Performance
MARCH 2011
Construction Law Briefing
Arthur Cox is one of the few
Irish law firms to have a
dedicated team of
construction law specialists,
offering expert advice to
all parties involved in
construction and engineering
projects in both Ireland and
Northern Ireland.
Our Construction Group
combines contentious and
non-contentious expertise
and we understand the
ever-changing commercial
objectives and imperatives
of our clients. Our experience
spans a breadth of industrial,
manufacturing and
commercial sectors. Our
clients include employers
and developers from both the
public and private
sector, contractors and
sub-contractors, acting
individually or in consortium,
construction professionals
and funding institutions.
Bringing the Shutters Down
- ways to limit your liability
General
The limitation of liability is an issue that is hotly negotiated in most commercial contracts
and construction is no different. It can, however, 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. Unfortunately, such reliance can prove perilous
as they may not always adequately deal with the commercial risks of a particular project.
Clauses governing contractual liability fall into three main categories: risk, indemnity and
exclusion clauses. Risk clauses assign the risk of certain events to one of the parties to the
contract so that it is clear, from the outset, who will bear the liability of that risk occurring.
Indemnity clauses involve one party agreeing to make good a loss suffered by the other.
Exclusion clauses refer to those clauses that seek to exclude or limit a liability that one party
may owe to the other. This note will focus on exclusion clauses.
Exclusion Clauses
Exclusion clauses are clauses relied upon by a party, who would otherwise owe a liability,
to limit or exclude that liability. It is virtually impossible to eliminate the risk of a breach of
contract occurring. A contracting party, however, may wish to manage its liability should
any problems arise. This is normally achieved by imposing a financial cap on liability and/or
excluding certain heads of liability altogether.
Parties are generally free to agree whatever they choose in relation to excluding liability.
Great care and attention needs to be paid to the drafting of exclusion clauses in light of their
importance and the fact that they are subject to specific common law rules of interpretation.
Contra Proferentem and Negligence
The Contra Proferentem rule provides that, where there is any ambiguity in the meaning
of an exclusion clause, the clause will be interpreted against the person who drafted or
tendered the document. This is a well established principle and the courts have indicated
that, where a party wishes to exclude or limit his liability, he must do so in a clear and
unambiguous manner.
This document contains a general
summary of legislation and is not a
complete or definitive statement of the
law. Specific legal advice should be
obtained where appropriate.
A good example of where the contra proferentem rule will be exercised is where a party
seeks to exclude liability for negligence. In such an instance, 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. Indeed, it has been held that if a
clause is wide enough to cover both negligence and another head of damage, where no
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WAYS TO LIMIT YOUR LIABILITY
MARCH 2011
express reference to negligence has been made, the court
will not enforce the clause as being effective in respect
of limiting liability for negligence. In order to avoid this
pitfall, any such clause should make reference expressly to
negligence and then deal with other tortious liability.
Direct and Indirect Loss
It is important to consider the types of loss that you are
seeking to limit or exclude. For example, losses can be
lassified as direct or indirect. The case of Hadley v
Baxendale (1854) is the authority for determining whether
a loss arising from a contract breach 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:
(a) the loss that would fairly and reasonably be considered to arise from such a breach in the usual course of things; or
(b) 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 losses (and
which, for the avoidance of doubt, can include loss of profit)
are 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, as outlined above,
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 contract is characterised and
the degree of knowledge of the circumstances the parties
are assumed to have.
Limiting your liability
Whilst the best approach is to avoid a breach of contract
altogether, there are some simple considerations that can
assist in managing your potential liability. In every situation, where a contract is being negotiated, you should
consider what losses are likely to be incurred and what
is important for recovery or exclusion in respect of those
losses, in the event of a breach of contract. It is important to
identify the concerns of the parties and the relevance of the
exclusion clauses to those concerns. The types and heads
of loss to be excluded should be considered i.e. direct/indirect, negligence, and whether any overall caps on liability
should be included. Clauses should be drafted clearly and
unambiguously and, if the need arises, all heads of loss to be
excluded should be listed so that parties cannot argue about
what was meant at a later date.
Contacts
For further information please contact:
Martin Cooney Associate
Construction
Niav O’Higgins Partner
Head of Construction
tel: +353 (0)1 618 0312
martin.cooney@arthurcox.com
tel: +353 (0)1 618 0314
niav.ohiggins@arthurcox.com
Dublin
Belfast
Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland
tel: +353 (0)1 618 0000 | fax: +353 (0)1 618 0618
email: dublin@arthurcox.com
Capital House, 3 Upper Queen Street, Belfast BT1 6PU, Northern Ireland
tel: +44 (0)28 9023 0007 | fax: +44 (0)28 9023 3464
email: belfast@arthurcox.com
London
New York
12 Gough Square, London EC4A 3DW, England
tel: +44 (0)20 7832 0200 | fax: +44 (0)20 7832 0201
email: london@arthurcox.com
One Rockefeller Plaza, New York NY 10020, USA
tel: +1 (1)212 782 3294 | fax: +1 (1)212 782 3295
email: newyork@arthurcox.com
www.arthurcox.com
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