Limitation of Liability clauses in construction contracts: key considerations

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13 January, 2020

When negotiating commercial contracts, parties often become embroiled in extensive negotiations when it comes to each party's legal liability in the event that a breach of contract takes place. This is particularly apparent within the construction sector, which is largely owing to the affect that one party's breach of a multi-party contract can have on the smooth progression of the project as a whole. Whilst most standard form contracts contain largely uncontested provisions and procedures dealing with minor breaches of contract (such as allowing the aggrieved party to serve a payless notice in the event of delays caused), parties are often at odds when it comes to material breaches and the extent to which the innocent party should be compensated.

When assessing damages for breaches of contract, it is well established that a claimant may recover contractual damages for those losses arising naturally from the breach of contract, providing that such was in the contemplation of the parties at the time that the contract was made (Hadley v Baxendale [1854]). However, in practice the application of this principle without any limitation could, in some instances, lead to an unquantifiable level of liability on contractors and sub-contractors, which if relied upon, could have a drastic impact on that business' solvency. Parties cannot limit their liability in some instances, such as where damage and loss is caused as a result of one party's fraudulent activity or negligently-caused personal injury or death. Subject to the "unreasonableness" test within the Unfair Contract Terms Act 1977 (which largely prohibits blanket limits), parties can limit their liability for other damage or loss arising from their negligent contractual performance.

Both JCT and NEC standard form contracts include various limitation of liability clauses and optional clauses, leaving the parties to agree appropriate limits. Generally, the client will seek to impose as minimal a limit as is possible, reflecting its desire to recoup the entirety of its losses in the event of a breach taking place. Comparatively, as set out above a well-advised contractor ought to avoid a scenario in which its breach of contract may result in it being in an insolvent state.

A generally acceptable middle ground for both parties is to set their respective liability limits in line with the value of the contract in question. Alternatively, if there are inherent risks in the works under the contract such that they outweigh its value, the contractor's liability may be limited in accordance with the professional indemnity insurance policies that it holds. Should these levels not be sufficient for the client/employer, then a decision needs to be made as to whether it is willing to accept the potential that it may not recover its losses should a breach take place (noting the further difficulties that arise where there are numerous contractors and sub-contractors).

For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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