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Interpretation and effect of a financial cap on liability

Gateley Legal

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In the case of Equitix Eeef Biomass 2 Ltd v Fox & Others [2021] EWHC 2781 (TCC) the High Court considered whether a contractual cap on liability for warranty claims applied to damages only or whether it included other ancillary liabilities including interest and costs.

Background Facts

In August 2016, the claimant purchased the entire issued share capital of a company called Gaia Heat Limited (“Gaia”) from the defendants and the parties entered into a share sale agreement (“the SSA”). Gaia was a supplier of steam generated by two biomass boilers. 

The claimant brought proceedings for breach of warranty and sought damages. The Court held that warranties in the SSA had been false and the claimant had overpaid by £13.45m.

However, the SSA contained a cap on liability at £11m and so the Court gave judgment for £11m.

The Issues

The claimant sought interest and costs in addition to the damages and the issue before the Court was whether interest and costs could be claimed in addition to the £11m or whether the £11m was a cap of the entire amount payable by the defendants.

The cap was expressed to relate to liability in respect of any claim under the SSA for breach of warranty.

The defendants said that this imposed an aggregate financial limit which included not just damages but also interest and costs. It argued that the parties could not be taken to have intended that those ancillary obligations would remain at large and uncapped, and that such an interpretation was inconsistent with the broad words "in respect of".

The claimant’s position was that the cap applied to damages only because a claim was defined as "any claim under [the SSA] for breach of the Warranties". An ancillary order to pay interest or costs would not create a liability "in respect of" the claim itself but in respect of the litigation process to determine the claim and would not, therefore, be a liability in respect of a claim "under" the SSA.

The Decision

The Court preferred the claimant’s construction. The limitation applied "in respect of" a "claim under [the SSA]". This did not extend to claims for interest or costs which would be made pursuant to the Court's jurisdiction to make ancillary orders, rather being made under the SSA itself.

Although the phrase "in respect of" was wide, the Court considered that it was not as broad as the phrase "arising out of or in connection with", and it would have expected interest and costs to be mentioned expressly in the liability cap if the parties had intended that important litigation rights were being foregone.

Implications

Although this decision was not in relation to a performance bond, it has implications for the construction industry and sureties.

Bonds should always contain a financial cap on liability. Although this case related to a share sale agreement, the position which the Court took in relation to interpretation fits with what would be expected if the Court had been interpreting the maximum bond amount in an ABI bond wording. As you might expect that cap will apply to the amount payable under the bond only –based on the ABI wording, it will not operate to limit any interest and costs ordered to be paid in addition.

If you are entering into a document which entitles you to recover sums –for example an indemnity which entitles you to recover in respect of bond claims – note that the words “arising out of or in connection with” are wider and thus preferable to “in respect of”. In contrast, if you are the payer, then you may wish to limit it to the narrower wording.

Financial caps are an important part of negotiations in many wide ranging contracts. They may be included in construction contracts for example to place an overall cap on the contractor’s liability for liquidated damages. It is important to check this aspect when dealing with bond claims.

In summary, yet again the message is: clear drafting. If a cap is negotiated, make sure it is clear what is included and excluded from that cap and what it relates to.

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.

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