We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
03 October 2017
In Royal Devon and Exeter NHS Foundation Trust v Atos IT UK Services Limited ( EWHC 2197 (TCC)) the Technology and Construction Court was asked to determine as a preliminary issue the enforceability of a limitation of liability clause in an IT services agreement. The Royal Devon and Exeter NHS Foundation Trust argued that the clause was sufficiently ambiguous so as to be unenforceable. The court disagreed, concluding that, despite being poorly drafted, the clause could be interpreted in a way which reflected the intention of the parties, made commercial sense and was therefore valid and enforceable. The dispute also involved a claim for wasted expenditure against ATOS, but the decision is interesting for the court's analysis of the liability clause (which is the focus of this update).
In November 2011 the trust signed an agreement with ATOS for "health record scanning, electronic document management and associated services", which comprised the provision of a system called "Mobius Clinical Electronic Medical Records". The value of the contract was around £5 million and had a term of five years. The trust was unhappy with the performance of the system and in 2014 served notice on ATOS terminating the contract and brought a claim for £7.9 million for breach of contract.
ATOS argued that any claim by the trust was subject to Clause 8.1.2 of the agreement, which limited its liability by reference to the amount set out in Schedule G of the agreement. The relevant clause in Schedule G provided that:
"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."
The trust argued as follows:
In reply ATOS argued that despite the unfortunate drafting, the clause was capable of being interpreted and had contractual force. The cure was to substitute the formulation in the opening sentence of 9.2.2 with the same words that were used in the opening of 9.2.1 (ie, "any claim arising"). Further, the use of the words "the aggregate liability of the Contractor… shall not exceed" and the disjunctive "or" in paragraph 9.2 indicated that these were alternative caps and not cumulative. There was therefore only one cap determined by the timing of the first default. ATOS also submitted that in the alternative there were two caps: one applying to defaults occurring in the first 12 months of the contract and calculated by reference to the total contract price and the second applying to defaults occurring after the first 12 months, calculated by reference to the total contract charges paid in the 12 months prior to the claim.
The court identified the general principles governing the interpretation of written contracts, which it briefly summarised as follows: the court is concerned to ascertain the intention of the parties by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract. This exercise in interpretation should focus on the meaning of the words in their documentary, factual and commercial context and that meaning must be assessed in light of:
The judge cited a number of well-known recent decisions concerning contractual construction, including Arnold v Britton ( UKSC 36), Rainy Sky SA v Kookmin Bank ( UKSC 50), Chartbrook Ltd v Persimmon Homes Ltd ( UKHL 38) and Wood v Capita Insurance Services Ltd ( UKSC 24).
As to the interpretation of limitation of liability clauses, the court held that there was no presumption against the parties having agreed to limit their remedies for breach of contract. If the words were sufficiently clear, the court would give contractual force to such clauses in accordance with the court's general approach of striving to give effect to contractual terms rather than finding them void for uncertainty.
Applying that analysis, the court agreed with ATOS that while paragraph 9.2 had not been drafted with precision, it was capable of contractual force by rectifying the plural references to "claim(s)" in paragraph 9.2.2 to be read in the singular. Further, the formulation "aggregate liability… shall not exceed" pointed towards the intention of the parties to limit the total liability of ATOS such that there was only one cap, not multiple caps. To read it otherwise would render the clause devoid of any real purpose, as ATOS could face a liability amounting to many times the total contractual price.
The court commented that where the words used in a contract 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 decision reflects the willingness of the court to seek to give legal effect to contractual provisions rather than declining to adjudicate on an issue of contractual interpretation merely on the basis that the parties had defined their obligations in an imprecise or unclear way. The case provides a useful reminder to practitioners of the importance of clear contractual drafting to ensure that the agreement accurately reflects the parties' intentions as to their respective obligations and liabilities.
Although the court observed that courts may take a commercial approach when faced with competing interpretations of contractual clauses, it does not follow that an uncommercial or harsh result is a sufficient reason to favour one interpretation over another; a number of recent decisions have shifted the emphasis back to the primacy of the language used when interpreting contracts, even if that language produces an uncommercial or absurd result (eg, Wood v Capita Insurance Services, which was cited by the court).
For further information on this topic please contact Greg Pooler or Tim Brown at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.