Price Waterhouse (A Firm) v University Of Keele

This is an appeal with the permission of the judge against the orders of Hart J dated 2 and 10 July 2003. By these orders the judge gave judgment against the appellants, Price Waterhouse, for £1,670,163.06 with interest in the sum of £170,914.90 as damages for professional negligence. The judge held that these damages were not within a limitation clause in Price Waterhouse’s terms of business and that accordingly it was unnecessary for him to consider whether the Unfair Contract Terms Act 1977 prevented the appellants from relying on this clause. Price Waterhouse appeal against these two rulings of the judge.

Price Waterhouse agreed to provide professional services to the respondent, The University of Keele, in connection with the establishment of a profit related pay scheme (“PRP scheme”). The University operated a PRP scheme in its financial year beginning 1 August 1996. A PRP scheme involved employees substituting “or sacrificing” part of their existing taxable pay in order to participate in the scheme. The scheme had to be registered with the Inland Revenue. A scheme could be designed to ensure that, so long as there was sufficient profit, both employer and employee could be better off. However, a number of requirements had to be satisfied, including a requirement that the scheme contained provisions that no payment of profit should be made if less than 80% of the employees participated in the scheme. Certain employees could be excluded, including employees employed for less than three years. The scheme could be either “opt in” or an “opt out” scheme. The University chose an opt in scheme. In the event the University failed to satisfy all the requirements for a valid PRP scheme. For the purpose of calculating the 80%, it took as the numerator non-casual employees of both above and below three years’ service who opted to join the scheme and as the denominator it took all employees with greater than three years’ service, whether or not they opted to join the scheme, but only non-casual employees with less than three years’ service who opted to join. So the result was that short-term employees who did not opt to join the scheme were not counted for the purposes of the denominator used to establish the 80% requirement but they were entitled to opt into the scheme. The judge considered that Price Waterhouse’s interpretation of the scheme, on the basis of which this denominator was adopted, was unsustainable and indeed Price Waterhouse accepted in their defence that their advice had been negligent. The principal issues at trial, therefore, were causation and the measure of damages.

The factual background to the agreement of the term is described in paragraph 16 to 20 of the judge’s judgment. In material part, the judge found:-

The judge made no findings as to whether Mr Rigg was given any explanation about the limitation of liability clause before he signed the terms of engagement. However, there is nothing in the documentation to suggest that he was given such an explanation. The terms about limitation of liability were as follows:-

The judge held that, although “Services” were not directly defined in Price Waterhouse’s terms and conditions, they could be taken to be those described in Price Waterhouse’s proposal letter dated 19 January 1996. The attachment to that letter stated that the proposal covered “all aspects of the implementation of” a PRP scheme.

Price Waterhouse’s standard terms and conditions contained the following further passage:-

On this appeal, argument has centred on the third paragraph quoted under the heading “Liability”. It contains two sentences. The first sentence has been referred to in argument as the “first limb” and the second sentence as the “second limb”. I will refer to them below in the same way.

The judge’s reasons for his rulings now in issue in this appeal were as follows:-

The damages awarded by the judge included the tax which the University of Keele had to pay as a result of the cancellation of the scheme, after giving credit for the savings which it enjoyed as a result of implementing the scheme, and professional fees incurred in extricating itself from the scheme. However, the major element in the damages was an award of 80% of the savings which would have been achieved by schemes successfully implemented for each of the relevant years on the bases determined by the judge. The judge assessed the chance of success of the scheme, if proper advice had been given, at 80%. The figure before interest for 80% of the savings in question was £1,249,856. The University contended that the consequences of the advice given in connection with the implementation of the scheme for the University’s financial year beginning 1 August 1996 flowed through into the scheme operated by the University for the subsequent year and led to its being unable to operate a successful scheme in the following two years after that.

I now turn to the question of the interpretation of the limitation clause, and for this purpose I proceed on the basis that it is correct to characterise the head of damage in question as the loss of anticipated benefits and savings for the purposes of the second limb. This is broadly speaking common ground for the purposes of this aspect of the case although the University draws support for the judge’s interpretation by demonstrating that the failure to achieve tax savings could equally well be described (on the facts of this case) in large measure as tax paid which it would otherwise not had to have paid. I am not myself much moved by that point as it is really only using other words to describe what the parties would clearly have understood to be an anticipated saving in tax.

