Interpreting indemnity clauses: how many caps and what size?

By Jeremy Glover, Partner, Fenwick Elliott

Limitation of liability clauses are intended to provide certainty as to a party’s potential exposure following a breach of contract. It is unsurprisingly therefore of some importance to take care to ensure that the intended limits reflect what is agreed. A recent case about a contract for the supply of software services provides a useful refresher of some of the key principles parties need to bear in mind.

Drax Energy Solutions Ltd v Wipro Ltd 

[2023] EWHC 1342 (TCC)

The dispute here centred on the interpretation of a limitation of liability clause, sub-clause 33.2, contained in a Master Services Agreement (“MSA”) made between Drax and Wipro in January 2017 for the provision of a new IT system. The project was not a success, although the reasons for this remain under dispute and were not the subject of these court proceedings. However, Drax terminated the MSA on account of what were said to be repudiatory breaches on the part of Wipro.

Whilst cases such as these will always depend on their facts, or here the wording of the clause in question, it is always interesting to see the arguments used and the way the court approaches its decision. In 2021, the Supreme Court1 in the UK gave guidance about the way to construe exclusion limitation clauses. Lord Leggatt noted that the approach of the courts to the interpretation of exclusion clauses (including clauses limiting liability) had changed markedly in the last 50 years and, following a consideration of the authorities, he went on to say: 

“The modern view is accordingly to recognise that commercial parties are free to make their own bargains and allocate risks as they think fit, and that the task of the court is to interpret the words used fairly applying the ordinary methods of contractual interpretation. It also remains necessary, however, to recognise that a vital part of the setting in which parties contract is a framework of rights and obligations established by the common law (and often now codified in statute). These comprise duties imposed by the law of tort and also norms of commerce which have come to be recognised as ordinary incidents of particular types of contract or relationship and which often take the form of terms implied in the contract by law. Although its strength will vary according to the circumstances of the case, the court in construing the contract starts from the assumption that in the absence of clear words the parties did not intend the contract to derogate from these normal rights and obligations.”

Drax’s claims, which totalled some £31 million, fell into four categories. The Judge explained that “using round figures,” Drax was seeking:

(1) Quality: £9.8 million;    

(2) Delay: £9.7 million;

(3) Termination: £12 million; and

(4) Misrepresentation: £31 million.

The first three claims were distinct and separate losses. The way the misrepresentation claim was framed, with Drax alleging that, but for the representations which were false, it would not have entered into the MSA meant that different parts of it overlapped with each of the other three claims.

The relevant clause of the MSA was, in full, as follows: 

"33. LIABILITY

33.2 Subject to clauses 33.1, 33.3, 33.5 and 33.6, 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.”

Mr Justice Waksman had to consider two issues:

Issue 1: Did clause 33.2 of the MSA provide for a single aggregate cap which applied to Drax’s liability for Wipro’s claim; or multiple caps with a separate financial limit applying to each of Wipro’s claims?

Issue 2: If there were multiple caps, how did they apply to Wipro’s claims? 

Drax said that, if these preliminary issues were determined in its favour, the effect of the cap would be to reduce Wipro's maximum possible liability in these proceedings down from £31.7 million to around £23 million. This was because, while the claims in respect of Quality and Delay would fall below the relevant caps for each, and those claims are worth £19.5 million, there would be an applicable cap of £3.78 million on the Termination Claims of £12 million. 

Wipro said that the charges payable in the first 12 months were £7,671,118 and 150% of that figure was £11,506,677. Rounded to £11.5 million, this was the maximum amount of loss for which Wipro could be made liable, in respect of all and any of the claims made against it. In other words, if Drax succeeded entirely, and in principle, Wipro was liable for £31.7 million of loss, Drax could only recover £11.5 million. 

Drax said that the £11.5 million figure was a limit which applied to each and every separate claim, assuming they all arose in the first year. It was not a single maximum applied to all claims. Drax further said that a “claim” meant "cause of action". There was one claim for misrepresentation; nine quality claims; four claims in respect of delay; one claim for repudiatory breach, and one claim in respect of the Exit Plan. Alternatively, there were four “claims”: misrepresentation, quality, delay and termination. 

