Limiting and Excluding Liability in Construction Contracts

10/05/2016

The financial consequences for contractors, sub-contractors and consultants who are sued for breaching the terms of a construction contract can be ruinous.  Although professional indemnity insurance can help protect parties to some degree, often the coverage is not nearly enough to compensate if a major breach occurs. It is understandable, and some would say sensible, for parties to try and limit or exclude their liability.

However, limiting or excluding liability under a construction contract is a legal minefield, which can blow up in the faces of the unwary and ill-advised.  It is imperative to not only have knowledge of what options are available to limit or exclude liability, but understand how the courts will interpret such clauses if a claim is pursued.

Methods for limiting liability in construction contracts

The three most common methods for limiting exposure are:

• financial caps on liability          

• net contribution clauses         

• exclusion clauses

Financial cap on liability

Using this method, the party will limit the amount they will pay out if a certain breach occurs.  It can be drafted as a limit to the amount paid out, regardless of the number of breaches, or by capping the amount per claim.  The latter is the preferred method because it often falls into line with professional indemnity insurance policies.

The extent the party can cap its liability depends on its bargaining power, (and the skill of its lawyers). 

Financial caps work very well for parties such as architects on a large project.  Their role may be relatively small in the overall scale of the project, but the risk of a large claim if something goes awry is substantial.  By capping financial liability, the architect can ensure that their liability does not vastly exceed the level of their involvement and the fee they received for their work on the project.

There is no concept of proportionate liability in English law.  If a number of parties were responsible for a claimant’s loss, he or she can sue any one of them for 100% recovery.

A net contribution clause negates this prima facie rule and ensures that the claimant must pursue an action against all parties responsible for the damage if he or she wants to recoup all their losses.

Employers will often resist the inclusion of a net-contribution clause because it may prevent them from being able to choose the best option for recovery of the whole loss and then pursue that one party.  There is also the danger of one of the parties becoming insolvent, leaving the claimant unable to recover all their losses.

The fact is that in the construction industry, net contribution clauses are unpopular and will often be rejected outright, particularly in difficult economic times.

A compromise can sometimes be reached were the consultant wishing to insert the net contribution clause is an architect or engineer.  Sometimes a net contribution clause can be drafted so only these principle design consultants are named and they each have to pay their, 'just and equitable' contribution to the losses.

Exclusion clauses negate complete liability for any loss or damage caused by a particular party.

The overarching rule of exclusion clauses is, for them to hold up in court they have to be clear and unambiguous.  For example, in the case of Persimmon Homes v Ove Arup & Partners [2015] EWHC 3573 (TCC), the Technology and Construction Court held that the phrase, 'Liability for any claim in relation to asbestos is excluded' was sufficiently clear to exclude liability.

The court acknowledged that there is now, 'an increasing recognition that parties to commercial contracts should be 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.

However, the enforceability of exclusion clauses in construction contracts is far from clear.  In Transocean Drilling v Providence Resources [2014] EWHC 4260 (Comm), the court, whilst agreeing with the principle that parties to a commercial contract are entitled to apportion risk as they see fit, relied on the approach taken in Gilbert-Ash v Modern Engineering [1974] AC689.  Here, the court said that the party relying on the exclusion clause:

"must establish that the words show a clear intention to deprive the other party of a remedy to which he would otherwise be entitled, because one starts with the presumption that neither party intends to abandon any remedies for breach by the other arising by operation of the law, and clear words must be used in order to rebut that presumption".

The courts rely on the contra preferentem rule to control the scope of exclusion clauses.  This rule states that if a clause in the contract is ambiguous then it will be interpreted against the party who seek to rely on it.

The Unfair Contracts Act 1(TUCA) 977 may also limit the application of an exclusion clause in a construction contract.  The TUCA will apply if the contract is based on one of the party's standard terms.  If this is the case, the party seeking to rely on the exclusion clause has the onus of establishing that it is reasonable.

Because many construction contracts are a mixture of industry standard terms (ie JCT contracts) and bespoke terms, when deciding whether or not TUCA will apply, the court will look at the degree of modifications to the standard terms and decide whether they have been modified enough to become bespoke.

Summary

When seeking to limit liability, parties must be clear and concise regarding how liability is to be limited and to what extent.  Anything less is opening up an invitation for limitation of liability clauses to be challenged in court.

Remember, certain liabilities can never be excluded, such as liability for personal injury, fraud and wilful default. 

What is certain is the drafting of the limitation clause is key; if this is done correctly, by an experienced solicitor, there is a good chance the clause will stand up to scrutiny.