Exclusion and limitation clauses are central to any IT or technology contract. When a dispute arises exclusions and limitations of liability are invariably key to determining whether there is liability and the extent of it.
When a dispute arises exclusions and limitations of liability are very often key to determining whether there is liability, and the extent of it. In the first in a series of articles covering the Tech and Cyber disputes, we look at exclusion and limitation clauses and common issues that arise with them.
For a supplier, well-drafted exclusions and limitations can help ensure that entering into a contract makes commercial sense and that the risks involved are acceptable. For a purchaser, it is important to understand the scope of these limitations so you aware of what can and what cannot be recovered in the event of a dispute.
As seen in the recent case of CIS General Insurance Limited v IBM United Kingdom Limited  EWHC 347 (TCC) (CIS) (which is summarised here) exclusion clauses can have a very significant impact on the value of a claim. In CIS, the Court determined that a claim for £128 million of reliance losses was excluded under the contract, and that the customer, CIS, could only recover £15.9 million less the value of IBM’s counterclaim.
Exclusion and Limitation Clauses
As their name suggests, exclusion clauses seek to exclude specific types of liability from the contract. Limitation clauses seek to impose limitations and caps on liability, either for specific types of losses or as an overall cap on liability.
Not all types of liability can be excluded or limited, for example there is a general prohibition against excluding liability for fraud, or for personal injury or death caused by one’s own negligence. Equally, it is unlikely that a party would be able to protect itself from all liability by virtue of an exclusion. In some cases, exclusions and limitations can also be subject to a reasonableness test under the Unfair Contract Terms Act 1977.
IT and technology contracts will often exclude liability for, amongst other things:
- Indirect and consequential losses;
- Loss of profits;
- Loss of savings;
- Loss of business; and
- Loss of goodwill.
As was seen in CIS, exclusions such as loss of profits and savings can have a very significant impact on the parties’ liabilities. It is therefore important to carefully consider what specifically is being excluded and what losses can be claimed.
If it is vital that a particular type of loss is excluded (or included), this needs to be considered at an early stage of negotiations and catered for in the drafting. Spending time to fully consider the potential consequences of a breach and how this will interplay with the exclusion clause is key to ensuring that there are no nasty surprises if the relationship breaks down – be it having to soak-up significant losses you had hoped to recover, or being liable for losses you had thought excluded.
Determining whether the wording used will exclude a certain type of loss is not always straightforward. In CIS a claim for £128 million was made for the wasted expenditure CIS had incurred on the failed project. The Court, somewhat surprisingly, decided that the claim for wasted expenditure was excluded because it amounted to a claim for loss of profits or savings.
In her judgment, O’Farrell J explained that the claim simply represented a different method of quantifying the loss of the bargain and was therefore fundamentally no different from a claim for loss of profits. The contract in dispute excluded claims for loss of profit, revenue and savings and so CIS was unable to recover its wasted expenditure. This can be contrasted with the earlier well known decision in Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd  EWHC 2197 (TCC) which found that a claim for wasted expenditure could proceed despite a contractual exclusion for loss of profits, revenue or anticipated savings, as the contractual benefit that the Royal Devon and Exeter NHS Foundation Trust had hoped to achieve was non-pecuniary – it was to provide a working system for the benefit of patients, rather than to make a profit. These decisions show how the specific circumstances in different cases can lead to quite different outcomes for similar drafting. They highlight why exclusion clauses need to be considered carefully in context.
It is also important to be aware that an exclusion clause may be interpreted strictly and narrowly by the court. Whilst there is competing authority as to whether strict interpretation is the correct approach (as helpfully summarised in CNM Estates (Tolworth Tower) Ltd v Vecref I Sarl  EWHC 1605 (Comm)), there is a risk that an exclusion will be interpreted narrowly and this should be considered at the drafting stage.
Attempts to exclude certain risks are more likely to be interpreted narrowly, particularly attempts to exclude liability for negligence or wilful default and misconduct. Whilst each case will turn on its own facts and the precise wording used, express reference in the contract may be needed to exclude liability for negligence.
