Are you Missing Important Issues while you Focus on Limitation of Liability Clauses?

Contract Administration

I wrote a LinkedIn post the other day about the receivers for Airport Link claiming $2.2 billion in damages from the engineers for allegedly misleading or deceptive traffic projections.

Despite the big claim, it was reported that the engineers are relying on a limitation of liability clause, asserting that their liability is capped at $10 million.

This case shines a harsh light on limitation of liability clauses and how important that they can be in a doomsday scenario.

However, a few counterintuitive things have always struck me about limitations of liability.

Does the Issue Distract Negotiations?

don’t miss smaller, more common issues while spending time distracted on the supposed “big picture” of a liability cap

The time devoted to the liability cap in contract negotiations is often significantly more than the time spent negotiating other issues.

Sure, limits of liability are important, but they bite very rarely.  On virtually every project, there are a multitude of other niggles that threaten to become serious injuries every single day.

The limitation of liability is often the headline and only real “not negotiable” in contractors’ and engineers’ commercial limits.  I have been in many meetings where the CEO or senior executives ask “have we capped our liability?” while making limited further enquiries on the contract they are signing.

Over-emphasis on the liability cap gives some plausible deniability that risk is being managed properly.  To be fair, the senior executives can’t be across everything, so it’s reasonable to focus on what is perceived to be in the “bet the company” category of risk.

However, relying on the security blanket of a liability cap does nothing to protect against the “death by a thousand cuts”.  Contingency, and then margin, can be eroded quite quickly through these cuts, leading to actual bottom-line losses or, worse, insolvency.  This can all happen well before the issues of a liability cap will ever come up.

Where are the Thousand Cuts?

Think of the other risks that might not be addressed properly because of all the time and effort spent negotiating the liability cap.

Have you accepted the risk for matters outside of your control?

Is the extension of time clause fair?  Is the program achievable?  Does “practical completion” mean what you think it means, or does it mean something worse?

Are you entitled to fair extra payment for variations or changes to the program?

Are the time bars horrendous?  Does the failure to comply with technical notification requirements extinguish an otherwise valid entitlement to extra time and money?

If things get heated, is it too easy for the other party to leverage a quick and dirty outcome?  For example, by starving you of cash-flow through oppressive set-off clauses and rights to cash security?

Do your insurance policies properly cover your insurable risks?  Not all risks are insurable and not all policies are the same.  Don’t assume too much.

These are just some of the issues that can be overlooked (or sufficient attention not given) if you are too distracted on the supposed “big picture” of a liability cap.

don’t assume that the liability cap will save you from the day-to-day risks that affect your ability to make a reasonable return on your contracts

Does the Limitation Clause Mean what you Think It Does?

Another thing that has always struck me about liability caps is how the drafting of the clauses themselves can be overcomplicated.

Senior management might have the simple comfort of thinking their liability is capped, but the devil is always in the detail.

This is where circular [or even in some cases, surreptitious] drafting can come in and undermine what the business people think they have agreed to.

I have seen contracts where the exceptions to the “agreed” liability cap are so broad that you have to wonder whether the cap does anything in the first place.

For example, exceptions in relation to “defects” where the definition of defect means any noncompliance with the contract.  It is not difficult to imagine a situation where a contractor is sued for matters arising out of a breach of contract, the contractor relies on a limitation of liability, but then the principal says that the limit does not apply because the claim arises out of a “defect”.

Another example I have seen includes an attempt to carve out liability for negligence from the cap.  Again, it is hard to see the point of a liability cap in the first place, given that claims for breach of contract and negligence generally (but not always) arise from the same set of facts.

Sure – Avoid the Killer Blow, but Try not to Bleed Out Along the Way

This article is not intended to undermine the importance of limitation of liability clauses.

However, don’t assume that the liability cap will save you from the day-to-day risks that affect your ability to make a reasonable return on your contracts.  You’ll often get immediate benefit by paying more attention to these risks.

Finally, ensure that the drafting of any liability cap actually reflects your negotiated agreement.  In the doomsday scenario, you will want the clause to stand up when it counts.  Don’t allow unclear or tricky drafting to create problems later on.

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