Insights into Limitation of Liability Clauses from Drax v. Wipro case

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Introduction

The recent judgment in Drax Energy Solutions Limited v. Wipro Limited offers valuable insights into the interpretation and application of limitation of liability clauses in commercial contracts. This case highlights the importance of clear drafting and understanding the commercial context of such clauses, which general counsels should keep in mind.

Drax Energy Solutions Limited v. Wipro Limited

Key Facts:

• Contract: Wipro entered into a Master Services Agreement (MSA) dated 20 January 2017 with Drax Energy Solutions, for the provision of software services, including customer relationship management, billing, and smart metering facilities. The contract was valued at around £50 million.

• Dispute: Drax encountered numerous challenges related to Wipro’s alleged misrepresentations, lack of quality, and delays, culminating in the termination of the MSA by Drax on 7 August 2019.
  

Claims: 

• Drax: Claimed approximately £31.7 million in damages, alleging Wipro's failure to meet contractual obligations resulted in significant financial losses and reputational damage.

• Wipro: Counterclaimed for around £10 million, including damages for wrongful termination, prolongation costs, unpaid invoices, and termination claims.
  

 Key Issues Before the Court:

1. Whether the limitation of liability clause set out in the MSA provided for multiple liability caps per claim or one single aggregate cap.

2. How the term “claim” should be interpreted if multiple caps were intended.

Legal Interpretation of Liability Cap:

• "Clause 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 12 months from the date the claim first arose. If the claim arises in the first contract year, the amount shall be calculated as 150% of an estimate of the charges paid and payable for a full 12 months."

 Court’s Interpretation Principles:

1. Apply the “natural and ordinary” meaning of the clauses.

2. Clear words are needed before the court will remove valuable rights and remedies available under common law or statute.

3. Commercial common sense will be applied as understood by a reasonable person in the parties’ position.

4. Where multiple interpretations exist, the court will choose the one that yields the least bizarre outcome.

One Cap or Multiple Caps?

• Wipro’s Argument: The MSA wording created a single, aggregate liability cap of £11.5 million, citing the reference to “total liability.”

• Drax’s Argument: The limitation clause provided for multiple caps, leading to a total cap of £31.7 million, highlighting the reference to “12 months prior to the date the claim first arose” and the absence of “aggregate.”

 Court’s Decision:

The High Court ruled that the phrases “total liability” and “the claim” indicated a single aggregate cap. The court noted that Clause 33.3, which addressed data protection, imposed a single cap for all claims, and this consistency supported interpreting Clause 33.2 in the same manner.

Meaning of “Claim”:

• Although the court confirmed a single aggregate cap, it examined the interpretation of “claim.” Wipro saw “claim” as meaning “liability,” implying only one claim. 

• Drax argued it meant “cause of action,” potentially exposing Wipro to multiple claims and higher liability.

Judgment:

The High Court took a common-sense approach, finding a balance between the parties. It concluded there were four broad claims related to different types of actions and facts. The court ruled in favour of Wipro, determining that Clause 33.2 imposed a single aggregate cap for all claims.

This interpretation provides clarity and predictability in enforcing liability limits.

Conclusion:

The Drax v. Wipro case underscores the critical importance of clearly specifying whether liability limits are intended to cover all potential claims collectively or each claim individually. This case highlights the necessity for precise and clear drafting in commercial contracts.

Applying the insights from this case ensures fair and predictable outcomes in disputes concerning limitation of liability in contracts, thereby safeguarding the organisation’s interests and promoting more reliable and transparent business practices. 

Need a Contract Lawyer ?

Source: Drax v Wipro

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LEGAL ANALYSIS BY: Sarvesh Saxena, Barrister, Bar of England & Wales. Authorised to conduct unreserved legal services. No Rights of Audience.

Legal Disclaimer:

This article is for general informational purposes only and is not legal advice. It may not reflect the latest legal developments and is not guaranteed to be accurate or complete. No attorney-client relationship is created by this article. Readers should seek professional legal advice from a qualified attorney in their jurisdiction before making any legal decisions. The author disclaims all liability for actions taken based on this article's content.

Content Disclaimer:

This content was originally published by Allen & Overy before the A&O Shearman merger