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How to make sure limitation clauses don't catch you out

Limitation clauses almost always appear in construction contracts, but it is not always clear if they will be enforceable if challenged. One recent case highlights the importance of wording these clauses clearly, as well as the need for employers to re-negotiate clauses they are not happy with before signing a contract.

Most construction professionals will try to limit their liability for breach of contract or negligence. They might try to limit it to a certain sum, time period or type of loss – or all three.

These limitations find their way into contracts as limitation or exclusion clauses. While it is almost inevitable that these clauses appear, it is far from inevitable that they will actually be enforceable if challenged.

This is because such clauses are subject to the “reasonableness test” under the Unfair Contract Terms Act 1977. This test states that the clause has to be reasonable in the circumstances or it might be struck out by the courts.

Because the reasonableness test depends on the circumstances of each case, there is always some uncertainty whether a clause will be held to be reasonable or not.

As a rule of thumb, however, the relative bargaining position of the contracting parties will provide a guide. If the parties are on an equal footing commercially, it is more likely that a limitation clause will be held to be reasonable.

A dispute over limitation clauses

An example of how far this can be taken can be seen in the recent Technology and Construction Court case of Elvanite Full Circle Limited v Amec Earth & Environmental (UK) Limited [2013].

Elvanite, the employer, was attempting to recover substantial damages of around £800,000 from its planning consultant, Amec, for breach of contract and negligence. Amec’s primary case was that it had not been in breach of contract and had not been negligent.

However, its alternative case relied on three limitation clauses contained in its standard terms and conditions. These limitations had the effect of:

  • Time-barring any claim filed more than one year after substantial completion of its services;
  • Excluding any consequential, incidental or indirect damages; and
  • Limiting Amec’s total liability to its fee or £50,000 (whichever was less).

Amec’s fee was £13,000, so this was the relevant figure in this case.

The judge found that Amec was not in breach, but he went on to comment on whether Amec’s limitations were reasonable and thus enforceable.

Why were the clauses enforceable?

While his comments are technically ‘obiter’ (ie outside the decision) and therefore not binding, they are a useful guide as to how the High Court approaches limitation clauses in these circumstances.

The effect of Amec’s limitation clauses would have been to bar Elvanite’s claim completely. At first sight they seem severe, particularly given that they reduce the limitation period from six years to one, and limit potential damages of around £800,000 to just £13,000.

“The critical factor was that both parties were of equal bargaining power and that Elvanite had not objected to Amec’s terms and conditions”

Nevertheless, the judge found them to be reasonable. The critical factor was that both parties were of equal bargaining power and that Elvanite had been sent Amec’s terms and conditions (twice), and that it understood them and raised no objections to them.

That, however, was not the end of the story in respect of the clause limiting Amec’s liability to its fee.

The judge was keen to point out that, if Amec had the benefit of substantial professional indemnity insurance cover, the clause would not have been found to be reasonable (following the case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited [2012]).

Careful wording is key

Amec also nearly suffered from the sloppy drafting of the time limitation clause. No doubt it intended to bar any claim issued at court more than one year after it had substantially completed its services.

The judge found that since claims are issued and not filed at court, this must have been a reference to serving a formal Letter of Claim. So if Elvanite had issued a letter of claim complying with the pre-action protocol within the one-year period, its claim would not have been time-barred.

“Generally, where the parties are on equal footing, the starting point is that any limitation clause will be reasonable”

In fact, Elvanite had sent a letter notifying Amec of its claim within the limitation period, but unfortunately for Elvanite, the letter did not comply with the pre-action protocol.

What can be learnt from this decision?

Generally speaking, where the parties are on an equal commercial footing, the starting point is that any limitation clause will be reasonable. It is critical for employers to read the consultant’s standard terms and, if you do not like a limitation clause, re-negotiate it.

For consultants, it is of the utmost importance that any limitation clause is drafted precisely and clearly because, if there is any doubt as to its meaning, the clause will be construed against them.

William Curshon is a solicitor at Gateley

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