Case No: A1/2017/2587 & A
Neutral Citation Number: [2017] EWCA Civ 2196
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QBD, Technology and Construction Court
Mrs Justice O'Farrell DBE
HT2016000208
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 20/12/2017
Before :

LORD JUSTICE RUPERT JACKSON
and
LORD JUSTICE LEWISON

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Between :

	The Royal Devon & Exeter NHS Foundation Trust	Appellant	
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	ATOS IT Services UK Limited	Respondent	

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Alex Charlton QC (instructed by Clarion Solicitors Limited) for the Appellant
Zoe O'Sullivan QC & Andrew Lomas (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for the Respondent

Hearing date: Monday 18th December 2017

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Judgment
Lord Justice Rupert Jackson : 
1.	This judgment is in eight parts, namely: 

Part 1 – Introduction
	
Paragraphs 2 – 4 	

Part 2 – The facts
	
Paragraphs 5 – 13	

Part 3 – The present proceedings
	
Paragraphs 14 – 20	

Part 4 – The appeal to the Court of Appeal
	
Paragraphs 21 – 27	

Part 5 – Should there be permission to appeal or cross-appeal?
	
Paragraphs 28 – 33	

Part 6 – Does paragraph 9.2 of Schedule G impose one cap or two separate caps?
	
Paragraphs 34 – 47	

Part 7 – The defendant’s cross-appeal
	
Paragraphs 48 – 54

Part 8 – Conclusion
	
Paragraphs 55 – 56
	
Part 1 – Introduction
2.	This is an appeal and a cross-appeal about the meaning and effect of a limitation clause. The central issue is what was the natural meaning of the words used, applying the test of a reasonable person who had all the background knowledge of the parties. 
3.	Both parties are well-resourced, commercial organisations with ready access to legal advice. The term itself, although poorly drafted, is perfectly rational. There is no reason for the court to depart from the natural meaning of the words used, once that natural meaning has been ascertained. 
4.	After these introductory remarks, I must now turn to the facts. 
Part 2 – The facts
5.	In 2011 the claimant engaged the defendant to provide an IT system, whereby patient records would be held online. Clinicians would be able to view patients’ records electronically and make their own additions to the online records. 
6.	The claimant had 47 departments. The plan was that two small departments, namely orthodontics and oral surgery, would be the first ones to have their records put online. Once that had been done satisfactorily, the IT system would be rolled out to the other 45 departments. That was a sensible plan. The two small departments which were going online first were referred to as “early adopters”.
7.	The project commenced on 7th November 2011. On that date the parties entered into a contract in the standard form known as “NHS conditions of contract for the supply of IT systems and the provision of associated services”, subject to certain bespoke amendments. The contract included the following provisions: 
“1.1.20	Default means any breach of the obligations of either party (including but not limited to fundamental breach or breach of a fundamental term) or any Default, act, omission, negligence or statement of either party, its employees, agents or sub-contractors in connection with or in relation to the subject matter of the Contract and in respect of which such party is liable to the other hereunder;
…
1.2	Number
As used herein unless the context otherwise requires, the singular includes the plural and vice versa.
...
2		Obligations of parties
2.1	Contractor’s obligations
The Contractor shall meet the Contractor Undertakings contained in schedule A; and shall fulfil all its obligations under the Contract in accordance with the timetable in schedule E in consideration of payment by the Authority of the Contract Charges. 
2.2	Authority’s obligations
The Authority shall pay the Contractor the Contract Charges, and shall perform its responsibilities under the Contract including, but not limited to, those specified in schedule D (Authority’s responsibilities), in compliance with the Contractual Dates set out in schedule E.
…
3.1.1	The Contractor shall perform its delivery and installation obligations under the Contract according to the timetable contained in schedule E.
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8.1	Limitation of liability
8.1.1	Injury to Persons
Neither party excludes or limits liability to the other party for death or personal injury caused by the negligence of either party. 
8.1.2	Financial limits
Subject to clause 8.1.1 the liability of either party for Defaults shall be limited as stated below: 
(a) the liability of either party under the Contract for any one Default resulting in direct loss of or damage to tangible property of the other party or any series of connected Defaults resulting in or contributing to the loss of or damage to the tangible property of the other party shall not exceed the figure set out in schedule G; 
