Stepping Back from the Firing Line: Understanding Limitations on

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1 | ARTHUR COX
Group Briefing
March 2015
KEY CONTACTS
For further information on any of the
items discussed, please contact either of
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NIAV O’HIGGINS
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KAREN KILLORAN
PARTNER
+353 1 618 0324
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This document contains a general
summary of developments and is not
a complete or definitive statement of
the law. Specific legal advice should
be obtained where appropriate.
CONSTRUCTION & ENGINEERING
Stepping Back from the
Firing Line: Understanding
Limitations on Liability
Limitation of liability is an issue
that is hotly negotiated in most
commercial contracts and construction
is no different. It can sometimes be
overlooked where unamended standard
form contracts are used. Parties often
rely on the standard form clauses as
having the “authority” of being tried
and tested and drafted with the benefit
of the knowledge and experience of
the industry. Such reliance can prove
hazardous as they may not always
adequately deal with the commercial
risks of a particular project. The 2013
Irish High Court case of Mount Juliet
Properties Limited v Melarne Developments
Limited & Ors found that standard form
consulting engineering appointments
were deemed to be incorporated by
reference in correspondence between the
parties. These standard forms contain
overall financial caps on liability.
light of their importance and if there is
any ambiguity in the clause, it will be
construed against the drafter (Contra
Proferentum). A recent Irish Supreme Court
decision demonstrates the importance of
clarity and bringing the limitation clause
to the attention of the party against whom
it may be enforced. In the case of James
Elliott Construction Limited v Irish Asphalt
Limited1, it was held that a term seeking
to limit liability included within Irish
Asphalt’s standard terms and conditions
noted on the back of delivery dockets as
being “available on request” did not succeed
as not only were the terms and conditions
not printed on the delivery notes, there
was nothing to suggest that the actual
terms and conditions, and, in particular
the limitation clause, were ever brought
to the attention of anyone in Elliott
Construction.
EXCLUDING CERTAIN TYPES OF LOSS
EXCLUSION CLAUSES
Negligence
Exclusion clauses are clauses relied
upon by a party, who would otherwise
owe a liability, to limit or exclude that
liability. This is normally achieved by
imposing a financial cap on liability
and/or excluding certain heads of
liability altogether.
Where a party seeks to exclude liability
for negligence, the party must expressly
use the term “negligence” or an appropriate
synonym. Reliance on a generic “all claims”
clause without an express reference to
negligence will not suffice.
Drafting issues
Parties will often seek to limit their
liability for indirect or consequential
Great care and attention must be paid
to the drafting of exclusion clauses in
Direct and Indirect Loss
1
[2014] IESC 74
CONSTRUCTION & ENGINEERING
2 | ARTHUR COX
STEPPING BACK FROM THE FIRING LINE:
UNDERSTANDING LIMITATIONS ON LIABILITY
loss and so it is worth giving some
consideration as to what these terms
actually mean. The case of Hadley v
Baxendale (1854) is the authority for
determining whether a loss arising from
a breach of contract is direct or indirect.
This case gave rise to the “two limb” test,
explained below.
Where one party is in breach of contract,
the other party will be entitled to
recover, in respect of that breach:
»» the loss that would fairly and
reasonably be considered to arise
from such a breach in the usual
course of things; or
»» the loss that, at the time of contracting,
was within the reasonable
contemplation of the parties as a not
unlikely result of the breach.
The first limb of the rule relates to direct
loss and what naturally flows from the
breach. Such direct loss (which can
include loss of profit) is often the greatest
head of damages and it is important
to try and anticipate what might
reasonably arise, as a result of a breach,
in order to deal with liability for such
events. What is a direct loss will depend
on the nature and facts of any given case
and the knowledge of the parties at the
time the contract was made.
The second rule in Hadley v Baxendale
applies to loss that is greater than or
different from that which would be
expected in normal circumstances. In
essence, it is a loss that is “special” or
“exceptional”. Under the second rule, the
party in breach must have had actual
knowledge of the special circumstances,
at the time the contract is entered into,
that would give rise to a particular type
of “special” loss for that breach.
It is worth noting that the rules are
not mutually exclusive and the loss
that may be covered by either rule will
depend on how the relevant breach of
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contract is characterised and the degree
of knowledge of the circumstances the
parties are assumed to have.
completion of services was sufficient to
strike out the employer’s claim under a
building contract.
FINANCIAL CAPS ON LIABILITY
NET CONTRIBUTION CLAUSES
It is usual for parties to a contract to
agree an overall financial cap on liability
which is often equated to the contract
sum or a percentage thereof or to the
indemnity limit of the insurances to be
provided by the relevant party, to the
extent that the liability being limited
is insurable. Contracts also regularly
include clauses that cap parties’ liability
at a fixed or liquidated sum in respect of
certain identified events of default.
Net contribution clauses are often
included in collateral warranties as
a means of limiting the warrantor’s
liability. The purpose of net contribution
clauses is to transfer to the beneficiary
the risk that other persons responsible
for the same damage may be unable to
pay or may have ceased to exist. The
beneficiary will assume the burden
of pursuing from third parties such
contribution as may be available.
The most aggressive forms of net
contribution clause are those which
define the defendant’s liability in
terms of a fair and reasonable share
of the total loss. The mildest forms of
net contribution clause consist of an
undertaking by the beneficiary to obtain
(or an obligation on the developer to
put in place) collateral warranties from
other specified parties, usually the other
members of the design team and the
contractor. There may also be a provision
that no action will arise against the
warrantor unless such other warranties
are obtained.
TEMPORAL CAPS ON LIABILITY
Parties to a contract are free to agree
temporal limitations on their liability. In
the absence of any agreed express terms,
however, the duration of contractual
obligations will depend upon when
the contract is entered into, when the
development is completed and the
limitation period which applies (either
6 years or 12 years dependent upon
whether the contract is executed under
hand or under seal, respectively). In
respect of contractual obligations, time
starts to run from the date of breach,
(unless, exceptionally, there is an
element of wrongful concealment, in
which case time will run from the date
the breach of duty becomes reasonably
apparent). Tortious obligations will run
from the date of damage.
In Inframatrix Investments Ltd v Dean
Construction Ltd2, the Technology and
Construction Court in the UK (upheld
by the Court of Appeal) held that a
bespoke limitation clause preventing
claims being brought more than one
year after practical completion or
2
CONCLUSION
Exclusion clauses that significantly limit
parties’ liability by way of financial caps
and in respect of certain categories of
loss are generally extremely useful but
can sometimes be avoided if their terms
are not clearly drafted and brought to
the attention of the party against whom
they may ultimately be enforced or if
misrepresentation, fraud or fundamental
breach can be proved.
[2011] EWHC 1947
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