Excluding and Limiting Liability – Traps to Look Out For
In the recent case of Elvanite Full Circle Limited v AMEC Earth & Environment (UK) Limited, Elvanite sued AMEC for loss of profit on a failed property development transaction, but was unable to recover damages because AMEC had limited its liability under the contract.
AMEC was engaged by Elvanite in September 2007 to make a planning application seeking permission for waste recycling at a site in Colchester. Elvanite had purchased the site for £561,000 and intended to sell the site (with planning permission) to a well-known waste contractor, SITA, for £1,350,000.
Elvanite required the planning application to be submitted by November 2007. However, the planning application was not submitted until 3 April 2008, and there was a further period of delay lasting until July 2008 when Elvanite eventually withdrew the planning application and terminated the contract with AMEC.
A fresh planning application was made in September 2008 by a different consultant and planning permission was eventually granted on 25 March 2009. However, Elvanite was then unable to conclude the deal with SITA.
Elvanite sued AMEC for damages for loss of profit totalling £789,000, alleging that:
- The original application for planning permission was deficient and should have been made by November 2007.
- If an “appropriately complete” planning application had been made in time, planning permission would have been granted by the end of April 2008.
- The site would then have been sold to SITA for £1,350,000.
AMEC denied that the planning application was connected to the negotiations for the sale of the site to SITA, and also denied that the timing or quality of the planning application was the reason why the negotiations with SITA had eventually failed.
The court rejected Elvanite’s claim on the basis that:
- The planning application could not have been made at the end of November 2007 because of repeated changes to the proposed site layout.
- Between December 2007 and April 2008, any significant delay was due to the involvement of SITA (the planning application process was delayed so that it could accommodate their requirements).
- AMEC had not breached the contract because the quality of the planning application was not the reason why the application was not complete by November 2007.
- The SITA negotiations failed due to commercial reasons, wholly unconnected to the planning application.
In its defence, AMEC also relied on various exclusion clauses in its standard terms, namely:
(1) “CONSEQUENTIAL DAMAGES. AMEC shall NOT be responsible for any consequential, incidental or indirect damages”.
(2) “LIMITATION OF LIABILITY. Notwithstanding any other provision of this Agreement, the total liability of AMEC… shall be limited to the total compensation actually paid to AMEC for the Services or £50,000 (UK Sterling), whichever is less”.
(3) “All claims by CLIENT shall be deemed relinquished unless filed within 1 year after substantial completion of the Services”.
Elvanite argued that these clauses were unreasonable and could not be enforced.
The court considered whether the clauses were “fair and reasonable” within the meaning of the Unfair Contract Terms Act 1979 (UCTA). UCTA applies to standard terms of business which seek to restrict or exclude liability. Such terms must satisfy the requirement of reasonableness, having regard to the following relevant factors:
- The strength of the bargaining position of the parties.
- Whether any incentive was offered to enter into the contract.
- Whether the existence of the terms was known or ought to have been known when the contract was entered into.
The court took account of the following factors:
- The parties’ bargaining positions were broadly equal. There was no evidence to suggest that AMEC had taken unfair advantage of Elvanite.
- Elvanite’s Manager Director gave evidence confirming that AMEC’s terms and conditions had been sent to him in August 2007 and he did not raise any objections to them at the time.
- Terms limiting liability are not uncommon in contracts for the supply of services.
- It is not unreasonable to limit liability for consequential/indirect losses because a service provider generally has no way of knowing what consequential losses may be suffered by the other party.
The court found that AMEC’s terms were reasonable and AMEC was entitled to rely on them.
AMEC relied on clause (1) above to exclude Elvanite’s claim for loss of profits arising from the failure to sell the site to SITA. AMEC said that Elvanite’s claim was essentially for “consequential, incidental or indirect” losses.
The court agreed that the loss of profit had not been caused by the AMEC’s planning advice. The loss suffered by Elvanite had been caused by the failed commercial property transaction, which was not AMEC’s responsibility. This was an indirect loss which was excluded by the clause.
Limitation of Liability
In addition, AMEC said that if it had any liability to pay damages to Elvanite, the amount to be paid was limited to value of the services (£13,987.20) in accordance with clause (2) above.
The court acknowledged that it is common for companies providing professional services to limit their liability by reference to a pre-determined amount (usually the value of the contract or the limit of any insurance policy held). The court concluded the term was not unreasonable and that AMEC’s total liability to pay damages to Elvanite (if Elvanite’s claim had been successful) would not have exceeded the amount paid by Elvanite for the services, i.e. £13,987.20.
Variation of Limitation Period
The legal limitation period in which a claim for breach of contract can be brought is usually 6 or 12 years, depending on how the contract is signed. However, it is possible to include an express clause in a contract which shortens or lengthens the usual limitation period.
Elvanite terminated the contract with AMEC on 15 July 2008. AMEC relied on clause (3) above which required all claims to be “filed” within one year of substantial completion of the services, i.e. by no later than 15 July 2009. There was some dispute about what clause (3) meant, because AMEC argued that “filing” a claim meant issuing legal proceedings, whereas Elvanite argued that this was not correct because legal proceedings are not “filed” in English law.
The court decided that the clause could not be interpreted as creating a 1 year time limit for issuing legal proceedings because legal proceedings are technically not “filed”. However, the court decided that the clause created a 1 year time limit for sending a letter setting out the details of any claim. Elvanite had failed to send AMEC a letter setting out its claim in sufficient detail within the 1 year period following termination of AMEC’s engagement under the contract. Accordingly, the claim was also time barred and AMEC would not have had to pay damages to Elvanite even if Elvanite had been able to prove that AMEC was liable for loss of profit.
Even if Elvanite had been able to establish that AMEC was responsible for the loss of profit arising from the failure to sell the site to SITA, AMEC’s standard terms and conditions were drafted so robustly that they protected AMEC from the claim in a number of different ways. This case demonstrates to contractors, sub-contractors and professional consultants the importance of having comprehensive standard terms and conditions which effectively limit and exclude liability. If AMEC had not had these clauses limiting and excluding its liability, it could have been facing a bill of almost £800,000.
However, for employers, the case also demonstrates that where you freely enter into a contract on the other party’s standard terms, it is extremely difficult to subsequently argue that those terms are unreasonable. Accordingly, when entering into a contract, you should look out for:
- clauses which shorten the legal limitation period; and
- clauses which exclude or limit liability for a loss which you expect you could suffer if the contract is breached.
If you spot clauses like this, it is important to try to negotiate them out of the contract so that they do not come back to cause problems for you later on.This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.