Limitation and exclusion of liability – financial caps and loss of profit

Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185

The question

Did a limitation of liability clause in a contract for digital transformation services provide for a single, aggregate cap that applied to all claims, or for multiple caps?

Would a claim for loss of revenue, on the basis of anticipated cost savings not being realised due to project delays, be determined to be a claim for lost profits and therefore excluded by the contract?

The key takeaway

A limitation of liability clause that contained the wording “the aggregate liability … in respect of all other claims, losses or damages, shall in no event exceed” (but also ambiguous wording to the contrary) was held to provide for a single, aggregate cap that applied to all claims and not multiple, separate caps.

A party’s claim for loss of anticipated costs savings may be characterised as a claim for lost profits, thus falling under the exclusion in a liability clause. The distinction to be drawn is between actual costs expended (a “wasted expenditure” claim) and speculative losses (which may be considered a “loss of profits” claim).

The background

In 2012, Tata Consultancy Services Ltd (TCS), a supplier of business process outsourcing and IT services, entered into an agreement with the Disclosure and Barring Services (DBS) to undertake a digital services transformation project for the benefit of DBS. The project involved TCS taking over DBS’ existing systems while building a new system to modernise DBS’s processes. The modernisation project did not go to plan and each party blamed the other for significant delays.

In relation to the delays, TCS brought a claim for damages for losses caused by DBS’s breaches of the agreement in the sum of £110,229,124. DBS counterclaimed for its losses arising from the delays and defective software.

In the High Court, much of the case turned on the scope of each parties’ duties in relation to managing other contractors and organising the project. However, a key issue concerned the construction of the limitation of liability clauses. Of particular relevance were the following clauses on limits on TCS’ aggregate liability:

“52.2 Subject to clause 52.1, the CONTRACTOR’s total aggregate liability:

52.2.5 in respect of Delay Payments shall be limited to 10% of the implementation Charges.

52.2.6 in respect of all other claims, losses or damages, shall in no event exceed £10,000,000 (subject to indexation) or, if greater, an amount equivalent to 100% of the Charges paid under this Agreement during the 12 month period immediately preceding the date of the event giving rise to the claim under consideration less in all circumstances any amounts previously paid (as at the date of satisfaction of such liability) by the CONTRACTOR to the AUTHORITY in satisfaction of any liability under this Agreement.”

DBS contended that the cap of £10,000,000 referred to in clause 52.2.6 applied separately to each of its counterclaims brought against TCS. It was TCS’ position that clause 52.2.6 provided a single, aggregate cap of £10,000,000 (or the alternative amount based on Charges paid) to all claims other than those explicitly dealt with in the preceding sub-paragraphs of the clause. In relation to clause 52.2.5 which dealt with delay payments (which were not specifically defined in the agreement), TCS argued that “implementation Charges” was a specific reference to Charges associated with the successful “Delivery of the Modernisation Release” (£2,898,420.23) thereby limiting liability for Delayed Payments to £289,842.

A further clause dealing with loss of profits was also examined by the court:

“52.4 Subject to clauses 52.1 and 52.5, neither party will be liable to the other party for:

…

52.4.2 any loss of profits, turnover, business opportunities or damage to goodwill (whether direct or indirect).”

TCS claimed £77,314,727 for “Loss of Revenue” for lost “anticipated costs savings”, claiming that it had been deprived of benefitting from the operational efficiencies of the new software. It submitted that TCS’ costs in providing the operational services would have fallen significantly over time, owing to the new processes enabled by the software.

DBS submitted that TCS’s claim for wasted expenditure was in fact a claim for loss of profits, and as such was excluded by clause 52.4.2. TCS accepted that its loss could be characterised as either wasted expenditure or loss of profit, but having characterised it as wasted expenditure, it argued it was a valid claim for wasted expenditure that fell outside the exclusionary scope of clause 52.4.2.

The decision

The court found in favour of TCS in relation to clause 52.2.6, deciding that the clause applied a single aggregate cap across all claims. However, TCS was unsuccessful in its arguments with regard to its delay and loss of anticipated costs savings claims.

A single, aggregate cap or multiple caps?

The judge observed that clause 52.2.6 was “far from a model of clarity”. It was also not strictly necessary for a ruling to be made on whether a single cap applied to all claims or multiple separate caps given the judge’s later findings on liability and quantum. That said, the clause was construed as giving rise to a single cap applicable to all claims for a number of reasons.

Firstly, the words “the aggregate liability … in respect of all other claims, losses or damages, shall in no event exceed” demonstrated a clear intention that the clause was to cover the total liability that may exist regardless of the number of claims. This interpretation followed the judgments in two cases which contained similar language (Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWCA Civ 2196 and Drax Energy Solutions Ltd v Wipro Ltd [2023] EWHC 1342 (TCC) (Drax)). In both cases, the clause expressed a limit to the total aggregate liability before tying this cap on a per event basis to charges incurred in the 12 months prior to the date of the claim. In both cases, the respective judges found the wording did not create multiple caps on liability.

