Employer's Beware - The Rise And Rise Of Limitation Clauses

Introduction

In all high value and complex projects, there is inevitably a

risk that a contractor will be unable to complete the project on

budget and/or on time and that the resulting delays and losses are

significant, sometimes amounting to many times the initial contract

value. In the UK, large scale infrastructure projects have all too

often wildly exceeded time scales and budgets.

Given the commercial risks, it is no surprise that standard form

contracts such as FIDIC, ACE and RIBA all contain limitation

clauses which seek to place a cap on total legal liability. Despite

the high level of litigation in construction projects, it is

surprising that relatively few disputes have led to case law

examining the interpretation and enforceability of limitation

clauses. Nonetheless, case law from other sectors such as shipping

and IT have, in recent years, shown a striking trend in favour of

upholding limitation and exclusion clauses entered into between

business parties. The upshot for employers is that they must pay

closer attention than ever to the wording of exclusion clauses as

they are more likely to be upheld than in the past. This forces

employers either to negotiate more generous limitation sums or to

cover potential loss by means of increased insurance cover.

This article looks at the main legal issues relating to

enforceability of exclusion/limitation clauses and examines a

recent case (Regus v Epcot Solutions

Limited [2008] EWCA CIV 361) which continues the

recent trends in favour of upholding exclusion/limitation clauses

between commercial parties.

English law and the regulation of limitation clauses

As is well known, limitation clauses may be subject to the

operation of the Unfair Contract Terms Act 1977 ("UCTA").

In essence, English law recognises that there are two distinct

legal scenarios that may arise:

(i) a bespoke contract where the parties have negotiated the key

contractual terms from scratch and where the contract is not based

on one party's standard terms – in this case, the

Courts will enforce the contract as it is written and there is no

possibility of arguing that an exclusion/limitation clause is

invalid by reference to UCTA;

(ii) a contract on the standard terms of one of the parties,

where UCTA will apply and the party relying upon the

exclusion/limitation clause has the onus of establishing that the

clause is reasonable.

Accordingly, the Court must first establish whether UCTA applies

to a limitation clause at all. In many construction projects the

contract will be a mixture of standard boilerplate terms and terms

bespoke to that specific project. Therefore the question that

arises is whether the parties have contracted on standard written

terms or not.

This point has been considered in cases such as

South West Water Services Limited v International

Computers Limited and The Flamar

Pride. In the latter, it was held

that the terms were bespoke and UCTA did not apply since the

Defendants standard form contract was subject to a number of

alterations before its terms were finalised. In St

Albans City Council v. International Computers Ltd

negotiations had left the defendant's general conditions

effectively only slightly modified, so the parties were held to

have contracted on the defendant's standard terms.

The guiding principle from these cases is that whether the terms

are standard or bespoke will depend on the degree of modifications

that are made to the standard terms before the contract is

concluded. Although the Courts have tried to approach the issue as

to whether or not parties are contracting on standard terms in a

commonsense way and have looked at the degree of amendment of

standard terms, there have been occasions when, as in

St Albans, it might well be argued that

the Court's attempt to provide justice in a particular dispute

has led to it ignoring a number of amended or non-standard

clauses/schedules which were negotiated freely between the parties

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