Limiting Your Liability – Drafting Liability Caps

Limitation of liability clauses are one way in which businesses can manage risk and control their maximum potential financial exposure. As a result, limitation of liability clauses in construction contracts and professional appointments are often the subject of intense negotiation between the contracting parties.

Careful drafting is required to ensure a liability clause is enforceable.

What to consider when drafting caps on liability

Whilst each construction contract and professional appointment is different, the following key factors should be considered:

• the value of the construction contract / professional appointment;

• the type of services being provided under the contract / appointment and the level of risk involved in providing the services;

• the level of professional indemnity insurance under the contract / appointment;

• whether separate caps for specific types of loss are required, e.g. damage to property or loss of confidential information; and

• if there have been previous contracts / appointments with a client which have not included a limit of liability, but now seek to include one in a new contract / appointment with that same client (or reduce a previously agreed limit of liability), draw this to the client’s attention (see the case of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited below for further information on this).

Ultimately the level of the cap on liability is a commercial decision, taking into account the risk and reward under a contract.

The amount of the cap on liability

The amount of the cap may be expressed:

• as a percentage of the fee, or if the consultant will be paid a relatively small sum, the consultant may agree a cap on liability that is a multiple of its total fee;

• by reference to the consultant’s professional indemnity insurance. The level of professional indemnity insurance is sometimes used to reflect the amount of the cap on liability or as a reference for negotiations; or

• as a fixed amount. A lump sum cap is often negotiated by reference to a proportion or a multiple of the total fee.

When a cap on liability may be unenforceable

In Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited [2012], the Technology and Construction Court considered whether a cap on liability in a contract for professional services was enforceable.

In previous dealings between Trustees of Ampleforth Abbey Trust (“Ampleforth”) and Turner & Townsend, Turner & Townsend had been appointed on its own standard terms which did not impose a cap on its liability.

In this case, whilst Turner & Townsend’s standard terms were used, this time the appointment had a net contribution clause and an overall cap on liability to the lesser of the fee (which totalled £111,321) or £1 million. The contract also required Turner & Townsend to hold £10 million of professional indemnity insurance. The court held that the cap on liability did not apply and Ampleforth had access to Turner & Townsend’s £10 million professional indemnity cover.

The limitation clause was held to be unreasonable on the grounds that the contract required Turner & Townsend to maintain professional indemnity insurance and the cost of that insurance would have been passed onto Ampleforth within Turner & Townsend’s fees. It was held that it would have been unreasonable to uphold the limitation clause reducing the amount of insurance cover available to Ampleforth, cover which Ampleforth had effectively paid for, particularly as the liability cap was lower than the maintained insurance cover.

The judgement highlighted that:

• a cap on liability is subject to the “reasonableness” requirements of the Unfair Contract Terms Act 1997; and

• it is best practice for a consultant to draw the client’s attention to any cap on liability before entering into a professional appointment, particularly when dealing with an inexperienced client.

If you have any doubt in relation to a contract’s limitation of liability clause, please contact a member of the Construction Team.