Caps on liability Caps on liability are common in
be said to be “at large” – ie the contractor’s obligation will now be to complete the works within a reasonable time. In the event of a delay to completion of the project for which the contractor is responsible under the contract, liquidated damages (LDs) are commonly provided for. LDs enable parties to fix in advance an amount payable for each day, week or month of contractor delay. This has the advantage for the client that it need not prove its actual losses flowing from the delay in question in order to make recovery, and it has the advantage for the contractor of acting as a limitation on its liability for delay. In order to be enforceable, however, the level of the LDs must not be so extravagant that they constitute a penalty. In the case of simple delay-only LDs in construction contracts, they can usually avoid penalty status by being based on a genuine pre-estimate of the loss that may be caused by a delay. In the case of more complex provisions, however, or where the loss cannot be estimated, then the underlying test is whether the secondary obligation (to pay LDs) is out of all proportion to the legitimate interest that the employer has in enforcing the primary obligation (to complete the project on time). If a delay is the responsibility of the client under the contract (eg a breach of contract by the client, or a variation to the scope of the works), then the contractor is usually entitled – in addition to an extension of time – to additional loss and expense incurred as a direct result of the delay. In the case of a neutral event, which is neither party’s responsibility, the contractor will usually be awarded an extension of
construction projects, particularly where agreeing to cap the contractor’s liability can achieve a lower price for the client. Such limitations of liability may sometimes be agreed at a sum no less than the level of professional indemnity insurance that the contractor is required to maintain. Caps may apply in the aggregate, so that the client has a single source to draw from in the event of any claims, or on an each and every claim basis. Another approach is for contracts to contain express caps on the total loss recoverable from the contractor (although losses covered by insurance or comprising liabilities to third parties, such as indemnities for property damage and intellectual property infringements, may well be stated to fall outside these caps). The contractor may also require separate caps in relation to warranties and/or third party rights that are offered to other parties with an interest in the project. The key to fixing any cap on (or exclusion of) liability is to ensure that it is clearly worded, as any uncertainty may be construed against the party seeking to rely on the limitation (known as the “contra proferentem” rule). Delay and disruption Most construction contracts provide for an agreed completion date, and a mechanism for extending time in the event of certain project delays. If there is no such extension of time mechanism, and the client causes the contractor to be in delay (by, for example, instructing a variation), then the agreed completion date will fall away and time will
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