In a recent case the court found that a limitation of liability
in a contract between a Project Manager and an Employer was
unenforceable.
Background
This case concerned a dispute between the Project Manager
and the Employer in respect of the construction of new boarding
accommodation at Ampleforth College. The works were one of three
projects in relation to the college in which both parties were
involved. There was no dispute as to the quality of the works but
there were significant delays to completion.
The Employer brought proceedings against the Contractor which
settled at mediation for substantially less than the Employer
expected due to the reliance on letters of intent rather than a
formal contract. The Employer then brought proceedings
against the Project Manager claiming damages for professional
negligence. The Employer claimed that if the Project Manager had
acted with care and skill, it would have ensured the Contractor
execute the building contract (rather than letters of intent) and
that would have produced a more advantageous outcome in the dispute
with the Contractor for delay, as the Contractor would have been
liable for liquidated damages.
Breach of duty of care by the Project
Manager
The judge described the Project Manager's role as
being a "co-ordinator and guardian of the client's
interests" and stated that efforts to finalise the contractual
arrangements were "fundamental" rather than "a mere
aspiration". Although there was no absolute duty on the
Project Manager to procure the execution of the building contract,
the court held that by issuing repeated letters of intent and
failing to advise the client of the risks in doing so, it was in
breach of its obligations under its appointment and at common law,
by treating the contract as a "dispensable luxury".
Had the contract been executed, the Employer would have recovered
an additional £340,000 by way of a reasonable settlement, of
which two thirds was payable to reflect the size of the chance that
the Contractor would have signed the contract. The Employer was
therefore awarded damages of £226,667.
Limitation of liability found to be
unenforceable
When submitting its fee proposal for this project, the
Project Manager attached its standard terms and conditions,
including a limitation of liability which had not formed part of
the Project Manager's appointment on two earlier projects at
the college. A limitation on liability incorporated into the
Project Manager's retainer, on this third project was found to
be unenforceable as it did not meet the requirement of
"reasonableness" as set out in the Unfair Contract Terms
Act (UCTA) 1977.
Had the limitation been enforceable, the Project Manager's
liability would have been limited to the amount of its fee, which
totalled £111,321.
Judge Keyser QC found this limitation to be unreasonable,
emphasising the disparity between the £10m professional
indemnity insurance required under the retainer as against the
liability cap of less than £200,000. He found that the
parties had implicitly contracted that the cost of the £10m
insurance would, as a matter of commercial reality, be passed on to
the Employer within the fees payable. Consequently, upholding
the limitation of liability would render that cover illusory. In
fact, it might be debated whether it was implicit in the contract
for the Employer to pay for the PI cover, as consultants generally
take out PI insurance to cover all their activities for the period
in question, not just for a particular project.
The Judge also found force in the Employer's submission that
it was wrong, after building up a relationship of trust over two
previous projects, for the Project Manager to seek to introduce
such a limitation which was inconsistent with the contractual
requirement for substantial PI insurance, without any specific
notice and discussion.
Implications for limitation clauses in appointment
contracts
The decision in this case has raised concerns in some
quarters that it may be more difficult to enforce a limit of
liability in a consultant's appointment. We do not think so,
providing the factors below are considered in advance of
contracting.
It is important that the limit of liability is brought to the
attention of the client, discussed and specifically agreed. This is
particularly so where a consultant is contracting on his own
terms.
Although the starting point for fixing the limit might be, say,
ten times the fee, this will not always be the appropriate limit
– other factors could dictate a greater or lesser amount,
for example, the risks of the project and the damages that could be
payable if the consultant were negligent.
The current case should not be taken to indicate that a limit is
only going to be reasonable if it is for the amount of the
consultant's current professional indemnity insurance. The
amount has to be fair and reasonable having regard to all the
circumstances; the limit is more likely to be considered
'reasonable' when based on an assessment of the likely cost
of the work rather than an arbitrary (and perhaps unrealistically
low) figure.
Further reading: The
Trustees of Ampleforth Abbey Trust v Turner & Townsend Project
Management Ltd [2012] EWHC 2137 (TCC)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 11/09/2012.