Be Wary: Contract Drafting is an Art

In brief

Drafting contract clauses needs careful consideration.
Poorly drafted terms can lead to unforeseen consequences.
Wording and structure are vitally important.

Contracts and the terms they contain require some very careful consideration. In many cases, poorly drafted terms can come back and bite you, even though you believe that you have sufficiently mitigated your risks and given yourself more than adequate protection.

This is exactly what happened in the recent English Common Law case of Drax v Wipro [2023] EWHC 1342 (TCC).

Case Summary

This case concerned the supply of software from Wipro to Drax. The project was not a success, for numerous reasons, and Drax ended up terminating the contract and presenting a substantial claim of £31.7m under various heads of claim.

The central issues the court had to consider was:

On a true construction of the limit of liability clause, did it provide for a single aggregate cap or multiple caps?

If there are multiple caps, what claims, if any, does the cap apply to?

First Limb: On a true construction of the limit of liability clause, did it provide for a single aggregate cap or multiple caps?

The limit of liability clause was contained in clause 33 of the MSA and contained various sub-clauses, but the crux lay in clause 33.2. This clause stated:

Subject to 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 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 the full twelve months.

Drax claimed that the clause in question was not limited to a single claim, but applied to each and every claim and as such each claim that arose would be capped at 150% per head of claim. Wipro claimed that the cap applied to any and all claims and was capped in totality to 150% of the charges payable in the first year, when the claim(s) actually arose. The cap did not extend to each and every claim in its own right, but in aggregate.

The court turned to the actual language of the clause in question and found that the use of the words ‘limited to’ suggested that the clause applied to all claims, not individual claims. This was supported by the term ‘total liability’ and also by the absence of terms such as ‘each claim’.

The court also considered the overall interpretation of the clause’s intention. The Judge felt that in this instance, if one looked at the term ‘claim’ in reference to ‘when the claim first arose’ this really meant ‘when the first [of many] claim[s] arose’ and the absence of such terms as ‘each claim’ supported this. As such, and despite there being many claims, the cap applied to the total of those claims and the timing of the first of those claims simply set the appropriate start point.

The Court also stated that the clauses, in particular 33.2 and 33.3, were ‘not well drafted’, which is actually a rather damning statement despite sounding quite innocuous. Despite this, the court held that the relevant clause[s] suggested a single cap, not a series of individual caps, especially when one considers that the parties would have had the benefit of professional advice and assistance in making the MSA.

Second Limb: If there are multiple caps, what claims does the cap apply to?

Addressing the second limb, the Judge noted that with the first limb resolved to be an overall cap and not multiple caps, considering this limb would not alter the decision.

Drax claimed the term ‘claim’ related to 'cause of action’. Whilst the Judge accepted that a claim may give rise to a cause of action, as per the definition given by Diplock LJ in Letang v Cooper [1965] this does not necessarily mean that the term ‘claim’ is equal to ‘cause of action’. In fact, the Judge noted that there is no case law that proposes such a position and to do so would be ‘odd’. In the current case, this would amount to Drax having numerous claims, which would far exceed the cap in any event and would operate to make the clause ‘if not devoid of all utility, then devoid of much of it’.

The court did not accept Wipro’s interpretation either, where Wipro submitted that claim meant liability, which could not be correct. The Judge felt that ‘claim’ and ‘liability’ are distinctly different and claim in this instance means the ‘first of all the claims’ made. In any event, clause 33.2 did not provide for multiple caps, but if it had done then these caps would be limited to 4 heads of claim: misrepresentation, quality, delay and termination.

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

Conclusion

This case provides a wakeup call for contract drafters, especially in common law jurisdictions but Civil Law jurisdictions should also take note.

It shows the importance of carefully describing what the clause applies to and the use of appropriate wording. In this case, the Judge made it clear that the crux was the term ‘claim first arose’ and where more than one claim is contemplated, evidenced by the term ‘any and all claims’ the wording suggests a single cap arising from when the first claim arose, regardless if there are multiple claims thereafter.

Poorly drafted terms can, on the face of it, appear to capture what the parties intended, but simple drafting errors can and will come back to bite.