Exclusion and limitation of liability clauses have always been a hot topic in the IT industry as suppliers seek to minimise its risk. Although Price Waterhouse v The
If PW’s exclusion clause had been enforceable they might have been able to save £1.8 million. Alternatively, if PW had made it clear to the University of Keele that they would not be able to recover losses arising from the failure to achieve the anticipated savings directly caused by PW’s services, Keele may have told PW that they would not agree to such terms – which would probably have saved PW substantial legal costs disputing the meaning of the exclusion clause.
Facts of the case
PW appealed against a High Court decision that they were liable to pay damages in the sum of £1,670,163.06 with interest of £170,914.90 for negligent advice in respect of the implementation of a profit-related pay (PRP) scheme which resulted in the University of Keele not obtaining the anticipated savings that it would have done if PW’s advice had not been negligent and the PRP system properly implemented. PW admitted that they had given negligent advice but sought to exclude any liability for the amount claimed by relying on the exclusion clause in its terms of engagement.
The liability clause stated:
“In no circumstances shall any liability (whether arising in contract, negligence or otherwise) of Price Waterhouse, its partners or employees, relating to the Services provided in connection with the engagement set out in this letter (or any variation or addition thereto) exceed £1,700,000 being twice the anticipated saving to Keele University from the implementation of the Profit-Related Pay Scheme.
Subject to the preceding paragraph we accept liability to pay damages in respect of loss or damage suffered by you as a direct result of our providing the Services [the first limb]. All other liability is expressly excluded, in particular consequential loss, failure to realise anticipated savings or benefit and a failure to obtain registration of the scheme [the second limb].”
Losses claimed for breach of contract fall into two categories:
· direct loss – loss which may fairly and reasonably be considered to arise naturally in the ordinary course of things.
· indirect or consequentiallLoss – loss which should have been reasonably contemplated by the parties at the time the contract was entered into as likely to arise from the breach concerned, ie loses which are the result of special circumstances known to the defendant.
The parties agreed that the failure to realise anticipated savings was not consequential loss for the purposes of the second limb. However, the court faced the difficulty that the loss arising from the failure to achieve the anticipated savings directly caused by PW’s services was covered by both limbs.
PW argued that the effect of reading the first and second limb together meant that because the second limb excluded liability arising from failure to realise anticipated savings, the loss or damage referred to in the first limb excluded losses arising from the failure to realise anticipated savings and benefits. Therefore, PW argued that as the losses arising from the failure to realise anticipated savings fell within the second limb, they represented losses which the parties had agreed to exclude.
Keele argued that the first and second limbs had separate purposes. The first limb was to define the liability PW accepted and the second limb excluded liability for all other liability not covered by the first limb.
The Court of Appeal held that the losses covered by the second limb were losses other than those mentioned in the first limb. Therefore, they were not included within the first limb. The Court of Appeal said that ‘the word “other” at the start of the second limb is the key to the precedence. It is the first.‘ The second limb then constitutes the residual category of liability. As the loss suffered by Keele was a direct result of PW providing negligent services it fell within the first limb. PW was accordingly ordered to pay damages of £1,841,077.90 including interest.
Salient Points
Lawyers for either side in an IT contract can learn some lessons.
· Be aware of the types of loss which may result from a breach of the contract. If both parties agree that certain types of loss should be included or excluded from the contract, you should include a non-exhaustive list of the types of direct and indirect losses which you wish to include or exclude as this will help considerably in establishing that the parties contemplated such losses at the time of entering into the contract; and it also helps to avoid uncertainty if a dispute arises.
· Even if your limitation or exclusion clause is well drafted and covers the types of loss which the parties agree to exclude, there may in certain circumstances still be a risk that it may be unenforceable under specific laws which restrict or prohibit the exclusion of liabilities such as the Unfair Contract Terms Act 1997 and the Consumer Protection Act 1987. This is beyond the scope of this article.
Mark Lewis and Charlotte Hinton are from the Field Fisher Waterhouse IP/IT Litigation Group.
