Most commercial contracts contain agreed limits on the parties’ liabilities.  These can take many forms, but in long-term contracts it is common to see an annual cap as well as an overall cap which applies to the lifetime of the contract.  You normally can’t control every aspect of a contract which could result in you incurring a liability, so there is a good argument for setting clear financial parameters around that potential exposure.

Even when that principle has been accepted by all parties to a contract, however, the detail needs to accurately reflect what they intended.  A contract term which a Court of Appeal judge recently described as “poorly drafted” resulted in a major international outsourcing business failing to cap its liability at the level it might have expected when it was sued for multiple breaches of that contract.

The case (Royal Devon & Exeter NHS Foundation Trust v Atos IT Services UK Ltd [2017] EWCA Civ 2196 (20 December 2017)) was heard just before Christmas 2017.  It concerned an IT outsourcing project initiated by a NHS Foundation Trust.  The supplier was ATOS IT Services UK Ltd (ATOS) and the contract was worth nearly £5 million to ATOS over a projected five years.  Although based on a NHS standard contract, the parties had agreed a number of negotiated amendments and these included liability limits.

Outsourcing agreements tend to be lengthy and often complicated contracts.  Usually, there is a great deal of detail setting out the many and varied responsibilities of the supplier, and schedules packed full of key performance indicators, milestones, service levels and service credit mechanisms.  But even though they can run to many hundreds of pages, the negotiations around these contracts often end up focussing on a handful of key areas.

One of these is almost invariably the scope of any cap on the supplier’s liability.  The supplier wants to win the contract, of course, but it does not usually want to risk losing all of its fees or more should things go wrong.  The customer on the other hand, wants to cover its risk if things should not work out by ensuring it is fully and effectively compensated.  In this case, the contract wording seemed to suggest that ATOS’ liability would be capped at the total contract price (just short of £5 million) for any claim arising in the first 12 months or for claims arising after that, the amount paid in charges during the preceding 12 months.

Because of the multiple breaches claimed by the Trust, it was in their interest that either the liability clause was held to be unenforceable – a position rejected by the judge at the first hearing - or that the clause meant there were two caps: one which applied during the first 12 months of the contract and then a second which applied to any claims arising after that initial period.  ATOS argued that the meaning and intention of the liability clause was that a single cap should apply and only the circumstances (i.e. whether a claim arose before or after 12 months had expired) would determine which cap was applicable.

In a refreshingly succinct judgment, Lord Justice Jackson remarked that because of the way in which the clause had been drafted it was not straightforward to interpret.  In fact, he went as far as to decide that the most likely meaning of the clause was the one which would “yield the least bizarre consequences...”!  His conclusion was that there were two separate caps which meant that the Trust’s claim had a higher aggregate limit and consequently they would be able to recover a greater amount of damages from ATOS.

The obvious but nonetheless notable lesson to be drawn from this case is the need for businesses and their legal advisers to be absolutely clear about what they expect their liability caps to achieve.  Having decided the commercial and financial boundaries which are to apply, then clear wording needs to be used so the contract accurately reflects this.  One of the fundamental reasons for using detailed written contracts is to deliver certainty to all parties.  If the words in the contract appear to be ambiguous or lead to any uncertainty this must be addressed  before the contract is signed.