Our previous Insight on the Supreme Court's judgment in Triple Point Technology v PTT focused on the court's welcome return to orthodoxy in the application of liquidated damages provisions after termination. However, that was not the only issue considered in that judgment.
In this Insight we look at the differing views held by the Supreme Court judges on what "negligence" might mean in the context of limitation clauses, and how the decision might affect contracts containing similar wording.
Background to the Supreme Court's decision
The facts of the case are summarised in our earlier Insight. A separate issue that arose in the case concerned whether Triple Point's liability to PTT for breach of contract was capped by a limitation of liability clause which restricted liability to the level of the contract price. The contract contained a carve-out from this limitation clause which stated that any liability arising from Triple Point's "fraud, negligence, gross negligence or wilful misconduct" would not fall within the cap.
The question for the courts was whether "negligence" in this carve-out included liability arising from a negligent breach of a contractual provision to exercise skill and care (so that such liability was effectively uncapped under the contract), or whether it was limited to liability arising outside the contract under the separate tort of negligence.
The lower court and the Court of Appeal had both held that the cap was limited to liability arising under the separate tort of negligence, and did not apply to a negligent breach of a contractual duty of skill and care. This was because the contract was wholly or substantially for services which were subject to the exercise of the contractual duty of skill and care. As such, to include negligent breach of contract within the meaning of "negligence" in the cap carve-out would effectively prevent all claims that might arise under the contract from falling within the limit on liability, rendering the cap useless (which could not have been the intention of the parties).
The Supreme Court judgment
The majority of the Supreme Court disagreed with this conclusion, finding that "negligence" in this context included a negligent breach of a contractual provision to exercise skill and care. This was the "natural and ordinary…[and] accepted meaning in English Law" of the term.
The majority also reasoned that that the contract was not in fact solely concerned with the provision of services that were subject to the exercise of a duty of skill and care. It included a number of obligations which were absolute (for example, relating to the use of intellectual property, confidentiality, and the deliverables and functionality to be provided), and not obligations to exercise skill and care. As such, interpreting the term "negligence" to include breaches of contractual duty did not render the cap on liability redundant (as had been argued by the lower courts), as it would apply to breaches of those absolute obligations. Though it wasn't an issue discussed in the judgment, whether an obligation is absolute or qualified by a duty of care is not always an easy distinction to make when applied to construction projects. For example, if a design is completed late against a programme on account of the designer's negligence, is this a breach of an absolute obligation (to complete the design by a specific date) or a breach of an obligation to exercise skill and care, or both?
The majority were also of the view that it did not make sense to limit the parties' intentions around interpretation of "negligence" to the separate tort of negligence as the scope of the application of that tort to the circumstances of the contract was extremely limited. According to Lady Arden, in the arguments heard by the court and even the judgments handed down by the lower courts, "no-one has yet thought of a realistic example of such a tort".
In his supporting judgment, Lord Leggatt also noted that, though the current approach of the courts to contractual interpretation is to give effect to terms freely agreed by the parties, it remains the case that clear words are necessary before the court will hold that a contract has taken away valuable rights or remedies which one of the parties to it would have had at common law.
However, Lord Sales (with whom Lord Hodge agreed) disagreed with the view of the majority, and preferred the interpretation adopted by the lower courts that the term "negligence" here was intended to refer to only the standalone tort of negligence, and not breach of a contractual duty. In reaching this conclusion, Lord Sales noted that the core provisions of the contract were subject to the exercise of skill and care to such an extent that to interpret the cap carve-out as including any breach of that contractual duty would have the effect of nullifying the limitation. He reasoned that the parties would not have intended to grant a limit on liability with the one hand, then immediately take it away with the other via the cap carve-out. Lord Sales also noted that in English Law, “negligence” is a term which is capable of bearing a narrow, technical meaning as referring (only) to the tort of negligence.
So where does this leave us?
In his dissenting judgment, Lord Sales was at pains to stress that his interpretation of the meaning of "negligence" was in reference to the specific clause in this case, noting that "[t]his is a one-off provision and the question of law to which it gives rise has no wider significance than this case". Nevertheless, the comments from both the majority and the minority Supreme Court judgments will be of interest given the frequency of use of the term "negligence" in limitation of liability clauses agreed between contractual counterparties.
The decision cannot be taken as establishing a hard and fast rule that the use of the term "negligence" in this context will always be interpreted to mean both the separate tort of negligence, and the breach of a contractual duty of skill and care – everything will turn on the precise drafting of any such limitation clause in the context of the contract as a whole. The split in judicial opinion on this point is demonstrative of the difficulty and confusion that can arise in these questions of interpretation.
This case serves as a stark reminder of the need to be clear and unambiguous as to what is and is not included within the scope of a limitation clause. The only way to prevent difficult questions of interpretation from arising is to ensure that the answer is provided at the contract drafting stage.