In the commercial construction space, limitation and exclusion of liability clauses serve as a key risk management tool. These clauses can limit or exclude types of liability of one party to another, providing certainty and predictability in the event of a dispute. That said, a poorly drafted clause can be worse than none at all. Courts require clear, unambiguous wording, and overly broad or vague provisions may not be enforceable. Or, they may be interpreted contrary to how the parties intended them to operate.
That said, if the clause doesn’t operate how we wanted it to, the Court will save us right? Well, not necessarily. The principle of freedom of contract grants the parties liberty to strike whatever bargain they choose. Therefore, the Courts are very reluctant to interfere.
To avoid having to spend unnecessary time and costs arguing over what your limitation or exclusion of liability clause means after contract execution, here are five essential drafting tips to help you get your contract’s limitation or exclusion of liability clause right.
Don’t go too broad – specificity is your friend
While the principle of freedom of contract is foundational, its not absolute. A clause that seeks to exclude all liability, without limits, may be struck down for undermining the very basis of the agreement. If a clause is too wide in its reach, it places the contract in risk of being negated, preventing any sort of contract being formed at all (Macrobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125).
Tip: Tailor the clause specifically to the types of liability you want to limit or exclude. A catch-all clause may seem attractive but could invite judicial scrutiny (see Tip 3 below).
Use clear, unambiguous language
Ambiguity is your enemy. The Courts have established that in cases of ambiguity, a clause will be construed ‘contra preferentum’ (Darlington Futures v Delco Australia (1986) 161 CLR 500). This rule allows a contract clause to be construed against the party that is seeking to rely upon it.
Tip: Avoid vague or technical phrasing unless its clearly defined in the contract.
Be explicit
A general limitation/exclusion of liability for loss is unlikely to be construed as applying to fundamental breach or negligence.
Further, if the relevant clause only refers to liability being limited or excluded for acts under the Contract, it may mean that the limitation/exclusion only applies to claims arising from acts permitted or authorised under the Contract.
The courts will look at the wording of the clause and the contract as a whole to determine whether the above causes of loss/damage are limited or exclude.
Tip: To avoid ambiguity, agree at the outset to use language that specifically includes a limitation or exclusion of:
- Fundamental breach;
- Negligence; or
- Anything arising out of or in connection with the relationship established by the Contract.
Make the cap on liability foolproof
In Lend Lease v KBR [2013] NSWSC 1142, uncertainty over the insurance-linked cap led to a major dispute. The uncertain drafting begged the question – was the liability cap $5 million, or was it $10 million with reinstatement, or was it even more? Ultimately, the court found it was $5 million, but the ambiguity created costly litigation.
Furthermore, does the cap apply to each claim made against the other party, or in the aggregate?
Tip: Make the cap on liability clear (by stating the number, or with reference to a clear contract sum (or percentage thereof)), and also make clear whether the cap is per claim or in the aggregate.
Define consequential loss
Sure, everyone knows they should exclude consequential loss. But seriously, what does consequential loss even include?
The easiest way to answer that question is by defining consequential loss in the Contract. That way, both parties can understand and agree on the types of loss than may fall under this umbrella term.
Tip: Define consequential loss in the Contract. Example types of losses that may be consequential loss include (are but are not limited to):
- loss of profit;
- loss or denial of opportunity; and
- loss of production.
Need help – contact us
Limitation and exclusion clauses are powerful tools, but only when drafted with precision and purpose.
If you are looking to draft or agree on an effective limitation or exclusion of liability clause, whether as a Principal, Contractor, Subcontractor or Consultant, our team can assist with reviewing and drafting clauses that protect your commercial interests.
Get in touch with us to discuss how we can help.