Interestingly, neither party supports the judge’s approach in holding that the clause (“read literally”) was self-contradictory. This led him to hold that he was bound either to apply the contra proferentem rule or to reject the second limb as repugnant. Both counsel submit that the limitation on liability, or at least the first and second limbs, must be read as a whole and consistently. Both counsel are also at one to this extent: on the question whether the loss or damage referred to in the first limb includes loss resulting from a failure to realise an anticipated saving (caused by Price Waterhouse’s negligence), both parties’ answer is in the affirmative but it is subject in the case of the appellants to the qualification that this would only be its meaning if the second limb were not present. How this point is put by Price Waterhouse will become clear below. Neither party says that the failure in question was consequential loss for the purposes of the second limb, and we are therefore not called upon to find a meaning for that expression as used in Price Waterhouse’s terms of business in this case. From these common points, the submissions diverge.

Mr Laurence Rabinowitz QC, for Price Waterhouse, submits that the effect of reading the first and second limbs together is that the loss and damage referred to in the first limb must be interpreted as excluding the failure to realise anticipated savings or benefits. The parties must be taken to have given that meaning to the words “loss or damage” in this context. They have treated the failure to realise anticipated benefits and savings as indirect loss for the purposes of the contract, and such failure can properly be so described because there are two stages to proving that such failure constitutes recoverable loss. It has to be shown, first, that Price Waterhouse was negligent, and, second, that the University would have obtained the benefit or saving in question. In other words, the second limb represents losses which the parties have agreed to exclude. Those exclusions clearly cover failure to achieve anticipated savings and benefits. As to the second limb, the use of the word “other” in the expression “all other liability” is consistent with this reading of the clause. The response to this interpretation of the first and second limbs of the University is equally emphatic, and I refer to it below.

Mr Rabinowitz also submits that Price Waterhouse’s interpretation makes sense on the facts. The first limb would cover tax payable as a result of negligent advice with interest and penalties and also professional fees incurred in unwinding a scheme. Price Waterhouse did not warrant that there would be any particular savings from the PRP schemes. The judge was in error in not finding a meaning for the second limb. Furthermore, a reasonable person would have realised that a failure to obtain anticipated benefits and savings was not covered. The interpretation contended for by Price Waterhouse also gives effect to both sentences. Moreover, on Mr Rabinowitz’s submission, the contra proferentem rule does not apply because, when the first and second limb are read together, their meaning is clear.

Mr Rabinowitz further submits that the University’s approach to interpretation involves writing in words: the words “other than when suffered as a direct loss” have to be inserted into the second limb after “all other liability”. The expression “consequential loss” has been construed by the courts to mean loss within the second limb of the rule in Hadley v Baxendale (1854) 9 Exch.341, and accordingly it was necessary for the parties to refer specifically to failure to realise anticipated savings as they are outside the term “consequential loss” in the second limb. By contrast the University’s argument renders the second limb otiose.

Mr Justin Fenwick QC, for the University of Keele, submits that when the first and second limbs are read together and consistently, their meaning is clear in his client’s favour. There is no conflict as the judge supposed. The first and second limbs have separate purposes. The purpose of the first limb is to define the liability which Price Waterhouse accepts. The aim of the second limb is to exclude liability for “other” liability, that is liability for losses other than those covered by the first limb. Accordingly, both limbs are mutually exclusive. Mutual exclusivity is also Mr Rabinowitz’s approach, save that he submits that failure to obtain anticipated savings is wholly within the second limb.

Mr Fenwick further submits that only losses suffered as a direct result of Price Waterhouse providing services are covered by the first limb. Direct losses not so covered would be within the second limb. So there could be loss in the form of anticipated benefits and savings for which liability was excluded by the second limb. Mr Fenwick makes a similar argument about a failure to obtain registration of the scheme within the second limb. However, as Mr Rabinowitz points out, this explanation for the reference to failure to realise anticipated savings in the second limb is not convincing because Price Waterhouse would not in any event expect to have any liability for loss of savings or benefits which were not due to their default. As Mr Rabinowitz puts it, there is “nothing to exclude”.

