Limitations of liability – "in respect of" narrower than "arising out of or in connection with"
A recent High Court case has highlighted the need to think carefully about how limitation of liability caps are drafted. [1] In this case, the limitation of liability applied to warranty claims under a share purchase agreement.
The court found that the liability cap, which was expressed to be "in respect of" any claim under the SPA for breach of warranty, only applied to limit liability for damages, and that it did not extend to limit liability for interest and costs.
In more detail
The limitation of liability applied for the benefit of the sellers under the SPA "in respect of" any claim under the SPA, with claim defined as "any claim under this Agreement for breach of the Warranties".
The sellers contended that:
(a) the limitation created an aggregate limit for damages and also for interest on damages, costs (i.e. litigation costs) and interest on costs;
(b) it was not intended that those ancillary obligations would be uncapped; and
(c) finding to the contrary would be inconsistent with the breadth of the expression "in respect of", which had been carefully chosen.
The court, however, preferred the buyer’s narrower construction. It determined that while "in respect of" is wide, it related to a "claim under this Agreement" (i.e. a claim under the SPA), and that 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. It was not a liability in respect of a claim "under" the SPA.
Comment
The judgment serves to reinforce the importance of precise drafting, particularly for provisions as significant as those that relate to exclusions and limitations of liability.
The court noted that it would have expected interests and costs to be mentioned specifically within the drafting of the cap if the parties had intended them to covered by it, and for important litigation rights of recovery to be foregone. The court also considered that the phrase "in respect of" is not as wide as a phrase such as "arising out of or in connection with".
It will be interesting to see whether this decision is appealed. In the meantime, careful thought should be given to limitations of liability – and how best to make sure that what you want to fall within the cap is clearly articulated.