It is common for contracts to treat breaches arising from wilful default or misconduct differently from other breaches. In De Beers UK Ltd (formerly Diamond Trading Co Ltd) v Atos Origin IT Services UK Ltd  EWHC 3276 (TCC) the Court gave some guidance on the meaning of wilful misconduct and deliberate default. At paragraph 206 Edwards-Stuart J held:
“Wilful misconduct refers to conduct by a person who knows that he is committing, and intends to commit a breach of duty, or is reckless in the sense of not caring whether or not he commits a breach of duty... a default that is deliberate, in the sense that the person committing the relevant act knew that it was a default ... it does not extend to recklessness and is therefore narrower than wilful misconduct...”
There is conflicting case law on how liability for wilful default and misconduct will be dealt with by the courts in the context of exclusion clauses. In Internet Broadcasting Corporation Ltd (t/a NETTV) and another v MAR LLC  EWHC 844 (Ch) (NETTV) the Court held that there is a strong rebuttable presumption that exclusion clauses will not apply to deliberate personal repudiatory breaches of contract, for example an intentional decision to cease performance of a contract taken by the controlling mind of a business. According to the NETTV decision, very clear wording will be needed to rebut the presumption that exclusion clauses are not intended to apply to deliberate personal repudiatory breaches.
However, NETTV has been widely criticised, in particular, in AstraZeneca UK Limited v Albemarle International Corporation and other  EWHC 1574 (Comm) (AstraZeneca) Flaux J explained obiter that he would have declined to follow the NETTV judgment as he considered that the decision was wrong on the modern authorities.
This conflict was considered recently in Mott MacDonald Ltd v Trant Engineering Ltd  EWHC 754 (TCC), where HH Judge Eyre QC declined to follow the NETTV decision, instead preferring the approach set out in AstraZenenca on the basis that it was both correct and more recent. This decision suggests that there is no rebuttable presumption and the usual principles of construction apply regardless of whether the breach is deliberate. However, there is still a lack of appellate authority on this point, so uncertainty remains.
Given this lack of clarity, caution is appropriate when drafting exclusion causes, particularly in relation to wilful default.
Service credits are also common in IT and Technology contracts and often limit the remedies available to the provision of service credits for certain breaches, normally a failure to provide the services for specified periods of time. These clauses can therefore act as exclusions, and it can be helpful to consider them in the same way as more obvious exclusions.
There has been some debate regarding whether clauses requiring the payment of service credits may amount to unenforceable penalties. However, the Supreme Court in Makdessi v Cavendish Square Holdings BV  UKSC 67 suggests that the threshold for arguing that clauses are unenforceable is high, requiring the penalty to be exorbitant or unconscionable in light of the innocent party's interest in the performance of the contract.
IT and Technology contracts will often include an aggregate limit of liability, as well as separate caps on liability for specified types of losses, such as losses arising from a data protection breach. It is common for these limits to be determined by reference to the charges paid under the agreement.
Limitations of liability are less likely to be interpreted strictly than exclusion clauses (Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd  UKHL 12). However, clear drafting is still important, as ambiguity over the correct application of limits can create significant uncertainty. In Royal Devon and Exeter NHS Foundation Trust v Atos IT Services UK Ltd  EWCA Civ 2196, a poorly drafted limitation clause lead to significant dispute as to the what the appropriate cap was.
It is common for IT and technology contracts to require the supplier to take out professional indemnity insurance with a specified cap on liability. Such insurance policies may well contain exclusions for certain types of liability, for example loss of profits or non-compensatory penalty payments. For both the supplier and purchaser, it will be important to consider to what extent liability under the relevant contract coincides with the cover under professional indemnity policy and whether there are any significant gaps.
Exclusion and limitation clauses are very often of central importance when a dispute arises. Careful consideration is needed to ensure that they are fit for purpose, taking into account the products or services being supplied and the parties’ appetites for risk.