Mr Fenwick also submits that the construction for which the University contends gives effect to the apparent intention of the parties. The cap in the previous paragraph in the limitation of liability clause was expressly fixed at twice the anticipated saving to the University from the PRP scheme. There would have been no reason to fix the limitation on liability in this way if it was not intended that the University should in some circumstances be able to recover for the loss of that anticipated saving from Price Waterhouse. Accordingly, Mr Fenwick submits that his interpretation gives meaning to both sentences. It also gives meaning to the word “other”. It also does not require the clause to be rewritten.

As counsel submit, the first and second limbs should be read as a whole and the court should endeavour to give meaning to both limbs. This is the long established approach to the construction of documents, and it is well-illustrated by Pagnan SA v Tradax Ocean Transportation SA [1987] 2 Lloyd’s Law Reports 342, cited by Mr Rabinowitz. This case involved the interpretation of a contract for the sale of tapioca pellets. The contract incorporated the provisions of GAFTA 119 which provided for the contract to be cancelled if export was prohibited. The contract also contained some “special conditions” which were to prevail over the general conditions if there was a conflict. The special conditions imposed an obligation on the seller to obtain an export certificate. The issue was whether this was an absolute obligation, that is whether the special condition was inconsistent with GAFTA 119 and thus prevailed over it. This court held that the first task was to see whether GAFTA 119 and the special condition could be read together so as not to be inconsistent. If they could, no question would arise of the special condition prevailing over that of the GAFTA 119. Having reviewed the authorities, Bingham LJ observed:-

In the Pagnan case, this court held that the two clauses could be reconciled. On the construction of the contract read as a whole, the sellers were under an obligation to obtain the export certificate but if their failure to do so was due to a prohibition on export, the unfulfilled portion of the contract was cancelled. Thus, no question of the special condition prevailing over GAFTA 119 arose.

So too, in this case, the initial task is to see whether the first and second limbs can be reconciled. The first limb is a positive statement of that for which Price Waterhouse accepts liability. A crucial criterion for the acceptance of liability is that the liability should not exceed £1.7 million. There are other limitations: the loss must be the direct result of the provision of the Services, the loss must not be consequential loss or loss referred to in the second limb, the loss must not be caused by the fraudulent or other specified acts of the University or its staff or agents, and the loss must be notified within the two year period specified in the final paragraph of the clause. The difficulty about reconciling the first and second limbs is that loss arising from the failure to realise anticipated savings, which is directly caused by Price Waterhouse’s provision of the Services, is covered by both limbs. On the ordinary meaning of the first limb, loss for which liability is accepted includes such loss. The second limb, which excludes liability, specifically refers to the failure to realise such savings so that loss resulting from such failure is within that limb also.

One way of reconciling the first and second limbs would be to adopt Mr Rabinowitz’s approach. This involves placing all loss resulting from the failure to achieve anticipated savings within the second limb. Is it open to the court to interpret the expression “loss or damage” in the first limb in the way submitted by Mr Rabinowitz? The terms must be interpreted in accordance with the principles of interpretation set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 to 913. Those principles include the following:-

However, to apply the approach of interpreting the first and second limbs against the relevant background here would require us in large part to build bricks without straw. We have no relevant evidence as the genesis of the first and second limbs, or the aim of the parties in agreeing them. Nor is there any intrinsic indication in the limitation of liability clause that the inevitable consequence of their agreement was that a meaning should be given to the words “loss or damage” in the first limb which restricts their ordinary meaning. As Bingham LJ said in the Pagnan case (at page 348):

In my judgment, the clause, read as whole, in fact points in the opposite direction. Significantly, the parties have used the word “other” in the phrase at the start of the second limb, “all other liability”. Some particular examples of “other” liability are then given, including consequential loss and the failure to realise anticipated savings. However, these are only examples of “all other liability”, that is liability other than in respect of loss or damage suffered as a direct result of the provision by Price Waterhouse of the Services. “All other liability” would, by reason of the opening words of the first limb and the preceding paragraph imposing the cap, include losses within the first limb but exceeding £1,700,000. Because of the word “other” at the start of the second limb, it is not necessary, contrary to the submission of Mr Rabinowitz, to read any words into the second limb to produce this result. Loss and damage is excluded by the second limb only if it represents loss not covered by the first limb.

