liability at clause 8.1.2(b) of the contract and paragraph 9.2.2 of Schedule G is effective, and if so, what is its meaning and effect.

The limited liability provision (clause 8.1.2) provided:

‘(a) the liability of either party under the Contract for any one Default resulting in direct loss of or damage to tangible property of the other party or any series of connected Defaults resulting in or contributing to the loss of or damage to the tangible property of the other party shall not exceed the figure set out in schedule G;

(b) the aggregate liability of either party under the Contract for all Defaults, other than those governed by sub-clause 8.1.2 (a) above, shall not exceed the amount stated in schedule G to be the limit of such liability.’

Schedule G (para 9) provided:

Paragraph 9.1

The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (a) shall not exceed the sum of two million pounds.

Paragraph 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.

There was a further restriction on liability in clause 8.1.3:

‘(a) Without prejudice to the generality of sub-clause 8.1.1 neither party shall be liable to the other for:

(i) loss of profits, or of business, or of revenue, or of goodwill, or of anticipated savings; and/or

(ii) indirect or consequential loss or damage; and/or

(iii) specific performance of the Contract unless expressly agreed by the parties to be applicable in schedule G.

(b) The provisions of sub-clause 8.1.3(a) shall not be taken as excluding or limiting the Authority's right under the Contract to claim for any of the following which results from a Default by the Contractor provided the Authority has made all reasonable efforts to mitigate such results:

(i) costs and expenses which would not otherwise have been incurred by the Authority including, without limiting the generality of the foregoing, costs relating to the time spent by the Authority's executives and employees in dealing with the consequences of the Default;

(ii) expenditure or charges paid by the Authority which would not otherwise have been incurred or would have ceased or would not have recurred;

(iii) costs, expenses and charges resulting from the loss or corruption of the date or Software owned by or under the control of the Authority, in accordance with sub-clause 13.4.2 provided that the Contractor's liability shall be limited to costs, expenses and charges associated with re-constituting such data or Software and returning it to a fully operational state insofar as it is inherently capable of being re-constituted.

(c) Any liability of the Contractor resulting from a claim under sub-clause 8.1.3(b) shall be subject to limitation in accordance with sub-clause 8.1.2.’

In the various heads of claim submitted by the Trust, it is worth noting that almost £2 million is claimed in respect of ‘Costs of internal IT, projects and health records staff at the Trust who would otherwise have been employed in work of benefit to the Trust’.

Finding on the first preliminary issue that clause 8.1.3(a) did not block the Trust’s claim, Mrs Justice O’Farrell stated (at [59]-[69]):

The Trust's case is that under the Contract ATOS promised to provide a functional EMR system. In reliance on ATOS's promise, the Trust incurred expenditure. In breach of contract ATOS failed to provide a functional EMR system. As a result of ATOS's breach, the expenditure was wasted. The Trust is entitled to recover the wasted expenditure as damages for breach of contract based on a rebuttable presumption that the value of a functional EMR system would be at least equal to such expenditure.

The Trust is not entitled to recover as damages any lost profits that it anticipated it would make using the new system, nor any lost revenue or savings that it planned to generate from use of the system. Those categories of loss are expressly excluded by clause 8.1.3(a).

However, that does not preclude the Trust from recovering damages to compensate for the loss of a functioning EMR system. That was a contractual benefit to which the Trust was entitled and of which it has been deprived by ATOS's alleged breach. The rebuttable presumption that the value of that loss is at least equal to the Trust's expenditure does not transform the claim for loss of the EMR system into a claim for loss of any additional benefits that would flow from use of the EMR system.

ATOS's submissions wrongly assume that any "contractual benefit" which is presumed to at least equal the value of the expenditure must represent profits, revenues or savings. In most commercial cases, there would be such a defined financial benefit that would be expected to defray the costs incurred and render the bargain financially viable. However, that is not the case where the contractual benefit is non-pecuniary. In those cases, the anticipated benefit is not a financial gain that could defray the costs incurred but rather a non-pecuniary benefit for which the claimant is prepared to incur such costs. In cases where a party does not expect to make a financial gain, it is the non-pecuniary "benefit" that is assigned a notional value equivalent to at least the amount of expenditure.

In this case, regardless whether the EMR system was anticipated to produce any profits, revenue or savings, the Trust would have the use of the EMR system as a contractual benefit. The claim for wasted expenditure is based on a rebuttable presumption, not that the EMR system would produce revenues to defray such expenditure, but rather that the use of the EMR system was worth at least the expenditure incurred.

ATOS has identified the internal costs of staff at the Trust as a particular head of damage that falls within the exclusion in clause 8.1.3(a) because it is pleaded that those resources would otherwise have been employed in beneficial work for the Trust. Reliance is placed on the Aerospace, Azzurri and Admiral cases as support for the proposition that on a proper analysis such internal costs are claims for lost revenue. However, those cases were concerned with the costs of diverted staff resources incurred after and as a consequence of the relevant breach or other wrong, in order to remedy the damage suffered. As such, they were properly characterised as lost revenues caused by the breach. They can be distinguished from the internal staff costs in this case, which form part of the costs incurred in performing the Contract. As such, they fall to be dealt with in the same way as the other wasted costs.

It is open to ATOS to defeat the claim for wasted expenditure by establishing that the expenditure exceeded any benefit to be gained from the Contract.

An award of damages for breach of contract should not put the claimant in a better position than he would have been in had the contract been performed: C&P Haulage v Middleton [1983] 1 WLR 1461 per Ackner LJ at pp.1467-1468.

If the defendant can establish that the claimant's expenditure would have been wasted in any event, because it made a "bad bargain", the wasted expenditure will not be recoverable as damages: Omak (above) per Teare J at paras. [44] to [47]; Yam Seng (above) per Leggatt J at para. [186].

The burden of proof lies on the defendant to show that the expenditure would not have been recouped and would have been wasted in any event: CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985] QB 16 per Hutchison J at p.40; Omak (above) per Teare J at paras. [47] Yam Seng (above) per Leggatt J at para. [187]. In the case of a contract where no financial gains were expected, the recoupment in question would not be payments but alternative gains, such as use or enjoyment. To establish a bad bargain in such a case, the defendant would have to show that the value of the asset or other performance promised was less than the expenditure incurred by the claimant.

The "bad bargain" principle does not change the characterisation of the damages claimed from compensation for loss of a functional EMR system to compensation for lost profits, revenue or savings.

The judge’s attention then turned to the second preliminary issue and the wording of Schedule G, para 9, which she said ‘is not drafted with precision’ but she had to determine ‘whether it can be made to make sense with sufficient clarity and certainty to make it enforceable’. While ‘the words used could give rise to competing interpretations, one of which makes commercial sense and the other does not, it is open to the court to prefer the interpretation that makes commercial sense’. The conclusion the judge reached was 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 is 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.

Published: 2017-09-01T10:00:00

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