Limitation clauses are a double-edged sword in construction contracts. On the one hand, they provide necessary protection against open-ended liability. On the other, they can leave an injured party without recourse.
Here are some key issues to consider:
Time Limitations
Construction disputes often manifest years after project completion. A standard 6-year limitation period may bar claims before defects appear. It’s important to consider the need to execute the contract as a deed, thereby extending the limitation period to 12 years, which should then protect against latent defects or building safety issues with longer discovery periods.
Balance the need between extending the limitation period and the availability and extra costs of a 12-year limitation period.
Learn more on Delay Damages here.
Caps on Liability
Putting a cap on the total liability provides certainty for the party wanting to limit their risk. However, watch out for caps that are too low compared to the potential damages. If the cap is set too low, it may not provide enough compensation, and once reached, what happens then?
It is possible to set caps against e.g. availability guarantees and production, but these normally still form part of an overall cap.
No Greater Liability
A party may be given rights under a warranty and the ability to take direct action for damage and/or loss, even though they are not a party to the original contract. In these circumstances it is still possible to limit your exposure by what is referred to as a no greater liability clause. In simple terms, you cannot be liable under the warranty to an extent that exceeds the liability you had under the original contract.
Including a “no greater liability” clause restricts the warranty coverage to what’s in the underlying contract. It excludes broader duties that might otherwise apply.
This limits the warranty exposure, which is often the goal. But be careful – there could be unintended gaps between what’s covered in the underlying contract versus the warranty. Double-check that the warranty obligations align with the liabilities and scopes included in the original contract.
Net Contribution Clauses
These limit the ability of a party to claim damages to the basis on which the insured shared in the original division of responsibility. These are particularly prevalent in appointments and warranties with amendments. The issue they create is that, in the event of the insolvency of other liable parties, then you are restricted in what you can recover from the party protected by the net contribution clause. However, consider carve-outs for intentionally harmful acts or where policy reasons favour full compensation.
Balance is key. Limitation clauses allow prudent risk management, but if pushed too far, they can undermine the contract’s purpose.
In March 2023, we welcomed Chris Beirise of HKA Global, LLC (USA) and Claire Packman KC of 4 Pump Court to discuss the ‘Top Tips for Infrastructure Projects’. It was a great session. To watch the recording and access the supporting documents, click here.
For expert legal advice and representation in construction and commercial property matters, contact Barton Legal.
Please note, this article and any accompanying video or presentation are for educational and marketing purposes only. It must not be used for giving advice in any shape or form, and it is not a substitute for legal advice. The author does not accept responsibility for loss howsoever occasioned to any person or persons acting or refraining from action as a result of this material.
