A trend is emerging where contractors are aggressively pursuing limitations to their liability in larger scale commercial property construction contracts.
While a settled market position is not yet apparent, there does seem to be a consistent move to limit liability for consequential loss. Some contractors are even pushing for a single overall cap on their total liability.
This trend may be an adoption of developments in specialised overseas markets, like the power industry, where consequential damages can be a significant issue. Or, it may reflect the bargaining power of large contractors in the current market. In any event, it is questionable as to whether the domestic contractors' approach is justified. An interruption to power supply arising from the failure of a power station could have significant consequential losses, but the scope for similar losses because of issues with residential, office or industrial buildings is not as evident.
Our recent experience is that contractors have achieved a range of positions in recent transactions including:
- a total liability cap set at a percentage of the contract price (with, in some instances, the percentage reduces following practical completion)
- a liability cap on consequential losses flowing from a defect or a failure to deliver on time
- a relatively modest total liability cap (when compared with the contract price) but with a number of exceptions.
This trend, of course, adversely affects the risk profile of the developer and financier.
In many instances, a financier takes comfort from the quality and standing of the main contractor and will place a degree of confidence in, and rely on, the contractor's ability to manage and mitigate latent and delivery-related risks. An inadequate liability cap will significantly alter a normal risk allocation regime and limit a financier's ability to place reliance on the contractor.
Financiers will need to come to grips with the contractors' positions on their construction financing transactions, and may need to work through a jigsaw of related issues, to properly understand the risk exposure (eg whether it is possible for the developer and financier to have recourse to insurance proceeds where direct recourse to the contractor has been exhausted).
Suggested approach
From a philosophical perspective, it seems logical that any liability cap should apply only after other remedies have been exhausted. The builder's residual liability is the thing which ought to concern the builder rather than the quantum of a global cap.
Our suggested approach, from a developer/financier perspective, would be that any clause limiting a contractor's liability apply only after the following items (ie that the limit is in addition to these items):
- available insurance proceeds
- contributory amounts claimable from subcontractors
- performance bonds and performance guarantees
- liquidated damages.
To date, contributory amounts from subcontractors have not been mentioned.
Other items which are commonly excluded from the cap include losses arising in connection with:
- wilful default or fraud by the contractor
- death or personal injury
- third party property damage
- breach by the contractor of any third party intellectual property rights.
Some contractors also appear willing to have their obligations uncapped during the defect rectification period.
Example clause
The Contractor will be obliged to fully perform the contract for the contract price. However, the Contractor will not be liable for [insert negotiated liability amount] OR [consequential losses, which will include pure economic loss, but shall not include the payment of liquidated damages for late completion].
This limit on liability shall not apply in respect of any liability of the Contractor arising from:
- death or personal injury
- etc
Also, amounts recovered by the Developer under or in connection with:
- the performance bond issued on behalf of the Contractor in favour of the Developer;
- liquidated damages payable under this contract;
- insurance proceeds; or
- amounts recovered or recoverable from subcontractors of the Contractor,
will not be included in the limit on liability
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
