Limitation of liability is a hotly negotiated issue in most commercial contracts and construction is no exception. It can sometimes be overlooked where unamended standard form contracts are used. Parties often rely on the standard form clauses as being tried and tested and drafted with the benefit of industry knowledge and experience. Such reliance can prove hazardous, as it may not adequately deal with the commercial risks of a particular project. The 2013 High Court case Mount Juliet Properties Limited v Melarne Developments Limited found that standard form consulting engineering appointments were incorporated by reference in correspondence between the parties. These standard forms contained overall financial caps on liability.
Exclusion clauses are clauses relied on by a party – which would otherwise owe a liability – to limit or exclude that liability. This is normally achieved by imposing a financial cap on liability or excluding certain heads of liability altogether.
Great care and attention must be paid to the drafting of exclusion clauses in light of their importance. If there is any ambiguity in the clause it will be construed against the drafter (contra proferentem). A recent Supreme Court decision demonstrated the importance of clarity and of bringing the limitation clause to the attention of the party against which it may be enforced. In James Elliott Construction Limited v Irish Asphalt Limited, it was held that a term seeking to limit liability included within Irish Asphalt's standard terms and conditions noted on the back of delivery dockets as being "available on request" did not succeed, as not only were the terms and conditions not printed on the delivery notes, but there was nothing to suggest that the actual terms and conditions (particularly the limitation clause) were ever brought to the attention of Elliott Construction.
Excluding certain types of loss
Where a party seeks to exclude liability for negligence, the party must expressly use the term 'negligence' or an appropriate synonym. Reliance on a generic 'all claims' clause without an express reference to negligence will not suffice.
Direct and indirect loss
Parties will often seek to limit their liability for indirect or consequential loss, so it is worth considering what these terms actually mean. The 1854 case of Hadley v Baxendale provided the authority for determining whether a loss arising from a breach of contract is direct or indirect. This case gave rise to the 'two limb' test. Where one party is in breach of contract, the other party will be entitled to recover:
- the loss that would fairly and reasonably be considered to arise from such a breach in the usual course of things; or
- the loss that, at the time of contracting, was within the reasonable contemplation of the parties as a not unlikely result of the breach.
The first limb of the rule relates to direct loss and what naturally flows from the breach. Such direct loss (which can include loss of profit) is often the greatest head of damages and it is important to anticipate what might reasonably arise as a result of a breach in order to deal with liability for such events. What qualifies as a direct loss will depend on the nature and facts of any given case and the knowledge of the parties at the time that the contract was made.
The second rule in Hadley applies to loss that is greater than or different from that which would be expected in normal circumstances. In essence, it is a loss that is special or exceptional. Under the second rule, the party in breach must have had actual knowledge of the special circumstances – at the time that the contract was entered into – that would give rise to a particular type of special loss for that breach.
The rules are not mutually exclusive and the loss that may be covered by either rule will depend on how the relevant breach of contract is characterised and the degree of knowledge of the circumstances that the parties are assumed to have.
Financial caps on liability
It is usual for parties to a contract to agree an overall financial cap on liability, which is often equated to the contract sum or a percentage thereof, or to the indemnity limit of the insurances to be provided by the relevant party, to the extent that the liability being limited is insurable. Contracts also regularly include clauses that cap parties' liability at a fixed or liquidated sum in respect of certain identified events of default.
Temporal caps on liability
Parties to a contract are free to agree temporal limitations on their liability. However, in the absence of any agreed express terms, the duration of contractual obligations will depend on:
- when the contract is entered into;
- when the development is completed; and
- the limitation period which applies (either six or 12 years, depending on whether the contract is executed under hand or under seal, respectively).
In respect of contractual obligations, time begins to run from the date of breach (unless, exceptionally, there is an element of wrongful concealment, in which case time will run from the date that the breach of duty becomes reasonably apparent). Tortious obligations will run from the date of damage.
Net contribution clauses
Net contribution clauses are often included in collateral warranties as a means of limiting the warrantor's liability. The purpose of net contribution clauses is to transfer to the beneficiary the risk that other persons responsible for the same damage may be unable to pay or may have ceased to exist. The beneficiary will assume the burden of pursuing from third parties such contribution as may be available. The most aggressive forms of net contribution clause are those which define the defendant's liability in terms of a fair and reasonable share of the total loss. The mildest forms of net contribution clause consist of an undertaking by the beneficiary to obtain (or an obligation on the developer to put in place) collateral warranties from other specified parties, usually the other members of the design team and the contractor. There may also be a provision that no action will arise against the warrantor unless such other warranties are obtained.
Exclusion clauses that significantly limit parties' liability by way of financial caps and in respect of certain categories of loss are generally extremely useful, but can sometimes be avoided if their terms are not clearly drafted and brought to the attention of the party against whom they may ultimately be enforced or if misrepresentation, fraud or fundamental breach can be proved.