Drax v Wipro offers a stark reminder about the importance of correctly drafting limitation of liability clauses

Earlier this year in the case of Drax Energy Solutions Ltd v Wipro Ltd [2023] EWHC 1342 (TCC), the High Court served an important warning regarding the risks of poorly drafted limitation of liability clauses.

Background

In 2017, Wipro was instructed to provide software services to Drax pursuant to a Master Services Agreement (MSA). The services themselves were to be provided by Wipro in accordance the MSA’s six separate but related Statements of Work (SOWs). However, the project ended in failure, owing to a series of delays and missed deadlines by Wipro – ultimately resulting in Drax’s early termination of the MSA.

Drax subsequently issued proceedings against Wipro, of which the largest quantified claim sat around approximately £31 million and equated to more than four times the fees payable in the first year of the MSA. In response, Wipro issued a counterclaim valued at around £10 million seeking damages for wrongful termination, prolongation costs, unpaid invoices and termination claims.

The key preliminary issue between the parties related to limitation, with the MSA’s key provision in respect of any limitation of liability reading as follows (emphases added):

“…, the Supplier’s total liability to the Customer, whether in contract, tort (including negligence), for breach of statutory duty or otherwise, arising out of or in connection with this Agreement (including all Statements of Work) shall be limited to an amount equivalent to 150% of the Charges paid or payable in the preceding twelve months from the date the claim first arose. If the claim arises in the first Contract Year then the amount shall be calculated as 150% of an estimate of the Charges paid and payable for a full twelve months.”

Drax considered that this provision provided for multiple, separate liability caps for each of its claims up to a value of £11.5 million, meaning that Wipro’s liability (which it claimed was £31.7 million) would be capped at around £23 million. Drax highlighted the reference to “12 months prior to the date the claim first arose” which made little sense in the context of a single cap, and flagged that the MSA had omitted use of the word “aggregate”.

By contrast, Wipro claimed the wording created a single aggregate cap on liability of just over £11.5 million (150% of the first year’s charges of £7,671,118) citing the reference to “total liability” in the clause. If Wipro was correct, Drax’s claim would be heavily reduced to a maximum of £11.5 million.

Outcome in the High Court

The Court’s conclusion was that, on balance, Wipro’s interpretation was correct; the clause should be interpreted to impose a single aggregate liability cap, determined by the charges paid or payable in the previous 12 months.

Phrases such as “total liability” and “the claim”, as opposed to “each” or “a” claim were considered a clear indication that the limitation of liability clause intended to impose a single aggregate cap. There was no explicit use of the words “per claim” or “per event” in support of Drax’s argument.

A distinction was also made between the data protection super cap stating that Wipro’s “total aggregate liability” for “any and all claims” relating to a breach of the data protection clause was capped at a specified level, and the general damages cap which did not include references to “aggregate” or “for all and any claims.” Here, the High Court stated that this absence of wording suggested that it is not clear that a single cap applies for all claims contemplated by the limitation of liability clause as a whole.

Finally, the Court did not consider that there are any commercial considerations which weigh against the interpretive outcome suggested by the language of the limitation of liability clause.

This meant that the maximum cap was £11.5 million and Drax’s claim was substantially reduced to this figure.

So how do we learn from this?

On review of the parties interpretations, the Court specifically criticised the MSA for not being well drafted “on any view” – providing a clear warning to lawyers that caution should be exercised when using ambiguous language.

Where liability caps are tied to fees over a rolling period, the following considerations should be taken into account during drafting and negotiation:

• Avoid conflicts with other liability provisions that deal with specific types of losses, or inadvertently including overlapping caps where a single aggregate cap was intended
• Consider using fixed liability caps to avoid argument when calculating percentages of the fees paid and/or payable with reference to a rolling period
• Use the word “aggregate” if that is what is meant. The court gives considerable weight to the word “aggregate”
• Ensure liability clauses and caps are kept simple to avoid argument. If the liability cap in this case had simply been an aggregate cap of £11.5 million there would have been no dispute on this point
• It is common to include reference to the charges paid or payable in the previous 12 months. But, given the ambiguities that often arise with this type of wording, it’s questionable whether this distinction is a worthwhile addition. If you know the likely spend in each year of the contract, consider whether you could convert this to a simple number
• A “per claim” cap is always at risk of debate. Consider avoiding a “per claim” cap – an aggregate limit tied at a single simple financial cap is more likely to be enforceable (although a customer will naturally prefer a per claim cap)
• The court reviewed the provisions used for a different liability cap in the contract in respect of data protection claims to obtain insight into the drafter’s original intention. Therefore, do try to make key clauses such as those on liability consistent. If there is an inconsistency that might influence the court to believe that there was a good reason for that inconsistency.

If you have questions about the topics raised in this article, please do get in touch.