Issue 1

As a starting point, the Judge did not accept Drax's wider interpretation of "claim". The expression "claim" could not here be simply equated with "cause of action". This meant that the only interpretation of "claim" put forward by Drax which the court did consider was the narrower one whereby there were only four relevant claims. Wipro's position was that (a) there was only one claim anyway, but (b), even if not, clause 33.2 imposed one single cap in relation to all claims, however described and however numerous, unless any of them fell within another part of clause 33.

The Language of the Clause

The Judge started with the language of the clause 33.2 itself. Taken in isolation, looking at the first three lines of the clause and the words "limited to", the language strongly suggested that this was a cap for all claims. The phrase "total liability" supported that reading, as well as the absence of words like "for each claim" after the word "liability". So, if there had been here a specific sum stated after the words "limited to", for example £10 million or £20 million, rather than the formulae which in fact follow them, the language would clearly indicate a single cap.

However, one had to have regard to the actual words used after the words "limited to". The formulae used referred to when "the claim" first arose or arises. If "claim" was to be interpreted as meaning each claim that had arisen, then this would suggest that the relevant formula was to be applied to each such claim, in which case there would be a number of separate caps. However, the Judge felt that, if one looked at “claim”, the reference to when “the claim first arose” really meant when the first [of the various] claim[s] arose. On that interpretation, although there could be several claims, the cap is still for the total of those claims and the timing of the first of those claims simply sets the appropriate limit. 

The Judge also looked at the language of other provisions. For example, clause 33.3, which imposed a single cap for all claims relating to a breach of clause 21 of the MSA. That provision dealt with data protection. One particular feature was the reference to the date when “the claim first arose”. This was in circumstances where it is accepted that, while there could be more than one claim (as contemplated by the words “… any and all claims …”), there was a single cap for all claims. This would then suggest that the same expression in the clause should be interpreted in the same way, since the same words are used in each provision. That would, therefore, provide added support for view of the clause as imposing a single cap.

Overall, the Judge considered that despite some “linguistic quirks”, the correct interpretation was that there was a single cap, as argued by Wipro, and not separate caps for each claim. In making this decision, the Judge expressly noted: “the context of where both parties are large corporations which obviously had professional advice and assistance in the making of the MSA”. 

Commercial Considerations

Drax submitted that Wipro's interpretation would lead to some surprising results. There was no business sense to Wipro's interpretation because a single cap would be inappropriate where there could be (looking at the date when the MSA was made) many potential claims over an indefinite period of time by more than one Drax entity. The Judge thought that this was, in theory, true, but commented that one had to be “realistic”. If, as Drax alleged here, the project was proving or threatening to be a disaster within the first year, it was hardly likely to commission yet further work and, indeed, at some point, it would surely terminate. That, of course, is exactly what Drax did. 

Drax also said that, on the basis that there were only four relevant claims, on Wipro's interpretation, they were still capped at one third of their potential value, i.e., £11.5 million as opposed to £31 million. The Judge said this was true but noted that £11.5 million was not insignificant. If Drax did not, in the end, protect itself in terms of claims to be made as much as it could or should have done, that was not a reason for preferring its interpretation and was quite different from saying that a clause makes no commercial sense.

Issue 2

As there was a single cap for all of the claims, strictly, Issue 2 did not matter, but it was relevant to how the Judge had decided the first issue.

Drax's primary position was that "claim" here meant "cause of action". The Judge noted the “classic definition of a cause of action” given by Diplock LJ in Letang v Cooper [1965] 1 QB 232, being a factual situation, the existence of which entitles one party to obtain a remedy against another.

However, here, the Judge said that you had to construe “claim” in the context of the operation of clause 33.2. The four claims here did not (save in the case of the Misrepresentation Claim) overlap in terms of loss, and they represented how Drax had pleaded out its claim. Further, and in a broad sense, they corresponded to different causes of action, because they were plainly different, and relied on different sets of facts. They, therefore, corresponded to a common-sense view of what claims were being made here. Given that the exercise of identification could not simply be avoided, the answer had to be here that whilst clause 33.2 did not provide for multiple caps, if it had done, then the claims to which those caps applied would be the four claims detailed above: misrepresentation, quality, delay and termination. 

Conclusion 

Accordingly, clause 33.2 of the MSA provided for a single aggregate cap which applied to Wipro’s liability for all of Drax’s claims.

Previous article [1] | Next article [2]

• 1. Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29. For more information on the case, see: Triple Point: more than simply ‘liquidated damages’ [3]