Key Takeaways
- Ambiguous wording in liability caps can create millions in unforeseen exposure.
- The Tata v. Barring case demonstrates that courts will interpret caps strictly based on precise drafting.
- If the limitation of liability clause refers to “the claim” without specifying whether that means the first claim or any claim, it creates room for argument.
A single sentence in a limitation of liability clause can leave millions at stake if it’s not drafted precisely. Is the cap a single aggregate amount? Does it reset per claim? Which claim sets the calculation period?
Consider this common example:
“The total aggregate liability of [Vendor] to [Customer], whether arising in contract, tort (including negligence), or otherwise, shall not exceed the fees paid by [Customer] to [Vendor] during the 12-month period immediately preceding the claim.”
Which claim? Each claim? All claims?
This type of wording appears in countless technology contracts, yet it often creates uncertainty. Does “total aggregate liability” mean the cap applies once across the entire relationship, no matter how many claims arise? Or does “the claim” suggest that the 12-month period cap resets for each claim giving the customer the potential to recover more than one cap’s worth over the contract term? And if it’s tied to a 12-month period before “the claim,” is that a moving target as fees change?
Common Approaches to Liability Caps
If you haven’t really considered these questions, it can make your head spin. But there is some clarity to be found.
Before untangling this issue, it’s worth noting the typical ways caps are structured. Some clauses set the cap at “total fees paid” over the life of the contract, which grows over time and generally benefits the customer. Others use a “per claim” cap, which resets for each separate claim, potentially multiplying exposure – also a customer-friendly position.
On the vendor side, some prefer a fixed amount for the entire term, providing predictability but no increase if the contract grows. Another vendor-friendly variation ties the cap to the 12 months’ fees before the first claim, crystallizing the cap at a single point in time and creating certainty.
The challenge arises when the limitation of liability clause is vague. If the clause refers to “the claim” without specifying whether that means the first claim or any claim, it creates room for argument.
Lessons from the Tata v. Barring Case
The case of Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) illustrates how such ambiguity can lead to disputes. The parties disagreed on whether the liability cap was a single aggregate amount or one that reset per claim. The court’s interpretation hinged entirely on the clause’s precise wording and whether it clearly signaled the intended outcome.
The lesson from Tata is that courts look for unambiguous indicators of intent. If the parties want a single cap for all claims, say so directly:
“The total aggregate liability… for all claims… shall not exceed [amount].”
If they want a per-claim cap:
“For each claim, liability shall not exceed…”
And if the cap is calculated based on contract value, define the reference point. Such as the 12 months before the first claim, before each claim, or another agreed period.
A Clearer Alternative
Limitation of liability clauses are meant to provide certainty. But vague drafting around caps on direct damages can produce exactly the opposite, turning what should be a clear risk allocation tool into a source of costly dispute.
As a contrast, here’s an example from the Tata case that clearly identifies the reference point and addresses prior payments against the cap:
“The aggregate liability… in respect of all other claims, losses or damages, shall in no event exceed 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.”
This type of wording leaves little room for doubt. It defines exactly how the cap is calculated, identifies the relevant event, and ensures any amounts already paid under the agreement are deducted from the cap. It is a reminder that clarity in drafting reduces the risk of dispute and gives both parties real certainty in the transaction.
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