Ten issues for consideration when negotiating liability regimes in Construction Contracts Cameron Ross, Partner Alison Sewell, Special Counsel 16 June 2016
Liability Framework Introductory Comments - 1 Liability is the result of project risks eventuating Theory Abrahamson Principle: Risk should sit with the party who is in the best position to manage the risk Ministerial Direction No.2: Contractual Provisions for Public Construction Reality Relative bargaining position of parties Relationship between parties Project delivery model Contracting rules for each party Market conditions Nature of project
Liability Framework Introductory Comments - 2 Generally project liability is dealt with by Transferring liability Limiting liability Insuring liability Managing any retained or transference Point in time when discussions regarding liability regime occurs
Issue 1: Should there be a liability cap? Form of exclusion clause Cap is an arrangement when Party A agrees to limit or cap the liability of Party B to Party A DTF Insurance Provisions Procurement Guide identifies potential benefit of cap: Reduced prices for goods/services Encouraging small business but notes importance of risk assessment and urges caution Cap is only as good as drafting and will be interpreted strictly Contra proferentem rule will apply in case of ambiguity against the party relying on it
Issue 2: What is the right cap? Contract value or fixed sum? Consider sub-caps Specified loss Annual liability For a contractor/subcontractor: Is there gap risk? Framework agreements Consider operation of liability cap over time Consider operation of insurance
Issue 3: How should a liability cap interact with insurance? Insurance forms fundamental part of liability regime Key consideration when considering quantum of liability cap Never state that liability cap is the amount recovered under an insurance policy Exclude proceeds of insurance from liability cap
Issue 3 (cont.): Insurance and liability caps Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Ltd [2012] EWHC 2137 Liability for any negligent failure by Us [TTPM] to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms and in no event shall Our liability exceed the fees paid to Us or 1million whichever is the less.
Issue 4: What liabilities should be excluded from liability cap? Liability for fraud always Liability that can not be contracted out of - always Liability for personal injury - usually Liability for (third party) claims - possibly Liability for breach of intellectual property obligations (including intellectual property claims by third parties) - possibly Liability for breach of confidentiality/privacy/security obligations - possibly Liability arising from Wilful misconduct - possibly Gross negligence - possibly
Issue 5: How does consequential loss fit into the liability regime? Increasingly common request to discuss exclusion of consequential loss Excluded loss such that Party B will never have liability for Party A s consequential loss Can also be subject to a separate cap Needs to be considered in context of project
Issue 5 (cont.): What is consequential loss? - 1 Usual rule for calculating damages for breach of contract is to seek to put the innocent party in the same position as if the contract had been performed BUT damages must not be too remote from the breach Hadley v Baxendale First limb: losses which flow naturally from the breach of contract Second limb: losses which may reasonably be supposed to have been in the contemplation of the parties, at the time of entering into the contract, as the probable result of the breach of it. Traditional view was that consequential loss falls within the second limb of Hadley v Baxendale
Issue 5 (cont.): What is consequential loss? - 2 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 The expression consequential loss was intended to have its ordinary and natural meaning and unrealistic to suppose parties used term by reference to second limb in Hadley v Baxendale The true distinction is between: normal loss which is loss that every plaintiff in a like situation will suffer consequential loss which is anything beyond the normal measure loss of profits expenses incurred through breach
Issue 5 (cont.): What is consequential loss? - 3 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 Normal losses Costs of purchasing and installing the system, attempting to make it work and repairing the existing afterburner Costs of dismantling and disposing of the system Consequential losses Labour costs involved in attempting to make the system functional Additional energy costs incurred as a consequence of the system not being functional Peerless substantially widened the scope of consequential loss The Peerless approach has been accepted in SA, NSW and Qld WA Courts have recently adopted a different approach: Regional Power Corp v Pacific Hydro Group Two Pty Ltd (No 2)
Issue 5 (cont.): Excluding consequential loss Define types of consequential loss Loss of profit Loss of anticipated savings Loss of business Loss of goodwill/reputation Loss of data (?) Define types of losses that are not consequential loss
Issue 6: What are liquidated damages? Contractual stipulation for a pre agreed fixed sum, or other specified consequence on the occurrence of a breach of contract During contractual negotiations, parties are free to stipulate the amount that a party must pay if it breaches the contract That stipulation (specific or otherwise) is commonly referred to as a 'liquidated damages clause'
Issue 6 (cont.): Why use liquidated damages? - 1 Principal Certainty of damages flowing from breach Codifies Principal s right to damages for certain categories of breach Cost and time effective in recovery of damages where difficult to assess Avoids usual burden of establishing full extent of loss Incentive to perform expeditiously
Issue 6 (cont.): Why use liquidated damages? - 2 Contractor Contractor obtains a limit of liability Certainty of risk exposure
Issue 6 (cont.): Enforcing liquidated damages 1 Dunlop Pneumatic Tyre Co Limited v New Garage & Motor Co Limited (1915) AC 79 Australians courts have broadly applied the Dunlop test to assess whether a liquidated damages clause is enforceable or void as a penalty. The essence of a penalty is a payment of money stipulated as in terrorem [in order to frighten] of the offending party; the essence of liquidated damages is a genuine pre-estimate of damage.
