Liability limitations

Although I am often asked to advise on limits of liability, the subject a matter for commercial rather than legal consideration.

HBG Gateley Wareing, COMMENT, MEP

What do the limits of liability actually mean within a contract? Dennis Brand outlines the important issues.

Although I am asked from time to time to advise on limits of liability, the subject is in fact a matter for commercial rather than legal consideration. That said, it is not necessarily straightforward and requires thought on what financial level to request or accept, plus what to include or exclude.

As to the financial level, this can be a fixed sum or a fixed percentage of the final contract price. The latter is more likely to be the case; a fixed sum is used where the contract is for a lump sum or fixed price that is unlikely to change while the work or services are carried out.

Limits of liability vary depending upon the contract price; the work or services to be provided; or the concerned industry. In the construction and engineering industries, limits of liability usually range from 10-20%, although on occasions this can be higher.

In the oil and gas industry, particularly for design and engineering aspects, the limit of liability is usually set at 10% but there is evidence that this is increasing.

Fixing the limit

Often the contracted parties will fix the limit of liability at the amount of insurance that the contractor or consultant is obliged to provide under the contract terms.

There is nothing wrong with this in principle but it must be understood that the limit of liability is fixed at the same level as the amount of the insurance that the party is obliged to have in place and not the value of the proceeds of any insurance claim.

It is also not unusual in contracts for professional services for the limit of liability to be linked to the value of the consultant's policy of professional indemnity insurance. Professional indemnity insurance is personal to the consultant and it is a matter for them whether they make a claim against that policy.

Therefore any reference in the contract to the limit of liability being the same as the level of cover needed for professional indemnity insurance can only be to confirm the level of the limit.

A typical limit of liability provision for direct loss under a contract for work or services is: "the contractor's liability whether in contract, under statute, in tort (including negligence) and otherwise, but excluding gross negligence and wilful misconduct, for all costs and for delays, losses, damages and liabilities whatsoever and howsoever arising which are suffered or incurred by the client and which are directly or indirectly connected with this agreement should not exceed an amount equal to [ ]% of the contract price."

This type of provision usually limits the liability of one party for any direct loss or damage suffered by another party. It is not normally intended to include indirect or consequential loss.

However, if such losses are not specifically excluded by the parties in the contract they will be considered as included and the harmed party can claim compensation for both direct and indirect loss.

While the parties may agree a limit of liability for direct loss, it is not unusual for loss suffered by breach of one party's intellectual property rights to be excluded from such agreements.

This is because the loss that the injured party may suffer could be very substantial. Excluding gross negligence and wilful misconduct is acceptable as long as the parties can agree on definitions for both.

Local options

In the UAE and in many other jurisdictions it is not possible for a party to limit the liability for damage to or loss of a party's property; and/or for sickness, injury or death of its personnel arising out of or in relation to the performance of the work or services under a contract.

You may think that such a provision is not unreasonable given that persons who suffer loss or injury should be compensated and that it would be grossly unfair if the two parties to a contract were able to limit their liability in respect to such loss, damage or injury.

Finally, in the UAE and in many other jurisdictions there is a strict liability on the part of designers and constructors for any defect that threatens the integrity of the building or leads to its partial or total collapse.

This is known as decennial liability. The UAE Civil Code specifically prohibits the limiting of liability for loss in respect of decennial liability and any agreement that is contrary to the law will be void.

Dennis Brand is senior legal advisor with HBG Gateley Wareing. Email: Dbrand@hbj-gw.com Tel: +971 4 321 9999

 

Limits to liability in brief

• A limit of liability usually limits the liability of one party for any direct loss or damage suffered by another party.

• Limits of liability vary depending upon the contract price; the work or services to be provided and the industry concerned. In the construction and engineering industries, limits of liability generally range from 10-20%.

• Limits of liability are not normally intended to include indirect or consequential loss. However, if such losses are not specifically excluded in the contract they will be considered as included and the harmed party can claim compensation for both direct and indirect loss.

• While a limit of liability may be agreed for direct loss, it is common for loss suffered by breach of one party's intellectual property rights to be excluded from such agreements.

• It is not possible for a party to limit the liability for damage to or loss of a party's property; and/or for sickness, injury or death of its personnel arising out of or in relation to the performance of the work or services under a contract.

• In the UAE and in many other jurisdictions there is a strict liability on the part of designers and constructors, known as decennial liability, for any defect that threatens the integrity of the building or leads to its partial or total collapse.
 

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