Limitations of liability – is there too small a limit?

Limitation of liability clauses are commonly negotiated to protect parties from unexpected or excessive damages in the event of a breach of contract. This helps parties to construction contracts and appointments manage their risk level and financial exposure. Sometimes, limitations of liability are required by professional indemnity insurance providers in order to offer sufficient cover for a party.

This article looks at three common types of limitations of liability: contractual caps, net contribution clauses, and exclusion clauses.

Caps on liability

Overall limits of liability, often referred to as ‘caps’, are fairly common in appointments. However, it can often be difficult to reach an agreeable compromise, because a consultant will want to limit its liability as much as possible, whereas the client will want to maximise the potential recoverability of damages. Consultants often deem it not commercially sensible to accept a high level of exposure where the fee they are receiving for their services is disproportionately low.

Where a low cap can be negotiated, though, is that necessarily a good idea? You may (reasonably) assume that an incorporated cap on liability would indeed cap a consultant’s liability at the cited level however low that may be: after all, parties are generally free to contract as they see fit. However, it may come as a surprise that this is not always the case.

A case from 2012 – Trustees of Ampleforth Abbey Trust v. Turner & Townsend Management Limited – concerned the appointment of construction consultants Turner and Townsend as project managers for a development at Ampleforth School. T&T were deemed negligent by the court for failing to procure a contract with the contractor, resulting in an inability for Ampleforth to recover liquidated damages of £750,000 from the contractor.

T&T’s appointment contained a cap on liability at the lesser of £1,000,000 or the total fee paid under the appointment (which in the event was £111,321). The terms of the appointment also required T&T to maintain professional indemnity insurance cover at £10,000,000.

The court found that the cap on liability was of no effect, and therefore Ampleforth were able to access T&T’s full PI cover. This was because the cap did not pass the ‘reasonableness’ test under the Unfair Contract Terms Act 1977 (usually known as ‘UCTA’). The primary reason for this was that T&T were required to maintain a level of PI cover far in excess of the cap incorporated into their appointment, and therefore such a low cap could not be justified. The judge commented that the fee for that insurance would have no doubt been incorporated into T&T’s overall fee for their services. There was no valid explanation as to why such a low cap on liability was incorporated into the contract, and so the judge rejected it altogether.

Net contribution clauses

Net contribution clauses are sometimes requested by parties in order to limit their liability to the amount which would be apportioned by a court in circumstances where two or more parties are jointly liable for the same loss or damage. In the absence of a net contribution clause, the client/employer could recover 100% of its loss or damage from just one of the jointly liable parties.

From the employer’s perspective, however, net contribution clauses are often not acceptable. This is because if, for example, the contractor who was 70% liable became insolvent, the employer would only be able to recover 30% of its loss and damage suffered. As such, net contribution clauses are not routinely included within consultant appointments as they are often deemed too risky for the client/employer.

Exclusion clauses

Sometimes, a party may request the exclusion or cap of a specific type of loss for clarity, such as loss of profit or consequential losses. This is much more infrequent than those mentioned above, however. Also note that a contract cannot limit liability for certain things, such as fraud, personal injury, or death,.

Exclusion clauses have to be clear and unambiguous. In the 2015 case of Persimmon Homes v. Ove Arup & Partners, the court held that the wording “liability for any claim in relation to asbestos is excluded” was sufficiently clear to exclude liability for asbestos. Mr Justice Stuart-Smith acknowledged within the same judgment that “there has been a shift in the approach of the Courts to limitation and exclusion clauses” and that there is “an increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fit, particularly where insurance may be available to one or other or both parties to cover the risks being so allocated”.

Despite this more liberal approach, care should always be taken when incorporating exclusion clauses, otherwise parties face the contra proferentemrule being implied where there is a question over the interpretation of a commercial contract. This essentially means that where there is doubt about the interpretation of a clause, the words will be construed against the party that proposed them.

Conclusion

Parties wishing to incorporate a cap on liability into a construction contract should take care to ensure that it is not disproportionately below the PI insurance level they will be maintaining for the project in question, otherwise they risk the cap being disregarded entirely. Additionally, any exclusions of liability should be drafted clearly to have the desired effect. We frequently deal with issues arising from exclusion clauses as well as ensuring the balance of risk is properly allocated at the contract formation stage. If you require any assistance, we’d be delighted to hear from you.

This article originally featured in the March 2024 edition of our Aggregate newsletter: to read the complete edition, click here.