Issue 6 (cont.): Enforcing liquidated damages - 2 Lessons from Dunlop: Test for penalty is applied at time of contract Does not matter that pre-estimation is almost an impossibility Key indicators of a penalty are: sum must not be extravagant and unconscionable in comparison to the loss arising from the breach where breach is not paying sum of money, sum must not be greater than sum that ought to have been paid
Warranty is one of the most ill-used expression in the legal dictionary. (Finnegan v Allen [1943] 1 KB 425 at 430, CA, per Lord Greene MR)
Issue 7: What is a warranty? For lawyers: Lawyers use the word 'warranty' to denote a subsidiary term in a contract as distinct from a vital term. For everyone else: In business and legal transactions, a warranty is an assurance by one party to the other party that certain facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed (Butterworth's: Words and Phrases Legally Defined vol 4. 1988
Issue 7 (cont.): Warranties 1 Warranty is a statement made about certain facts Warrantor promises to ensure that those facts are or will be as stated Subsidiary term of the contract and thus will not itself give rise to a right to termination. Breach entitles the innocent party to damages.
Issue 7 (cont.): Warranties - 2 Express Implied Common law Statute
Issue 8: Transferring risks through indemnities What is an indemnity? An enforceable undertaking by one party to compensate another party for loss, damage or expenses which arise in specified circumstances Who is protected? Privity of contract doctrine parties to contract are bound by and entitled to enforce it Consider whether indemnity applying in favour of non-party can be enforced
Issue 9: Advantages of indemnities over right of common law damages - 1 Common Law Indemnity Damages are remedy for breach of contract Obligation to indemnify not necessarily dependent on breach of contract Proximate cause test Loss must be caused by the breach Multiple causes of loss Break in chain of causation Causation test may be wider than proximate cause Remoteness restrictions from Hadley v Baxendale No concept of remoteness
Issue 9 (cont.): Advantages of indemnities over right of common law damages - 2 Common Law Recovery must place injured party in position it would have been but for the breach Obligation to mitigate loss Recovery on once and for all basis Limitation period runs from date of breach Indemnity Recovery limited only by scope of indemnity No obligation to mitigate loss (unless indemnity provides otherwise) Continuing losses recoverable Indemnity continues for as long as indemnity remains in force Limitation period runs from breach of contract constituted by refusal to indemnify
Issue 10: Interpretation of Indemnities Interpret indemnities in same manner as other contractual provisions Clause construed strictly in the context of the contract as a whole and to the extent there remains any ambiguity, resolved in favour of indemnifier BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173 Give the words their natural and ordinary meaning Samways v Workcover Queensland & Ors [2010] QSC 126 at [67]; Erect Scaffolding (Australia) Pty Ltd v Sutton (2009) 72 NSWLR 1 at [21]
Drafting tips Who will provide the indemnity? Who is protected by the indemnity? Indemnifier Indemnified What is covered by the indemnity? Scope What triggers the indemnity? What exclusions apply? Avoid boiler plates Trigger Limits Customise
Contact details Cameron Ross Partner T +61 3 8608 2383 M +61 401 148 664 Alison Sewell Special Counsel T +61 3 8608 2834 M +61 404 061 452 EMAIL cameron.ross@minterellison.com alison.sewell@minterellison.com