Technology and Construction Court considers enforceability of limitation of liability clause and scope of a project manager's duties

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It is not uncommon for suppliers, service providers and other professionals to include provisions in their terms of business limiting their liability if something goes wrong.  The extent to which liability can be limited, however, is subject to a range of regulation, including the Unfair Contract Terms Act 1977 (UCTA) and, when dealing with consumers, the Unfair Terms in Consumer Contracts Regulations 1999.

Crucially, any limitation of liability contained in an organisation's standard terms of business must be "reasonable" having regard to the circumstances which were, or ought reasonably to have been, known to the parties when the contract was made.  If not, the provision will be unenforceable by the party seeking to rely on it.

The recent case of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited provides an interesting decision on the reasonability (or otherwise) of limitation of liability clauses.  Although the decision relates to a dispute in the construction industry, it is relevant to organisations which routinely include limitation of liability clauses in their standard terms or deal with those which do.  It is also of interest to project managers and those who engage them.

Facts

The trustees of Ampleforth Abbey Trust (Ampleforth) appointed Turner & Townsend Project Management Limited (TTPM) to act as project manager in relation to the construction of a new boarding house.  The building contractor for the project was Kier Regional Limited (Kier).  A building contract was drafted but never executed and the construction work was undertaken under eight separate letters of intent.

The boarding house was eventually constructed to a satisfactory standard, but significantly behind schedule.  Because of the delay, Ampleforth claimed liquidated damages from Kier, pursuant to the provisions of the draft building contract.  Kier denied that it should have to pay liquidated damages as the building contract had not in fact been signed.  That dispute was settled following mediation.

Following settlement of that particular claim, Ampleforth made a claim against TTPM on the basis that TTPM had 'acted in breach of its duty to exercise reasonable skill and care to procure execution of the building contract'.  Ampleforth alleged that TTPM's negligence (which had meant that the building contract was never signed) meant it was unable to claim liquidated damages from Kier.

TTPM denied that it had acted negligently and argued that, in any case, its standard terms (under which it had been appointed by Ampleforth) contained a provision limiting its liability to the lesser of 'the fees paid to [TTPM] or £1 million'.  TTPM's fees were £111,321.

Decision

The Court found that TTPM did owe Ampleforth a duty to exercise reasonable skill and care to procure an executed building contract, that TTPM had acted negligently in failing to do so and that Ampleforth had suffered loss as a result.  The court based its decision heavily on the obligations that it felt were within TTPM's remit as project manager.

Generally, 'a project manager will act as the representative of the employer for the purpose of co-ordinating the different aspects of a…project'.  Although TTPM was not under an absolute obligation to procure an executed building contract, it was vital that TTPM made sufficient efforts to do so.  It is extremely unusual for a project of this type to be completed under a letter of intent and TTPM's failure to procure a signed building contract suggested that 'something went wrong'.  Essentially, TTPM had failed to take adequate steps to resolve outstanding matters, to advise Ampleforth of the importance of signing the building contract and to apply sufficient resources to the matter.  These comments give an indication of some of the expectations that courts are likely to have of project managers in the construction industry and perhaps more generally.

Importantly, the Court also held that TTPM could not rely on the cap on liability in its appointment by Ampleforth.

The Court did not deny that the limitation of liability was incorporated into its professional appointment, but it found that it was unreasonable, contrary to the requirements of UCTA.  TTPM had contractually committed to have in place professional indemnity insurance (PII) of £10 million and the court held that it was unreasonable for TTPM to have that level of cover (the cost of which would be passed on to Ampleforth) but not allow Ampleforth to benefit from it by imposing a much lower cap on liability.

Comment: Limitation of liability

The Court's principal reasoning behind its decision in relation to the limitation of liability was that a professional consultant usually passes on the cost of its PII to its clients.  While that is true, PII is usually taken out in respect of all of an organisation's activities and clients; the cost to an individual client in respect of that insurance cover is therefore usually quite small.

Nevertheless, it is likely that the principles established by the case will be used to challenge the validity of a cap on liability or to argue for a lower (or no) cap on a professional consultant's liability where PII of a significantly higher value is held by the consultant.

It seems likely that if TTPM had taken out PII cover of only £1 million, the limitation of liability clause would have been 'reasonable'.  By obtaining a higher level of insurance, the lower cap was in fact considered unreasonable.  This raises an interesting dilemma for suppliers as a low level of insurance cover may not be sufficient to cover liability but a high level of cover may invalidate a significantly lower contractual cap on liability.  A limitation of liability clause is intended to minimise risk; however, this decision demonstrates that any such clause should be balanced against the level of insurance available.

On the strength of this decision, it seems likely that a limit on liability that is linked to the level of insurance available to a supplier will be reasonable.  However, liability can be capped by reference to a number of variables and parties seeking to limit liability should assess on a case-by-case basis the level of risk they are prepared to bear in the context of the goods or services being provided.  Parties should also consider the precise types of loss (of which there are many) for which they would expect the other to be responsible and draft any limitation of liability clause accordingly.

The court also considered whether TTPM should have made more effort to bring the limitation of liability clause to the Ampleforth's attention. 

Comment: Letters of intent

This case also highlights some of the difficulties that can arise where letters of intent are used in relation to a project.  Although this is not an uncommon scenario, the effectiveness of any letter of intent will depend on its form and content.  In particular, the parties need to be clear whether the letter (or any part of it) is intended to be legally binding or not, and what happens if a letter of intent expires and no contract is signed.

The advantages of a 'non-binding' letter of intent are limited.  They can produce uncertainty for both parties in relation to fundamental elements of the arrangements, for example specification, price and allocation of risk.  Certainty may be increased by the use of a 'binding' letter of intent but it will still be critical to set out the position clearly in relation to all aspects of the arrangements that are to be covered and to use reasonable efforts to put in place a formal contract.

In contrast to the views expressed in Ampleforth, it is common for projects to be undertaken on the basis of a letter (or letters) of intent and for parties subsequently to discover that their contractual position is not what they thought it was.  While it is a counsel of perfection, to quote Lord Clarke's decision in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG, parties should be wary of the "perils of beginning work without agreeing the precise basis upon which it is to be done.  The moral of the story is to agree first and to start work later".