Wasted expenditure and contract performance
In this article, we consider the recent case of The Royal Devon and Exeter NHS Foundation Trust v Atos IT Services UK Limited  EWHC 2197 (TCC). This was a judgment of preliminary issues, where the court considered whether heads of loss fell within an exclusion clause in the contract and whether there was a cap on liability.
The case doesn’t blaze a trail of innovation but it does highlight the importance of accurately drafting exclusion clauses and it also provides useful illustration of how the court interprets clauses within a contract.
The claimant (a hospital trust) contracted with Atos to provide an electronic management system for just shy of £5 million. Atos provided an inadequate system and the trust terminated the contract, and sought damages of £7.9 million for wasted expenditure incurred in reliance on Atos performing the contract.
Atos argued that the trust was not entitled to such damages because of a clause that excluded liability for loss of profits, business, revenue, goodwill or anticipated savings. Atos also argued that damages should be capped.
The trust was not claiming for loss of profits, as this was clearly prohibited by the exclusion clause. The court found that the trust was entitled to the loss of contractual benefit (i.e. the loss of a functional management system) and Atos was wrong to assume that benefit would be by way of profits or revenue. Where the benefit is non-pecuniary, then that benefit will be given a notional value of at least equal to the amount of expenditure and it was for Atos to prove otherwise. The court allowed the trust to recover damages for wasted expenditure.
Of particular interest are the employee costs. Part of the trust’s claim related to the cost of staff who would have otherwise been employed in work of benefit to the trust. Atos argued that the basis of this head of loss should be the loss of revenue those staff would generate (which would fall within the exclusion clause). The judge disagreed: the cases Atos sought to rely on concerned staff costs that were incurred as a result of the breach, and that those staff costs would rightly fall within the category of lost revenues and be excluded. However, the case here was different because the staff were assigned to facilitate performance of the contract and therefore the costs fell outside of the exclusion clause.
There was a clause in the contract that sought to cap Atos’s liability to the trust. broadly set out as follows:
- Liability for any one default shall not exceed the figure in Schedule G;
- The aggregate liability for all defaults shall not exceed the amount in Schedule G;
- Schedule G provided that the total charges would not exceed:
- for any claim arising in the first 12 months of the term of the contract, the total contract price; or
- for claims arising after the first 12 months of the contract, the total contract charges paid in the 12 months prior to the date of that claim. [Our emphasis]
In commercial contracts, the court will generally give effect to a clause that limits a party’s liability provided the clause is clear and unambiguous or can at least be construed as such. There is no presumption against parties having agreed to give up or limit their contractual remedies and, provided that clear words had been used, the court would give effect to the commercial allocation of risk in a contract. Atos argued that the above amounted to a valid limitation of liability and was, consequently, valid and enforceable.
The trust argued that the clause was not capable of being construed as a limitation of liability, as reference in the clause to ‘claims’ and ‘that claim’ were contradictory and it is not clear whether there is a single cap or a cap for each claim that might arise; in effect, the clause sought to define terms within itself that were themselves not defined and was therefore unenforceable through uncertainty.
ATOS argued that the clause would make sense if the words at paragraph c(ii) ‘for claims arising’ were substituted for ‘any claim arising’ which was consistent with the paragraph c(i). Atos submitted that the caps were alternatives and not accumulative or that there were two caps depending on whether the defaults occurred within the first 12 months of the contract or after.
The court will be concerned with the intentions of the parties when interpreting a contract and will look at what a reasonable person with the knowledge of the parties would understand the contract to be by looking at the meaning of the words in their context.
The court accepted that paragraph c(ii) could be rectified by reading all references to claims in the plural in the singular.
The court then looked at how that paragraph would be read with the preceding paragraph and whether, when read together, it provides for one, two or multiple caps. The court’s reasoning was:
- The use of the word ‘or’ between the paragraphs and the words ‘aggregate liability […] shall not exceed’ at paragraph b suggest that one cap should apply, depending on which paragraph the relevant default fell within; and
- If paragraph (ii) were to provide for multiple caps then paragraph (i) would have to be read the same. This could result in damages far exceeding the contract value and would render the purpose of the cap useless.
Ultimately, the court found the clause to be valid and enforceable, and preferred the interpretation that made commercial sense; the clause provided one cap for all defaults with the level of cap depending on whether the first default occurred within the first 12 months of the contract or after.
Where there is more than one interpretation of a clause, the court will apply the one it deems more appropriate by looking at the intention of the parties and the wording of the contract itself. It is open to the court to prefer the interpretation that makes commercial sense but that is not to say that the court will redraft badly worded contractual provisions or correct a ‘bad bargain’ with the benefit of hindsight.
The court reasonably considered that the intention of the parties could be construed by reading it together with the other contractual provisions that sought to limit the total liability of Atos and by assuming that the parties intended the provision to have a reasonable and commercially sensible effect.
This was decided as a preliminary issue and should narrow the issues in dispute, making it more likely that broad terms of settlement can be agreed. However, costly litigation could have been avoided had the contractual provisions been drafted with more precision. It is inevitable that parties turn their attention to what a contract actually means once a dispute crystallises but it is also worth pointing out that it would still have been open to the parties to agree what the exclusion provisions meant, which would have avoided the need for court intervention.
For more information on wasted expenditure or any of the other issues raised in this article, please contact Nichola Board in the Commercial Litigation team by emailing firstname.lastname@example.org or calling 0117 394 5034.
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Posted on Nov 22nd, 2017 by Lyons Davidson