03 May 2017 #Construction
Limitation of liability clauses are one way in which businesses can manage risk and control their maximum potential financial exposure. As a result, limitation of liability clauses in construction contracts and professional appointments are often the subject of intense negotiation between the contracting parties.
Careful drafting is required to ensure a liability clause is enforceable.
What to consider when drafting caps on liability
Whilst each construction contract and professional appointment is different, the following key factors should be considered:
Ultimately the level of the cap on liability is a commercial decision, taking into account the risk and reward under a contract.
The amount of the cap on liability
The amount of the cap may be expressed:
When a cap on liability may be unenforceable
In Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited , the Technology and Construction Court considered whether a cap on liability in a contract for professional services was enforceable.
In previous dealings between Trustees of Ampleforth Abbey Trust (“Ampleforth”) and Turner & Townsend, Turner & Townsend had been appointed on its own standard terms which did not impose a cap on its liability.
In this case, whilst Turner & Townsend’s standard terms were used, this time the appointment had a net contribution clause and an overall cap on liability to the lesser of the fee (which totalled £111,321) or £1 million. The contract also required Turner & Townsend to hold £10 million of professional indemnity insurance. The court held that the cap on liability did not apply and Ampleforth had access to Turner & Townsend’s £10 million professional indemnity cover.
The limitation clause was held to be unreasonable on the grounds that the contract required Turner & Townsend to maintain professional indemnity insurance and the cost of that insurance would have been passed onto Ampleforth within Turner & Townsend’s fees. It was held that it would have been unreasonable to uphold the limitation clause reducing the amount of insurance cover available to Ampleforth, cover which Ampleforth had effectively paid for, particularly as the liability cap was lower than the maintained insurance cover.
The judgement highlighted that:
If you have any doubt in relation to a contract’s limitation of liability clause, please contact a member of the Construction Team.