(b) the aggregate liability of either party under the Contract for all Defaults, other than those governed by sub-clause 8.1.2 (a) above, shall not exceed the amount stated in schedule G to be the limit of such liability.
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19.1 	The Contract shall commence on the date of signature of the Contract by both parties, 
19.2	The Support Services shall commence on the date of signature of the Contract by both parties. 
19.3	The Support Services may be terminated by the Authority upon giving the Contractor not less than twelve (12) months’ notice, such notice to expire no earlier than the end of the Initial Period of Services, or on any anniversary of the expiry of the Initial Period. 
19.4	Unless terminated earlier in accordance with clause 19.3 or otherwise in accordance with clause 10 (Termination), or extended in accordance with this Contract, in particular schedule A, the provision of the Services shall continue for a term of five (5) years from the date of signature of the Contract by both parties.”
The total contract price was £4,939,207.00.
8.	Schedule E to the contract set out the timetable for works. This provided that the defendant would supply the IT system during the first year and that the early adopters would go live on 5th October 2012. In the subsequent four years the defendant would be engaged upon maintenance, training of staff and scanning in documents. 
9.	Schedule G and Appendix 1 to the contract set out the payment profile. This provided that the claimant would pay £2,816,932 to the defendant during year one. The claimant would pay the remaining £2,122,275 over the next four years. On average that would be about £530,000 per year. 
10.	Paragraph 9 of schedule G provided: 
“9. 	Limitation of Liability
9.1	The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (a) shall not exceed the sum of two million pounds.
9.2	The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:
9.2.1		for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price as set out in section 1.1; or
9.2.2		for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim.”
11.	Paragraph 9 of schedule G, unlike the other provisions quoted, was specifically negotiated between the parties. It was not part of the standard form contract. 
12.	The defendant duly set to work in November 2011. Unfortunately the project did not go well. The early adopters did not go live as planned, with all functionalities. The IT system was never rolled out to the other 45 departments. 
13.	There was a dispute between the parties about who was responsible for the mishaps. There was a lengthy dispute resolution process, but the parties were unable to resolve their differences. On 21st April 2016 the claimant gave notice terminating the contract. The present proceedings followed. 
Part 3 – The present proceedings
14.	By a claim form issued in the Technology and Construction Court on 4th August 2016, the claimant claimed damages for numerous alleged breaches of contract by the defendant. The defendant in due course served a defence and counterclaim, asserting that the claimant was responsible for the problems which had arisen. 
15.	An issue arose on the pleadings as to whether, and to what extent, the defendant’s liability was limited by paragraph 9.2.2 of schedule G to the contract. Mr Justice Coulson ordered that question and certain other matters to be determined as preliminary issues. 
16.	The trial of the preliminary issues came on for hearing before Mrs Justice O’Farrell (“the judge”) on 4th May 2017. The claimant argued that paragraph 9.2 of schedule G was not capable of being construed and should be declared unenforceable. The defendant accepted that paragraph 9.2 was poorly drafted, but submitted that it could be construed and should be enforced. The defendant submitted that there were two possible interpretations of paragraph 9.2: 
i)	Paragraph 9.2 imposed a single cap which, depending on the circumstances, would be either that set out in paragraph 9.2.1 or that set out in paragraph 9.2.2.
Alternatively, 
ii)	Paragraph 9.2 imposed two caps, the first in respect of defaults occurring in the first twelve months of the contract and the second in respect of subsequent defaults. 
17.	The judge handed down her reserved judgment on 31st August 2017. She rejected the claimant’s case that paragraph 9.2 was unenforceable. She held that the paragraph had the first of the two meanings canvassed by the defendant. 
18.	At paragraphs 84 to 89 of her judgment the judge said this: 
“84. The question that then arises is whether, and if so, how, paragraphs 9.2.1 and 9.2.2 operate together, and whether they provide for one, two or multiple caps. 
