Incorporation of Limited Liability Clause in the Construction Industry

Limitation of liability is a big deal for the parties to construction contracts.  If things go wrong and significant losses are incurred, business organisations should be seeking clarity and reassurance at the outset as to the extent to which they will be liable for such losses. Rightly or wrongly, caps on liability are not as common in construction contracts as other types of commercial arrangements; however they have recently come under the spotlight in the construction industry.

The default position is that if the agreement or contract between the parties contains no caps or limits on liability then the parties face potentially unlimited liability if things go wrong.

In an important ruling from the Court of Appeal, a limitation of liability was found to have been incorporated into a contract between two parties, despite the fact that a final contract was never executed, albeit that the parties did enter into an interim contract.  This ruling overturned that of the lower courts, that the parties had agreed a simple contract arising out of an acceptance of a letter or offer, and that no set of terms and conditions were incorporated into the contract, meaning there was no cap on liability.

What’s the background?
The appellant (Arcadis) was engaged by the respondent company (a specialist concrete sub-contractor) to carry out design works in connection with two large projects.  This was in anticipation of a wider agreement between the parties which, in the event, did not materialise.  Serious problems arose, such that part of the construction may have to be demolished and rebuilt at huge costs. Arcadis denied any liability for the defects.

The parties had been working under an existing set of terms and conditions when AMEC issued a letter of instruction to start work on a matter where it was intended the parties would enter into a new contract.

In the first instance, the Court held that Arcadis was left with unlimited liabilities because it had failed in its argument that a clause limiting liability was incorporated into the contract.

The Court of Appeal examined the individual construction contracts for the projects, concluding that the offer letter of 6 March 2012) was, in fact, “a standing offer, which if acted on before it lapsed or was lawfully withdrawn, would result in a binding contract”. This offer was accepted by Arcadis, by letter and/or through its conduct in undertaking the work.

Next, the Court said the parties had chosen “to stop the music” in relation to the terms that applied in the interim contract from November the previous year. The new contract incorporated the November terms by reference (a view supported by the correspondence).  Crucially, those terms included the limitation clause.

What does this mean?
The case clearly demonstrates the importance of suitable caps and limits on liability in a construction contract which are of integral importance to contractors to ensure that they have foresight over their potential contractual exposure.

However, what this case ultimately shows is that it is important to get your contractual documentation in line as early as possible. Whilst it is not always possible to finalise a contract before works begin in the construction industry, some form of contract should be in place at the earliest opportunity in all instances, whether this is a letter of intent or a full construction contract.

Arcadis may have won the case and successfully incorporated the cap on liability, had their contractual documentation been clearer and correctly executed. They could have saved themselves lengthy and costly legal proceedings.

Therefore, the lesson to be learnt is to get suitable contractual documents in place which set out the terms agreed between the parties and to ensure that they are clear, unambiguous and correctly executed.

How can we help?
If you have any concerns about your contractual arrangements, including limitation of any liabilities and other important clauses, take urgent, strategic legal advice as soon as possible.  Contact the experienced commercial solicitors at Herrington & Carmichael for specialist help and representation.

Please contact our construction team.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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