The word “other” at the start of the second limb is the key to the true interpretation of the first and second limbs. It tells the reader which of the two limbs has precedence: it is the first. The first limb must be given an interpretation which enables the liability accepted by Price Waterhouse to take effect according to its tenor. The second limb then constitutes the residual category of liability on the basis of the first category so construed. The two limbs are still being read consistently for the purposes of the approach laid down in the Pagnan case. There it was held that the question of one clause prevailing over another arose only if the two clauses could not be reconciled. But that does not mean that, in this case, the first limb should not be given precedence over the second limb. The reason for this is that the parties have used the word “other”, thus making it clear that the second limb is, as I have explained, the residual category. This approach does not involve reading in an inconsistency (contrary to the approach laid down in the Pagnan case), but rather using the parties’ own language in making the decision as to which limb a particular liability should be allocated.

This approach I have thus far adopted receives support from the immediately preceding paragraph of the limitation of liability clause which fixes the cap. In my judgment, it is a significant point that the cap is fixed at twice the anticipated saving to the University from implementation of the PRP scheme. There would be no point in fixing a cap on this basis unless it was thought that in some circumstances the University would be entitled to recover the anticipated benefit. The reason for the margin over the anticipated saving is that the estimate of the saving might be inaccurate and that other costs might be incurred. When this point was put to him, Mr Rabanowitz skilfully replied that the paragraph dealing with the cap was solely concerned with quantum: it was an attempt to set a reasonable limit for the purposes of the Unfair Contract Terms Act 1977 and it told one nothing about the first and second limb. I do not consider that the first and second limbs should be read in abstraction. As already explained, the first principle in the interpretation of documents is that the document should be read as a whole.

Two further points must be mentioned. First, it is not necessary, in my judgment, to rely on the contra proferentem rule because the document properly construed has a clear meaning. Second, the second limb on my interpretation repeats categories of loss already excluded by the paragraph establishing the cap and the first limb, defining Price Waterhouse’s acceptance of liability. But to conclude that there is an overlap or repetition or redundancy in contractual provisions does not mean that the interpretation of those provisions must be wrong (see Homburg Houtimport BV v Agrosin Ltd (the Starsin) [2003] 2 WLR 711 [112] per Lord Hoffmann). In particular, I do not consider that repetition is an insuperable objection in a document of this kind. Price Waterhouse’s terms and conditions can be seen to contain narrative; not every provision in this document is dispositive. There would be every reason for Price Waterhouse to repeat a point in order that it should be clear to the clients reading the clause that some forms of loss would not be recoverable against them.

Finally, reference was made in argument to the fact that Price Waterhouse gave no warranty that any particular saving would be achieved. But to conclude from that that no anticipated savings lost would be recoverable is syllogistic. Price Waterhouse did not guarantee that a particular saving would be made if that saving was dependent, for example, on the level of take-up by employees of the client. However, it is not, in my judgment, inconsistent with that (understandable) refusal to give a guarantee that they should not be wholly free from the consequences of their negligence if that resulted in the client losing a tax saving it would otherwise have achieved and which it engaged Price Waterhouse to assist it to obtain.

My reasoning differs from that of the judge. I would not hold that the first and second limbs are self-contradictory or that the second limb is in any relevant respect unclear. However, I am satisfied that the judge reached the right conclusion.

In those circumstances it is not necessary for me to deal with the further question raised by the University as to whether the clause was validly incorporated into the dealings between the parties in the years subsequent to 1996 (for which indeed no permission was given by the judge). Nor is it necessary for me to deal with the parties’ arguments on the Unfair Contract Terms Act 1977.

I have had the advantage of reading in draft the judgments of both Buxton and Arden LJJ, and I am in complete agreement with them that this appeal should be dismissed.

In paragraph 4 of her judgment, Arden LJ has set out the critical two sentences in the appellants’ terms of engagement, which are contained in the third paragraph under the heading LIABILITY. I will not, therefore, repeat them. I acknowledge that, when I read the papers for the first time, I was attracted to the judge’s straightforward view that the two sentences were self-contradictory, and that accordingly primacy had to be given to the first. Having heard full argument, however, I find myself in complete agreement with Arden LJ’s analysis, which I am gratefully content to adopt in its entirety.

In the judgment which follows, Buxton LJ reaches the same result by what seems to me a slightly different route. I am happy to travel the same path, since it reaches the same conclusion. Speaking for myself, however, I do not think it necessary to provide a possible rationale for the second of the two critical sentences in the appellants’ terms of engagement in order to reach Arden LJ’s conclusion that loss and damage is excluded by the second limb only if it represents loss not covered by the first.

