Limitation of liability – wasted expenditure or loss of profits?

Royal Devon and Exeter NHS Foundation Trust (the Trust) engaged ATOS IT Services (ATOS) to provide information management services. Unhappy with the performance of the system, the Trust sought damages to recover its wasted expenditure incurred in reliance on ATOS’s promise to provide a functional system. This included the contract price paid to ATOS and the Trust’s expenses incurred in order to set up and use the system (eg the cost of software licences, staff and contractors).

The contract contained a limitation of liability clause which: (i) excluded liability for loss of profits; and (ii) set a cap on the level of the parties’ liability.

Was the ‘wasted expenditure’ really just ‘loss of profits’?

ATOS argued that the damages for wasted expenditure should properly be characterised as compensation for loss of profit, which was excluded under the limitation of liability clause. ATOS submitted that the Trust’s expenditure would have been incurred in any event if the contract had been performed; the Trust’s claim for wasted expenditure was based on a rebuttable presumption that if the contract had been properly performed, the Trust would have received revenue and benefits that would have offset that expenditure. The claim was, therefore, one for loss of profits, rather than a claim to recover that expenditure itself.

The court held that the Trust was entitled to recover the wasted expenditure as damages to compensate it for its loss, ie not receiving a functioning system. This was a ‘contractual benefit’ to which the Trust was entitled and had been deprived by ATOS’s breach. The Trust’s claim was based on a rebuttable presumption that the value of receiving a functional system would be at least equal to the expenditure incurred. It did not matter that the ‘contractual benefit’ lost by the Trust was non-pecuniary rather than financial; the rebuttable presumption was not that the system would produce revenues, but rather that the system itself would be worth the expenditure incurred. The fact that the claim was based on this rebuttable presumption did not transform the claim into one for loss of additional benefits, such as profits, flowing from use of the system. As such, the claim was not excluded by the limitation of liability clause and the Trust was entitled to recover damages.

The court noted that if ATOS could establish that the Trust’s expenditure would have been wasted in any event, ie because the Trust had made a ‘bad bargain’, the wasted expenditure would not have been recoverable as damages. In order to run this argument, ATOS would have been required to show that the value of the system it provided was worth less than the expenditure incurred by the Trust – an unattractive proposition.

Liability cap

The clause included a liability cap that purported to limit ATOS’s aggregate liability for breach of contract to a figure determined by reference to whether a breach had occurred in the first 12 months of the contract or subsequently. The Trust argued that the liability cap was unenforceable for uncertainty because one of the sub clauses included inconsistent references to “claims” (plural) and “that claim” (singular) which made it ambiguous as to whether there was a single cap for all claims arising, or a separate cap for each claim. The court disagreed and held that the clause was capable of interpretation (by reading the references to claim(s) in the singular) and was, therefore, enforceable.

In reaching this decision, the court took account of the other provisions of the contract, which indicated that the parties intended to impose a financial cap on their total liability for all defaults. The court also assumed that the parties intended the provision to have a reasonable and commercially sensible effect; in favouring the interpretation that there was a single aggregate financial cap for all claims, the judge noted that the potential level of the cap in the alternative interpretation would “render it devoid of any real purpose”.

In her judgment, O’Farrell J made some helpful observations in relation to the court’s approach to contractual interpretation:

• when interpreting limitation of liability clauses, there is no presumption against the parties having  agreed to give up or limit their remedies for breach of contract; provided the words are clear, the  court will give effect to the commercial allocation of risk;
• the courts will strive to give effect to all contractual terms agreed by the parties where possible, and  will be reluctant to find that a contractual provision is void for uncertainty; and
• where there are competing interpretations of a provision, one of which makes commercial sense and  the other which does not, it is open to the court to prefer the former.

Comment

It is a well-established principle that in seeking to establish its loss, a claimant benefits from a rebuttable presumption that, ‘but for’ the defendant’s breach of contract, it would have generated enough profit from the agreement to at least recoup its expenditure.¹ In Royal Devon and Exeter NHS Foundation Trust, the court found that this rebuttable presumption applies not only to future ‘loss of profit’ but also to loss that had already crystallised (here the Trust’s wasted expenditure). It is noteworthy that the judge was prepared to make this finding even in circumstances where the Trust was not expecting or aiming to make a profit from the system; the ‘loss’ of a functional system (ie a non-pecuniary loss) was enough.

Another interesting facet of the case was how the judge distinguished the Trust’s claim for wasted employee costs. ATOS argued that the previous case law² made clear that the basis for recovery of wasted employee costs was that the damages represented a loss of revenue (ie profits) which would have been generated by those employees had they not been diverted from their normal duties by the breach. ATOS said that it was clear that these costs fell within the exclusion for loss of profits in the limitation of liability clause. The judge disagreed and found that the costs could be distinguished from the cases cited on the basis that these all related to employee costs incurred as a consequence of (and in order to remedy) the defendant’s breach; the employee costs claimed by the Trust formed part of the wasted expenditure incurred by the Trust in performing the contract. It therefore appears that the court has widened the application of this principle to cover circumstances where employee time is wasted in performing a contract that turns out to be worthless.

The case also contains some useful comments on contractual interpretation of a limitation of liability clauses, in particular O’Farrell J’s recognition that the court will look at the commercial rationale behind a provision when considering difficult questions of interpretation.

^Footnotes:

1. See for example Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), paragraph 190.

2  Aerospace Publishing Ltd v Thames Water Utilities Ltd [2007] EWCA Civ 3, Azzurri Communications Ltd v International Telecommunications Ltd [2013] EWPCC 17 and Admiral Management Services v Para-Protect Europe Ltd [2002] EWHC 233.