Interpreting Indemnity Clauses: How Many Caps And What Size?

• Published date: 13 July 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Trials & Appeals & Compensation
• Law Firm: Fenwick Elliott LLP
• Author: Mr Jeremy Glover

Limitation of liability clauses are intended to provide certainty as to a party's potential exposure following a breach of contract. It is unsurprisingly therefore of some importance to take care to ensure that the intended limits reflect what is agreed. A recent case about a contract for the supply of software services provides a useful refresher of some of the key principles parties need to bear in mind.

Drax Energy Solutions Ltd v Wipro Ltd

[2023] EWHC 1342 (TCC)

The dispute here centred on the interpretation of a limitation of liability clause, sub-clause 33.2, contained in a Master Services Agreement ("MSA") made between Drax and Wipro in January 2017 for the provision of a new IT system. The project was not a success, although the reasons for this remain under dispute and were not the subject of these court proceedings. However, Drax terminated the MSA on account of what were said to be repudiatory breaches on the part of Wipro.

Whilst cases such as these will always depend on their facts, or here the wording of the clause in question, it is always interesting to see the arguments used and the way the court approaches its decision. In 2021, the Supreme Court¹ in the UK gave guidance about the way to construe exclusion limitation clauses. Lord Leggatt noted that the approach of the courts to the interpretation of exclusion clauses (including clauses limiting liability) had changed markedly in the last 50 years and, following a consideration of the authorities, he went on to say:

"The modern view is accordingly to recognise that commercial parties are free to make their own bargains and allocate risks as they think fit, and that the task of the court is to interpret the words used fairly applying the ordinary methods of contractual interpretation. It also remains necessary, however, to recognise that a vital part of the setting in which parties contract is a framework of rights and obligations established by the common law (and often now codified in statute). These comprise duties imposed by the law of tort and also norms of commerce which have come to be recognised as ordinary incidents of particular types of contract or relationship and which often take the form of terms implied in the contract by law. Although its strength will vary according to the circumstances of the case, the court in construing the contract starts from the assumption that in the absence of clear words the parties did not intend the contract to derogate from these normal...