85. The introductory words in paragraph 9.2 "aggregate liability … shall not exceed" indicate that the intention of the provision is to limit the total or composite liability of ATOS. Those words read together with the reference to "or" between paragraphs 9.2.1 and 9.2.2 indicate that the parties intended to agree one cap that would apply, the level of which would be determined in accordance with the sub-paragraph into which the relevant Default fell. 
86. If paragraph 9.2 were intended to provide for multiple caps where there were multiple claims, both sub-paragraphs would have to be read on that basis. Paragraph 9.2.1 refers to "any claim" and would impose a cap in the amount of the Total Contract Price in respect of each claim arising in the first 12 months. That could lead to a liability cap that was multiple times the Total Contract Price in the event that there were several Defaults during that period. Likewise, if there were two breaches, one occurring during the first 12 months and one occurring 12 months and 1 day after the Contract, the level of the cap would approach double the Total Contract Price (the Total Contract Price plus the fixed charges paid in the first year and 1 day less the first milestone). It is very unlikely that the parties would have contemplated or agreed to such a term because the potential level of the cap would render it devoid of any real purpose. 
87. Where, as in this case, the words used could give rise to competing interpretations, one of which makes commercial sense and the other does not, it is open to the court to prefer the interpretation that makes commercial sense. 
88. Although the language used in paragraph 9.2 is not helpful, the intention of the parties can be ascertained by construing the provision together with clause 8.1 and in accordance with the assumption that the parties intended the provision to have a reasonable and commercially sensible effect. 
89. In my judgment, paragraph 9.2 imposes one aggregate cap on the liability of ATOS for all Defaults (excluding claims for personal injury or property damage). The level of the cap is determined by the timing of the first Default. If a Default occurs in the first twelve months of the Contract, the level of the cap is the Total Contract Price. If no Default occurs during the first twelve months of the Contract, the level of the cap is the total Contract Charges paid in a twelve month period prior to the first Default.”
19.	Having reached that conclusion, the judge granted a declaration in the following terms: 
“… on a true construction, clause 8.1.2(b) of and paragraph 9.2 of Schedule G to the Contract provide one aggregate cap on the liability of the Defendant for all Defaults encompassed by clause 8.1.2(b). If a Default occurs in the first twelve months of the Contract, the level of the cap is the Total Contract Price. If no default occurs during the first twelve months of the Contract, the level of the cap is the total Contract Charges paid in a twelve month period prior to the first Default.”
20.	The claimant was aggrieved by the judge’s decision. Accordingly it appealed to the Court of Appeal. 
Part 4 – The appeal to the Court of Appeal
21.	 By an appellant’s notice filed on 20th September 2017 the claimant appealed against the judge’s decision that paragraph 9.2 of schedule G imposed a single cap rather than two separate caps. It can be seen that on appeal the claimant is far less ambitious than it was at first instance. The claimant abandons its wholesale challenge to paragraph 9.2. Instead, more modestly, the claimant is arguing that of the two interpretations of paragraph 9.2 which the defendant had canvassed below, the judge ought to have adopted the second alternative, rather than the first alternative. 
22.	The defendant protests that the claimant’s case on appeal is a complete volte-face from its case below. Permission should not be granted for such an appeal. 
23.	I considered this matter on the papers on 16th October 2017. In view of the oddities in this case I directed that the question of permission and the appeal itself (if permission is granted) should be dealt with together at a rolled up hearing. 
24.	The defendant then launched a counter-attack. On 9th November 2017 it filed a respondent’s notice of cross-appeal, contending that, if the claimant’s appeal succeeded, then the last four words of paragraph 9.2.2 should be construed as meaning “the date when that claim was notified”. 
25.	Once again I considered this matter on the papers. I directed that the defendant’s application for permission to cross-appeal and the cross-appeal (if permission is granted) should be dealt with at the same time as the claimant’s application and appeal in a single rolled up hearing. 
26.	That hearing took place on Monday 18th December 2017. Mr Alex Charlton QC represented the claimant, as he had done below. Ms Zoe O’Sullivan QC represented the defendant, as she had done below. I am grateful to both counsel for their helpful skeleton arguments and oral submissions. 
27.	Having set the scene, I must now address the question of permission. 
