Will an overall cap on liability always work?
SABIC UK PETROCHEMICALS v PUNJ (Part 1) [2013]
The Technology and Construction Court has made a perhaps unexpected decision in interpreting a broad and relatively standard ‘catch all’ limit of liability clause that sought to protect a supplier. The Court said the aggregate liability clause only applied to claims for breaches of contract or so called tortious liabilities such as negligence. This case may provide a clue to answer the question of whether contractual indemnities take precedence over general limitation clauses.
Facts:
- SABIC (S) entered into a contract with a contractor (C) for the design, procurement and construction of a plant to produce a type of plastic. Before the end of the first year, it became evident that the agreed completion date would not be met and a new date for completion was agreed.
- Further difficulties occurred and evidence of C’s financial constraints was plain in that, amongst other things, it was reducing those working on key subcontracts and was unable to resource the works to ensure that the new completion date was met.
- S validly terminated the contract under a provision entitling it to do so where C’s financial position had deteriorated to such an extent that its capability to adequately fulfil its obligations under the contract had been placed in jeopardy.
- Clause 30.9 of the contract included a provision under which if the total cost to S of completing the works was more than the amount that it would have paid C if they had been completed by C (and the contract had not been terminated), S could recover the difference. The exact wording of clause 30.9 was important. It said, “[S] may itself complete the Works. If it does so if the total cost to [S] reasonably incurred exceeds the total that the Works would have cost had they been completed by the Contractor (the Contract not having been terminated) the difference shall be recoverable by [S] from the Contractor either by way of set off or as a debt".
- S claimed under clause 30.9 for the additional costs it incurred to complete the works. The Contractor argued that any such claim was limited by the liability provision in clause 35.2.4.2 which provided that, “the aggregate liability of the Contractor under or in connection with the Contract (whether or not as a result of the Contractor's negligence and whether in contract, tort, or otherwise at law) … shall not exceed 20% of the sum of the Contract Price". S maintained that this provision did not apply to its claim under clause 30.9.
Decision:
- Somewhat surprisingly, the Court held that the 20% limit did not apply to S’s claim for the additional costs to complete under clause 30.9. The wording of the cap, and the fact that other types of damages claims were either excluded or dealt with elsewhere, led the Court to say that the ‘better’ interpretation was that the cap was only applicable to damages claims.
- The Court said it was not clear what was added by the words “or otherwise at law” and did not regard these words as having any additional effect to include other types of claims. The ‘additional costs to complete’ provision was seen by the Court as an accounting exercise for calculating entitlement to costs on termination. Since termination (and therefore the provision in clause 30.9) could be triggered as a result of termination for material breach of contract but also due to C’s insolvency or, as in this case, if the financial position of C deteriorated to a certain degree (neither of which necessarily had to involve a breach of contract), clause 30.9 was viewed as being something different to a damages claim.
Points to Note:
- As it happened, S’s claim for the additional costs to complete fell below the 20% cap on liability, but nevertheless many may not have expected the Court to conclude that the cap did not cover a liability arising due to termination just because the termination was not triggered by a breach of a contractual or tortious obligation. This seems rather an odd outcome given the intent of the clause was quite clear and, we would suggest, even wrong. It will be interesting to see to what this extent this judgment is followed.
- Query what wording would have worked to include claims other than breaches within the scope of the liability limitation if the ‘otherwise at law’ was insufficient? Whilst the ‘at law’ addition was perhaps unnecessary, surely the ‘otherwise’ reference was intended to ensure that the limit of liability applied on a broad, all-encompassing basis? In the light of this judgment contract drafters would be well advised to make express reference to the fact that a limitation of liability clause includes any liability under a clause governing the entitlement to claim the costs incurred to complete work. That seems to be the only safe way to ensure that the clause would bite on such liabilities.
- Query too whether the fact that sums due under clause 30.9 were expressed to be recoverable ‘as a debt’ as opposed to a claim for damages made any difference? Although the clause does not use the term ‘indemnify’, clause 30.9 is a form of indemnity by any other name. It certainly increases the possibility that an indemnity in respect of losses, which is not expressly stated to be subject to the contractual provisions limiting liability, could as a result give rise to unlimited liability. This might be very bad news for many contracting parties who have previously relied upon what they thought was all-encompassing wording limiting liability.
- See also Part 2 in relation to whether performance bonds/guarantees count against caps on liability.