A cap in liability: The absolute limit

The phrase, “be careful what you wish for” is one which should be borne in mind when agreeing special or bespoke terms for commercial construction contracts. The thorny issue of a contractual limitation of liability and whether such clauses actually say what they are intended to mean can be the root of huge disagreement and is an issue regularly aired in court.

One of the latest cases on this point was heard by the Technology and Construction Court in January. At the top of the list of matters to be decided by the Judge was the question (probably close to the hearts of many of those negotiating contracts today) of whether a subcontract had an effective cap for delay and disruption in relation to claims for loss and expense suffered by the contractor, not only under the sub-contract but also under the main contract.

Limitations of liability (when agreed in construction contracts) can be and often are expressed as a percentage of the relevant contract price, or by reference to the limit of a contractor’s PI insurance. In McGee Group vs Galliford Try, the subcontract (a heavily amended version of the JCT standard form) stated that if the sub-contractor (McGee) failed to complete its sub-contract works, (which included the design and construction of earthworks and reinforced concrete super structures for a casino and leisure complex) in time, it would be liable to reimburse its employer, the contractor Galliford Try for direct loss and expense. “provided always that the subcontractor’s liability for direct loss and/or expense and/or damages shall not exceed 10% (ten per cent) of the value of this sub-contract order.”

McGee’s view was that the 10% cap applied to all Galliford Try’s losses for delay and disruption for which McGee was responsible. Galliford Try accepted that around £1.2m of a nearly £3.5m claim was covered by the cap, but insisted that the remaining £2.3m fell outside its scope. The reason for this was another clause in the amended subcontract that required McGee to reimburse Galliford Try for its losses under the main contract.

In the face of this apparent contradiction, the court applied general principles of contract interpretation: if a party wishes to rely on a clause limiting liability to a fixed financial amount in a commercial contract, it should be interpreted as part of the general allocation of benefit, risk and responsibility; the clause does not have to be interpreted restrictively or given special treatment. The court also underlined that the limitation clause had to be clear and unambiguous. In the circumstances, there was no doubt as to the meaning and the cap applied to McGee’s entire liability for delay and disruption under the main contract as well as under the sub-contract.

So where does this leave parties who wish to agree financial caps on liability for delay and make sure that such agreement is properly recorded and enforceable?

The court showed support for such caps in principle “to reduce risk and promote certainty” and, with this in mind, it is important that the wording of any limitations precisely describes the types and extent of losses to be capped. For example, in the McGee case the court felt that the term “direct loss and/or expense” is adequately understood by the industry. The additional words “and/or damages” did not extend the cap to losses that were not in the category of financial consequences of delay and disruption.

If a cap is to apply beyond the normal understanding of the words used to describe its ambit, for instance, if the clause is to respond to breaches of particular clauses, specific express or implied terms, this must be spelt out. A further point to consider is the effect of individual clauses on the general allocation of risk over the entire contract. This should reduce inconsistencies and avoid a potential (in the words of the judgment) “mismatch” between standard forms and bespoke amendments. While you are at it, it is also worth checking that the main contract and subcontract obligations are back to back. It is not simply a “housekeeping” exercise, or a job creation scheme conjured up by the lawyers. The case outlined above clearly underlines that due diligence in the early stages of contract preparation could be vital. Better to get it right up front than be taken by surprise down the line.

Stephanie Canham is head of construction at law firm Trowers & Hamlins