Part 5 – Should there be permission to appeal or cross-appeal?
28.	I readily accept that the thrust of the claimant’s case on appeal is very different from the thrust of its case below. On the other hand, even the most optimistic counsel usually has a fallback position. One of Mr Charlton’s fallback positions at trial was this. If paragraph 9.2 is valid and enforceable, then it imposes two separate caps not one. See page 33 of the transcript of the hearing below. 
29.	Nobody objected that Mr Charlton was not entitled to adopt that fallback position. That is perfectly understandable. One part of the preliminary issues asked an open-ended question, namely what was the meaning and effect of clause 8.1.2(b) of the contract in conjunction with paragraph 9.2.2 of schedule G?
30.	I therefore conclude that the claimant is not shut out from arguing the matters which it wishes to argue on appeal. The claimant’s grounds of appeal have a real prospect of success. Therefore permission should be granted. 
31.	The new situation in which the defendant finds itself is, in my view, a compelling reason to grant permission to cross-appeal. The defendant should be entitled to respond to this appeal by putting forward its own interpretation of paragraph 9.2.2.
32.	In the result, therefore, permission to appeal is granted to both parties. 
33.	I must now turn to the central question on the appeal, namely whether paragraph 9.2 of schedule G imposes one cap or two separate caps. 
Part 6 – Does paragraph 9.2 of schedule G impose one cap or two separate caps?
34.	The judge concluded that paragraph 9.2 of schedule G imposed one single cap. It did not impose multiple caps, nor did it impose two separate caps. 
35.	I agree that paragraph 9.2 does not impose multiple caps, essentially for the reasons stated by the judge in paragraph 86 of her judgment. Indeed Mr Charlton accepts the correctness of that paragraph. He does not canvas multiple caps as one possible interpretation of paragraph 9.2 of schedule G. 
36.	Where I differ from the judge is on the question of one cap or two caps. Let me focus on paragraph 85 of her judgment. I do not think that the phrase “aggregate liability” in the introductory words of paragraph 9.2 is a pointer toward one cap rather than two. It could equally well mean that the limit of liability is the aggregate of the sums set out in paragraphs 9.2.1 and 9.2.2.
37.	The other word to which the judge attaches significance is “or” at the end of paragraph 9.2.1. In my view, that does not assist. Sometimes the word “or” is disjunctive in that it appears between two alternative scenarios which cannot both apply. But sometimes “or” is conjunctive, not disjunctive. It appears between two scenarios, both of which may apply. See for example the heading of Part 5 of this judgment. There are many reported cases over the years in which the courts have construed “or” conjunctively. 
38.	Perfectly understandably, neither counsel has cited a raft of cases in which the courts have construed the word “or” in particular contexts. I will not launch into a review of authorities which neither counsel has cited. Suffice it to say there is no juridical objection to construing the word “or” conjunctively. There is a perfectly good reason for the use of “or” to separate paragraphs 9.2.1 and 9.2.2. They are mutually exclusive in the sense that each refers to a discrete period of time, and the two periods do not overlap.
39.	The parties have agreed, for good reason, that the phrase “any claim arising” at the start of paragraph 9.2.1 means “any default occurring”. The parties have also agreed, for good reason, that the words “claims arising” at the start of paragraph 9.2.2 means “defaults occurring”. 
40.	It seems to me that the language of paragraph 9.2 points emphatically towards there being two separate caps. For any default or defaults occurring in the first year of the contract, the defendant’s liability is capped at the amount of the contract sum (£4,939,207.00). For any default or defaults occurring in the years 2, 3, 4 or 5, the defendant’s liability is capped at a lower sum, namely the amount of the contract charges paid in the previous twelve months. If there are defaults in both periods, then the defendant’s liability for defaults before 7th November 2012 is capped at the amount of the contract sum; the defendant’s liability for subsequent defaults is capped at the amount of the contract charges paid in the relevant twelve month period. 
41.	There is nothing surprising about that arrangement. The defendant was doing the high value work in the first twelve months, when defaults could have very expensive consequences. The defendant was doing lower value work in years 2, 3, 4 and 5 when defaults would have less expensive consequences. 
42.	If a major default occurred during year 1, which “used up” the whole cap under paragraph 9.2.1, there is no reason why the defendant should have a free ride in years 2, 3, 4 and 5. The defendant’s liability for defaults in years 2, 3, 4 and 5 should be capped at the separate (lower) sum set out in paragraph 9.2.2.
