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PLC Construction blog: liability caps: when the cap doesn't fit

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This blog post looks at liability caps in professional appointments following Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd (last week we considered letters of intent in light of the same case). In Ampleforth, the project manager’s appointment contained a provision that limited its liability under the appointment. HHJ Keyser QC had to decide whether this provision was enforceable. He had little difficulty in deciding that it wasn’t. 

I think most people (including professional consultants) will agree with his decision on the facts, but is the judge’s reasoning as robust as it looks, and is the decision of wider application? Perhaps not, on either count.

The appointment 

The employer, Ampleforth, had employed the project manager on two previous construction projects. On both occasions the project manager was appointed on the basis of its standard terms, which did not include a liability cap. 

When it came to the third project, the project manager again proposed its standard terms. However, this time the terms included what, by any measure, was a fairly aggressive provision limiting the project manager’s liability to the lesser of the amount of the fee paid (which was £111,321) and £1,000,000. The appointment also required the project manager to maintain professional indemnity insurance (PII) of £10,000,000 for any one occurrence. Clearly, this was significantly more than the liability cap. 

The project manager did not flag this material change in its “standard” terms to the employer. As a result the employer, understandably if naively, assumed that the terms were the same as for the previous projects. On the facts, the judge had no difficulty in finding that the employer and the project manager had entered into a contract on the project manager’s standard terms, which included the cap on liability.

However, as the employer’s claim exceeded the cap, attention inevitably focused on whether the limitation clause was effective. In particular, was it reasonable under the Unfair Contract Terms Act 1977 (UCTA)? UCTA says that any contract term limiting liability for negligence must satisfy the test of reasonableness. It also says that any term in a party’s standard terms of business limiting liability for breach of contract must satisfy that test. 

Did the cap fit?

The judge found that the cap was unreasonable and of no effect. The principal reason he gave was that the contract required the project manager to maintain a level of PII vastly in excess of the cap. He couldn’t see any justification for this, particularly when he held that as a matter of commercial reality the cost of maintaining such insurance would be factored into the fee. Why should the employer pay for something from which it would never benefit? 

Now, I’m as happy as the next person when judges apply commercial reality in their reasoning. However, I’m far from convinced that the judge’s view of reality on this occasion was correct. PII policies are usually paid for on an annual basis and, where group companies are involved as in this case, are typically maintained on a group basis. The idea that the employer in Ampleforth was making any kind of direct or proportionate contribution to the cost of the project manager’s PII doesn’t pass the reality test. In fact, experience indicates that if the level of PII was reduced to £5,000,000, the project manager’s fee wouldn’t reduce by a penny. The cost of such policies is almost always lost in the fee allowance consultants (and contractors) make for their overheads. 

The judge’s second ground for striking out the cap is more forceful. He agreed with Ampleforth that it was “wrong that, after building up a relationship of trust from two previous projects, and knowing that the third project was not going out to competitive tender, [the project manager] should seek to introduce this Draconian term…..without specific notice and any discussion.” The judge also placed weight on the fact that it was understandable, if unwise, for the employer to assume that the proffered terms for the third project were simply a repeat of what had gone before. So in this context, the cap was unreasonable. 

What are the lessons?

The firm lesson to draw from Ampleforth is that the courts can, and will, use UCTA to strike down “hidden” or “unflagged” limitations of liability in standard terms which a naive or inexperienced client has accepted. As Ampleforth demonstrates, it will be much easier to persuade a court to adopt this approach if it feels that the consultant has misled or somehow misinformed the client. 

However, the idea that an obligation to maintain a level of PII greatly in excess of a cap on liability must generally lead to the cap being struck out as unreasonable is surely a non-starter, for reasons already mentioned. This idea has even less credibility where a client is experienced or has had independent legal advice on the particular contract terms (including any cap on liability). In such cases, the client must surely be taken to have either accepted the cap and/or negotiated the amount; commercial parties are “free to apportion the risks as they think fit”. It certainly wouldn’t be reasonable to suppose that an experienced client had failed to notice, or to be made aware of, the existence of a cap (a point supported by some of the judge’s remarks in Allen Fabrications Ltd v ASD Ltd ). The actual level of PII to be maintained in such cases should be immaterial to the enforceability of the cap, which will or should have been exhaustively reviewed or negotiated. 

As far as professional consultants are concerned, the practical lesson is to be clear and upfront when dealing with unsophisticated or unrepresented clients. If you want the benefit of a limitation clause, don’t slip it in without comment in the hope that no-one notices. The court just might.

This blog was first published by PLC Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. Please select the link for other PLC Construction blogs.

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