Capping ancillary liabilities in a contract

Equitix Eeef Biomass 2 Ltd v Fox & Ors [2021] EWHC 2781 (TCC)

The question

When will a limitation of liability clause cap ancillary liabilities such as costs and interest on damages? 

The key takeaway

Where parties intend to cap ancillary liabilities (such as costs and interest), in addition to damages, they should explicitly specify this in the contract. 

The background

Equitix Eeef Biomas 2 Ltd (Equitix) had purchased an energy company, Gaia Heat Limited (Gaia), from Michael Fox and various others (Fox and Ors). Equitix brought proceedings against Fox and Ors for breach of various warranties under the share sale agreement (SSA). 

The most significant of these allegations was that, in breach of warranty, Gaia’s plant and machinery were not in a fit state and there was, in fact, a litany of issues with them. As a result, Gaia’s sole customer, Greenergy, had terminated its contract with Gaia shortly after the sale was concluded.

The decision

The Court found that the warranties had indeed been breached and gave judgment for Equitix. Equitix was awarded £11m in damages, accepting that liability for breach of warranties was capped at this amount under the SSA. A supplemental judgment given the following month dealt with various consequential matters, including the liability cap in the SSA and also the application of an enhanced rate of interest given that at trial Fox and Ors had not beaten Equitix’s Part 36 offer.

Liability cap

The liability cap in Schedule 5 of the SSA stated that it applied to liability “in respect of a claim”. A “claim” was defined as “any claim under this Agreement for breach of the Warranties”.

Fox and Ors argued that the £11m cap included not only damages but also interest on damages, any uplift under CPR 36.17(4)(d), costs and interest on costs. Equitix disagreed. It argued that the cap applied to damages only – the alternative interpretation would undermine the court’s general discretion under the Senior Courts Act 1981 to make orders as to costs and interest on damages. 

The Court agreed with Equitix that the cap applied to damages only. The limitation of liability applied “in respect of” a “claim under [the SSA]”. Any claim for interest or costs would not be a claim under the SSA itself but would instead be made pursuant to the Courts’ jurisdiction to make such orders when determining claims. Further, the limitation of liability clause did not include any specific reference to costs or interest which, according to the Court, “one would expect if important litigation rights were being foregone”.

Why is this important?

The decision highlights how important it is to draft liability caps carefully to ensure that it is clear what is covered and what is not. The case also serves as a helpful reminder that, where a Part 36 offer is beaten at trial, the enhanced rate of interest is payable on the amount awarded at trial.

Any practical tips?

When drafting liability caps make sure it is clear which liabilities fall inside the cap and which do not. If you intend to cap the parties’ ancillary liability for costs and interest on damages, you should specifically call those out in the liability cap to avoid them being payable in addition to the cap amount.