43.	The judge’s analysis runs into difficulties if there are separate defaults in the first year and in subsequent years. If there is only one cap, which is it to be? 9.2.1 or 9.2.2? The judge recognised this problem and suggested an ingenious solution, namely that the choice of cap is determined by the date of the first default. The difficulty with this solution is, as Mr Charlton points out, that there is nothing in paragraph 9.2 which makes the date of the first default a critical factor in choosing between two caps. Although the date of the first default cannot be a tool for choosing between two caps, different considerations arise when it comes to the operation of paragraph 9.2.2.  The date of the defendant’s first default after the end of year one must be the date used for calculating the cap under paragraph 9.2.2 (subject to the issues raised by the cross-appeal, which I shall address in Part 7 below).
44.	Both counsel in the course of their submissions suggested hypothetical scenarios in which their opponent’s construction would lead to odd results. I accept that. Paragraph 9.2 of schedule G is a homemade clause which, however it is interpreted, will yield some odd results. It is now common ground (although it was not so before the judge) that paragraph 9.2 is valid and enforceable. Therefore it must have a meaning. The natural meaning, and the meaning which yields the least bizarre consequences, is that paragraph 9.2 imposes two separate caps, namely a high cap for defaults occurring in the first year and a separate, lower cap for defaults occurring in subsequent years. 
45.	We are lucky enough to live in an age when there is a galaxy of high appellate guidance on how to interpret contracts. Each new pronouncement helpfully re-explains what the previous decisions meant. In this case, however, there is no need for me to embark upon an Odyssey through all that material. The natural meaning of the words used accords with business common sense. 
46.	I would therefore allow the appeal and grant a declaration as sought by the claimant. I request counsel to agree the precise wording of the declaration. 
47.	I must now turn to the defendant’s cross-appeal.
Part 7 - The defendant’s cross-appeal
48.	The defendant contends that the twelve month period referred to in paragraph 9.2.2 ends not on the date of the default, but on the date when the claimant communicates to the defendant in writing a claim in respect of that default. On this analysis, the relevant date is arbitrary. If the claimant first communicates the claim in writing after the end of the contract period, the cap may be very low or indeed nil. 
49.	In developing this submission Ms O’Sullivan relied upon the judgment of Lord Clarke in Rainy Sky v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 at [21], where he said: 
“[T]he exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to a person in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”
50.	Ms O’Sullivan submits that the words “that claim” at the end of paragraph 9.2.2 are ambiguous. Therefore the court should prefer the construction which is consistent with business common sense. 
51.	I must confess to some doubt about whether Ms O’Sullivan’s construction, which favours the defendant so heavily, really does accord with business common sense. But let me put aside those uncharitable thoughts. The basic flaw in Ms O’Sullivan’s submission is that the words “that claim” are not ambiguous. When read in context the words “that claim” at the end of paragraph 9.2.2 are self-evidently a reference back to the words “claims arising” at the beginning of paragraph 9.2.2.
52.	The fact that “claims arising” are plural and “that claim” is singular does not matter. See clause 1.2 of the contract, which I have set out in Part 2 above. 
53.	As previously discussed, the phrase “any claim arising” at the start of paragraph 9.2.1 and the phrase “claims arising” at the start of paragraph 9.2.2 are references to defaults occurring, not to claims being notified. Any other interpretation would make a nonsense of both paragraphs. The parties are agreed about that. 
54.	Let me now draw the threads together. The words “that claim” at the end of paragraph 9.2.2 must be construed as referring back to “claims arising” at the beginning of that paragraph. Therefore the phrase “that claim” must be a reference to a default occurring, not to the claim being communicated. Therefore the cap under paragraph 9.2.2 is the total of the contract charges paid in the twelve months preceding the defendant’s default. 
Part 8 – Conclusion
55.	For the reasons set out in Part 6 above, I would allow the claimant’s appeal and grant a declaration along the lines sought by Mr Charlton. 
56.	For the reasons set out in Part 7 above, I would dismiss the defendant’s cross-appeal. 
Lord Justice Lewison :
57.	I agree.