Secondly, clause 52.2.6 did not contain the simple language of “per claim”, which might indicate multiple caps.

Thirdly, the clause sought to “net off sums previously paid”. This suggested that the capped sums calculated in accordance with the clause were not intended to be additive.

On a practical level, the judge considered TCS’ construction to be preferable and DBS’ to be unworkable. The way DBS had sought to apply the caps meant the losses claimed were derived from numerous separate alleged breaches, some one-off, and some continuing, each of which would give rise to separate causes of action. DBS’ approach depended on undefined and somewhat arbitrary grouping of breaches into themes – which could be done in a myriad of different ways. It would be difficult to apply in practice.

Although clause 52.2.6 aggregated liability under a single cap, it only did so for liability arising from that specific sub-paragraph. Despite the sub-paragraph ending with the words “in satisfaction of any liability under this Agreement”, the judge thought simple language would have been used if the intention was for clause 52.2.6 to override any cumulative liability from the preceding sub-paragraphs and the agreement as a whole.

The Delay Payments cap under clause 52.2.5

The pivotal phrase in clause 52.2.5 was “implementation Charges”. However, there was no definition for this term within the agreement. TCS argued it should be linked to a project milestone specified by it. This was dismissed by the judge who considered it impossible to discern a clear or meaningful intention to identify this particular type of charge. Claims for the Delay Payments were therefore not limited.

TCS’ claim for loss of anticipated costs savings

TCS’ claim for “loss of revenue” was argued as a wasted expenditure claim. However, this claim was not articulated as one for wasted expenditure in the sense that specific costs, actually incurred, had been identified as costs which were “wasted”. TCS’ argument was instead that, but for the delays to the software rollout, the predicted or anticipated efficiencies were not actually realised, creating a loss.

In reaching a decision, the judge referred to the Court of Appeal case of Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440 (Soteria). In that case, the court had emphasised the difference between loss of profit and wasted expenditure; the latter being a “type of loss [that] is the opposite of speculative: it is precisely ascertainable. It is a pure accounting exercise.”

Following the reasoning in the “instructive” Soteria case, the judge started with the natural and ordinary meaning of the words in the clause and noted that the words “Anticipated savings” did not appear in clause 52.4. However, while those words did not appear in clause 52.4.2, they did appear in clause 52.5 where DBS was expressly permitted to claim for such loss. While this was not determinative, the instruction in Soteria to distinguish between speculative loss and a claim for actual costs expended but wasted by reason of the termination, was. The claim made by TCS was in reality no more than a claim for loss of profits, despite the way in which it had been characterised. It was speculative in nature and was therefore caught by the wording of clause 52.4.2.

Why is this important?

The case highlights:

• a trend in recent judgments for courts to interpret references to “aggregate liability” in favour of parties seeking to assert that a single cap applies to all claims rather than multiple caps. This appears to be the case even where clauses beginning with “aggregate liability” (or “total liability” in Drax) are followed by references to the possibility of multiple claims. In this case, the inclusion of the word “total” before “aggregate liability” and its attachment to each sub-paragraph was treated as even more persuasive than previous caselaw in suggesting that the intention was for a single cap
  
  
• where key terms are omitted or not defined within a clause or agreement or where clauses are poorly drafted, the parties are left with a lack of certainty on construction. Where this is resolved by the courts, the correct starting point is the natural and ordinary meaning of the words, and the need to construe the clause within the surrounding provisions and the agreement as a whole
  
  
• the difference between a “wasted expenditure” claim – a claim that is precisely ascertainable, for actual costs expenditure; and a “loss of profits” claim, which may be “speculative” in nature as it may involve savings that were anticipated or which may have been made – and so another way of expressing a claim for the profits that would have been made were it not for the breach / termination.

Any practical tips?

Ensure clear drafting throughout limitation clauses, to avoid potential contradictions between “aggregate” or “total” caps and reference to multiple or separate events / claims.

In some contracts, it may be appropriate to apply different caps to different types of loss. If so, consider how the separate caps interact and what may happen if the same event / breach gives rise to different types of loss.

Key terms should be defined so as to avoid ambiguity, or even a provision lacking any meaning or becoming unenforceable.

Consider specifying the different types of loss within the limitation of liability/exclusion clause. While most limitation of liability clauses tend to focus on defining losses which are not recoverable, consider expressly stating certain types of loss (such as wasted expenditure) that will be recoverable in the event of a breach. If adopting this approach, ensure that the list is expressed to be non-exhaustive to avoid it inadvertently acting as a limitation to other types of claim.

Consider testing your set of exclusion and limitation of liability clauses against key risks or with common scenarios in mind, to ensure that they operate as intended, provide a commercial realistic outcome, and are practically workable in the circumstances. This can be particularly helpful where there are a series of different caps for different scenarios, or potentially overlapping exclusions and limitations.

Summer 2024