The following case raised interesting questions as to whether:

  • a sub-contractor’s standard clause that capped its liability (to the contract price) was incorporated into its agreement with the contractor;
  • assurances given by the sub-contractor in relation to the amount of its professional indemnity insurance (which exceeded the amount of the cap) were inconsistent with the incorporation of a cap with a lower amount; and
  • the clause capping the sub-contractor’s liability (if incorporated) satisfied the test of reasonableness required under the Unfair Contract Terms Act 1977 (“UCTA”).

Shepherd Homes Limited and Encia Remediation Limited and Green Piling Limited [2007] EWHC 70 (TCC)

The sub-contractor’s proposed tender for ground and piling works was set out in a package of documents. The package included the sub-contractor’s standard terms and conditions, which the sub-contractor handed to the contractor. These standard terms comprised ten terms which were printed on a one page document, in clear and legible print. One of the terms limited the sub-contractor’s liability for all losses to the contract price (approx. £91,000). One of the other documents in the package contained details of the sub-contractor’s professional indemnity insurance, which provided cover of £1,000,000 in the aggregate.

The parties discussed and amended the sub-contractor’s standard payment term, increasing the period for payment to the sub-contractor from 14 to 28 days. However, the parties did not discuss the clause which limited the sub-contractor’s liability to the contract price.

The sub-contractor later submitted its offer “as detailed in the attached documents”. The attached documents included the sub-contractor’s standard terms, with the amended payment term.

The contractor submitted a counter offer. The sub-contractor accepted this counter offer when it commenced work on site.

Discussions then took place between the contractor, its engineers, and the sub-contractor as to ways in which savings could be achieved by value engineering. One aspect of these discussions related to the pile head design. The engineers were not prepared to accept responsibility for an alternative pile head design proposed by the sub-contractor. The sub-contractor offered to indemnify the contractor and the engineers in relation to its proposed pile design. At that point, the contractor asked: “This is covered by your insurance, is it not?”; and the sub-contractor confirmed that it had professional indemnity insurance of £1 million.

It was common ground that there was no discussion about the cap, or the impact of insurance on either the cap or the extent of the sub-contractor’s liability.

The sub-contractor subsequently confirmed in writing, amongst other things, that it had professional indemnity insurance for £1 million in the aggregate and that it would indemnify the employer and its engineers against any liabilities in relation to the pile head design.

Settlement occurred, and the contractor issued proceedings against the sub-contractor alleging defective design of the piling system.

Was the cap incorporated into the contract?

The contractor originally argued that the cap was not incorporated into the contract because the sub-contractor had not given adequate notice of it to the contractor. The contractor relied upon principles set out in Chitty On Contracts (paragraph 12 - 015) which state that, where the particular standard term relied upon is a particularly onerous or unusual term, the party tendering the document must show that it has been brought fairly and reasonably to the other party’s attention. In the famous words of Denning LJ (quoted in Chitty):

“Some clauses ... would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient”.

The contractor withdrew its argument on this point after it became apparent from evidence that its contracts director had read and considered the sub-contractor’s terms and conditions. However, the court held that, even if the contractor had not read the sub-contractor’s terms and conditions, the contractor’s claim would still have failed, because the sub-contractor had done what was reasonably sufficient to give the contractor notice of its terms. If it had been relevant to decide the point, the court did not consider that the limitation of liability provision was particularly onerous or unusual.

What effect did the sub-contractor’s professional indemnity insurance cover have on the cap?

Was there an inconsistency between the existence of the cap in the piling contract and the sub-contractor confirming it would maintain professional indemnity insurance of £1 million in the aggregate?

The court found that there was no inconsistency, for a number of reasons:

  • The discussions about the sub-contractor’s insurance only arose in connection with the indemnity the sub-contractor had offered in relation to the pile head design.The discussions regarding the sub-contractor’s professional indemnity cover had not related to the whole piling contract. Whilst the cap did not therefore apply in relation to the pile head design, it did apply in respect of the remainder of the piling contract. (This was significant since the sub-contractor had not alleged that the pile head design caused any of the settlement.)
  • No one had said during discussions that the limit of the sub-contractor’s liability was to be measured by the extent of its insurance cover.
  • Cover of £1million in the aggregate would probably be required in order for a company with the sub-contractor’s turnover to be able to satisfy even a limited liability (to the contract price) since the £1 million might be required to satisfy other claims (including any claims in relation to any other development) in the same year.

Did the cap pass the UCTA test of reasonableness? The contractor’s argument

Section 3 of UCTA provides that where one of the contracting parties deals on the other’s written standard terms of business, a contractual term which excludes or restricts liability in relation to breach must satisfy the test of reasonableness.

Under section 11 of UCTA, where liability is restricted to a specified sum of money, in determining whether the term is reasonable, it is relevant to consider (a) the resources which the party could expect to be available to him to meet the liability, should it arise; and (b) how far it was open to him to cover himself by insurance.

The contractor argued that, since the parties contemplated that the sub-contractor would have the benefit of £1 million insurance cover, any term which denied the contractor the full extent of such benefit was neither fair nor reasonable, with the result that the cap was inapplicable.

The cap was reasonable

The court noted that the sub-contractor was a small company, eager to do business with the contractor, which was part of a large international group. The contractor had superior bargaining position. It had received tenders from, and could have contracted with, other sub-contractors, at higher prices, without any cap. It chose not to do so, but to secure favourable terms with the sub-contractor, including an immediate start on site. In all the circumstances, the term was a fair and reasonable one to have included in the contract between these parties. The cap did not cease to be reasonable because the sub-contractor confirmed it had insurance cover of £1 million.