There are many clauses in a construction contract that, at first glance, appear to be straightforward. However, they may in fact have unforeseen effects on the obligations and liabilities of the contracting parties.
More often than not a construction contract will contain provisions stating that certain entitlements are without prejudice to the common law rights of the parties.
However, what if a clause such as the following was included?
"...the liability of either party to the other for any breach of contract shall be limited to the expenses, charges, damages and reimbursements expressly provided in the Contract..." (clause 44.2 of IChemE Red Book 4th edition 2001)
Seems fine? You've entered into a contract setting out the terms of your relationship with the other party. Why shouldn't your remedies be as stated in the contract? However, bear in mind that inclusion of this exclusive remedies clause in a contract could, for example, exclude remedies available to the parties at common law. These include the right to repudiate the contract or the right to claim against the other party in negligence.
Also, the contractor could rely on the clause to limit its liability for defects if the contract contained, for example, a right for the employer to remedy defects where the contractor failed to do so.
Another clause which seems quite acceptable on the face of it is an entire agreement clause. For example:
"This Agreement and the Schedules and documents referred to herein constitute the entire agreement and understanding between you and us in relation to the subject matter thereof. Without prejudice to any variation as provided in clause 1.1, this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement but this will not affect any obligations in any such prior agreement which are expressed to continue after termination."
The intention of an entire agreement clause is to exclude pre-contractual statements from becoming terms of the contract. As with the exclusive remedies clause, you've entered into a contract dictating the terms of your relationship with the other party and so it's the terms in the contract that should apply. Beware however, that following recent case law such a clause will not exclude liability for misrepresentation or terms implied to give the contract business efficacy i.e. to make the contract work.
Limits on liability and consequential loss
The effects of limits on liability in a contract are not generally hidden and are often a key clause which parties look for when reviewing a contract. But is it clear what losses the limit applies to? What about the phrase "consequential loss"? Consequential losses are damages "such as may be reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as a probable result of the breach of it."
Great, but what losses does this actually cover? Probably not what you would expect! In one particular case, in addition to extra utility costs and lost revenue from Certificates of Renewable Energy Production, consequential losses were found to exclude:
"the costs of repair, replacement, mitigation and associated losses... the costs of contractors, site managers and health and safety personnel, attempted mitigation, auxiliary equipment and civil works, employee time, third party experts and laboratory testing and the purchase of auxiliary equipment...".
Instead, these costs were held to be direct costs. Surprised? If so, look carefully at the drafting of any limitation on liability in your contracts to make sure it doesn't contain any (bear) traps.
So what's all the fuss about when it comes to indemnities? Well, consider the following:
- the limitation period for a claim under an indemnity begins when the losses that are indemnified have been established
- the rules concerning remoteness and the duty to mitigate which would normally apply to a claim for breach of contract and could potentially limit the damages recoverable may not apply
- prior shareholder approval maybe required if a listed public company enters into an indemnity or similar agreement with another party (other than a wholly-owned subsidiary of the listed company)
- often the assumption is that an indemnity is acceptable where it is backed by insurance. However, the insurance you are relying on may not be sufficiently wide to cover the terms of the indemnity
- an indemnity doesn't have to include the word "indemnity" to take effect as an indemnity
Remember to tread carefully when it comes to indemnities!
One of the changes in the Joint Contracts Tribunal's Design & Build Revision 2 2009 contract is replacing all references to "written notice" to just "notice". It has also altered its "boilerplate" notices clause to provide for all notices to be in writing. This serves as a timely reminder of the importance of complying with notice provisions in contracts.
If giving of notice is a condition precedent to an entitlement under the contract to, for example, extensions of time or liquidated and ascertained damages, failure to comply with the notice requirements could bar the claim.
If you are terminating a contract, failure to comply with notice requirements could result in you being in repudiatory breach of the contract if the failure means the notice is ineffective. Also, watch out for any notice periods in collateral warranties relating to termination and/or suspension. These maybe longer than the main contract's notice periods and need to be taken into consideration where planning any termination or suspension.
When it comes to notices, remember: form, content, method of service and timing.