I would, accordingly, dismiss this appeal

I agree with Arden and Wall LJJ that this appeal must be dismissed. However, since their reasoning differs from that of the judge I venture to explain how I would reach that conclusion.

In Ailsa Craig Fishing Co v Malvern Fishing Co [1983] 1 WLR 964 Lord Fraser of Tullybelton, in a speech agreed in full by Lords Elwyn-Jones, Salmon and Lowry, held (at p 969H-970A) that an exclusion clause was to be construed strictly against the proferens, and that in order to be effective it must be most clearly and unambiguously expressed; but (at p 970D-F) that that principle did not apply in its full rigour when considering clauses merely limiting liability. The clause with which we are concerned is in part an exclusion clause and in part a limitation clause; but the aspect of it on which the appellants seek to rely asserts exclusion and not merely limitation, because the appellants seek on the basis of it entirely to escape liability for the damage summarised by the judge in § 62(2) of his judgment. The principle set out by Lord Fraser is wider than the general rule of contra proferentem , which latter depends for its applicability on discernment of an ambiguity in the language. Rather, Lord Fraser’s principle applies in a case such as the present directly, and without nice analysis in terms of ambiguity, when a clause that seeks to exclude liability that would otherwise attach under the contract cannot be construed with ease or confidence whichever party’s argument is addressed.

The appellants’ case, put shortly, is that loss of the benefits that would have accrued had the scheme not been negligently constructed is a “failure to realise anticipated savings”, and thus falls in terms within the exclusion clause. It was conceded, as the judge found in his §78, that that loss was, in the normal understanding of that phrase, a direct result of the appellants’ negligence. It did not, however, fall under the limb of the exemption clause that accepted liability for such loss or damage, because the parties had redefined the meaning of those words as used in the exemption clause. The addition of the second sentence, “All other liability is expressly excluded in particular consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the scheme” had the effect of telling the reader what the parties meant by loss or damage suffered as a direct result of the provision of the Services. Such loss, in this clause, is defined so as not to extend to, inter alia, failure to realise anticipated savings or benefits; so both sentences of the clause, and not just the second sentence, exclude liability for such failure.

That argument fails on the plain wording of the clause. The liabilities set out in the second sentence are said to be liabilities “other” than the liability in the first sentence. Where x is said to be other than y that means that x is different from, and not included within, y . Other Ranks are so called because they are not officers. The purpose of the second sentence must, therefore, be to contrast the cases to which it refers with the case addressed in the first sentence. The appellants’ case before us disclaimed any need to rewrite the clause to achieve the explanation of the reach of the first sentence for which they contended, but it is perhaps significant that when, at an earlier stage of the appeal, it was sought to demonstrate how the judge should have read both sentences together that was done by a reading that omitted the word “other”: “….damage suffered by you as a direct result of providing the Services, which damage does not include consequential loss…..”

The judge was therefore right to regard the expression, suffered as a direct result of providing the Services, as carrying its normal objective meaning, not limited or qualified by anything in the second sentence; and that the loss claimed by the respondents fell within that normal meaning.

Having so held, he went on to observe that in that context the second sentence rendered the clause self-contradictory, or was baffling in its meaning, and therefore should be simply ignored. The appellants criticise that approach, as not giving meaning to every word in the clause. They are not well-placed to make that complaint, as the proferor of an exemption clause that is subject to the rule referred to in §1 above; and if necessary I would reject that criticism on that ground alone. I am however satisfied that there is a possible explanation for the presence of the second sentence. The clause would appear to have a strong element of belt and braces. If a failure to realise anticipated savings did not result from the negligence of Price Waterhouse, then there could be no liability and thus, logically, no need for any exemption from such liability. But Price Waterhouse, having regard to experience rather than to logic, may very well have been anxious to make doubly sure that any of the other failures of the scheme that, on the evidence, might well occur however competently it was drawn up (insufficient take-up; legislative intervention; and so on) could not even arguably be laid at its door. That might well have led them to write into the contract provisions that exempted themselves not only from failure as a direct result of the provision of the Services but also from any failure at all. And that is not merely speculation; because when arguing the reasonableness of the clause at trial the appellant said:

That shows that the claus e does, prudentially, address cases for which PW would not in any event, if the matter were argued out, be liable. That is enough, when considering the intentions of the proferor, to meet any objection that the judge’s construction must fail because it renders some of the language redundant.