Financial claims falling within a liability cap
McGEE v GALLIFORD TRY BUILDING [2017]
The Technology and Construction Court decided that all of a contractor’s financial claims for delay caused by a sub-contractor were capped at 10% of the value of the sub-contract.
Facts:
- Galliford Try Building (“G”) appointed a sub-contractor, McGee Group (“M”), to carry out certain works on a project.
- The parties entered into a sub-contract that incorporated a form of the JCT Design and Build Sub-Contract Agreement, together with a large number of bespoke amendments.
- There was a potential mismatch between the JCT standard terms and the bespoke amendments. The sub-contract contained two separate bespoke provisions addressing the financial consequences of delay and disruption:
“2.21 If the Sub-Contractor fails to complete the Sub-Contract Works … within the relevant period[s] for completion, and if the Contractor gives notice to that effect to the Sub-Contractor within a reasonable time of the expiry of the period[s], the Sub-Contractor shall pay or allow to the Contractor the amount of any direct loss and/or expense suffered or incurred by the Contractor and caused by that failure... [Note that as well as 2.21, another clause, 2.21A, was expressed in almost identical language to the main clause 2.21.]
2.21B Provided always that the Sub-contractor's liability for direct loss and/or expense and/or damages shall not exceed 10% of the value of this Subcontract order.”
“4.21.2 Any sum reasonably estimated by the Contractor as due in respect of any loss, damage, expense or cost thereby caused to the Contractor may pending final determination of the matter in litigation … or agreement between the [parties], be deducted from any monies due or to become due to the Sub-Contractor or shall be recoverable by the Contractor from the Sub-Contractor as a debt.”
- The sub-contract works were delayed and G made deductions from sums otherwise due to M under the sub-contract for various amounts. The parties disagreed over how clause 2.21B was to be applied.
- G argued that:
- claims under clause 2.21 for its loss and expense caused by M's failure to complete the sub-contract works on time fell within the 10% cap; and
- other claims for the financial consequences of delay and disruption, such as loss and expense caused by a critical delay to the main contract caused by M (under clause 4.21), fell outside the cap.
- M maintained that the amount of its liability for all financial claims brought by G for delay and disruption was limited to the 10% cap under clause 2.21B.
Decision:
The Court decided that all G's claims for loss and/or expense and/or damages for delay and disruption were caught by the 10% limit. It commented that:
- the cap was not said to refer to claims made under particular clauses of the sub-contract (such as clause 2.21) or for breach of any express or implied terms. It was specifically a cap on M's liability for a particular type of claim, namely one for “direct loss and/or expense and/or damages”, whichever clause the claim was made under;
- there was no doubt as to what was covered by the wording “direct loss and/or expense” - the financial loss which flows directly from delay and disruption caused to a main contractor (or a sub-contractor), and is recoverable under the so-called ‘first limb’ of Hadley v Baxendale [1854] which covers loss arising directly and naturally flowing from the breach;
- the fact that clause 2.21B also used the words “and/or damages”, did not extend the cap beyond its liability for the financial consequences of delay and disruption. The addition of these words was “entirely unremarkable” because parties routinely put precisely the same claim for loss and expense (due to delay and disruption under the express terms of the contract) as a claim for damages for breach of contract, in the alternative;
- there was no practical or meaningful difference between a liability for “direct loss and/or expense and/or damages” arising out of delay and disruption under clause 2.21 and a liability for “loss, damage, expense or cost ” arising out of delay and disruption under clause 4.21; this was a “distinction without a difference”.
Points to note:
- Looking at the principles that apply to clauses which seek to limit liability, the Court said, “A clause which seeks to limit the liability of one party to a commercial contract ... should generally be treated as an element of the parties' wider allocation of benefit, risk and responsibility. No special rules apply to the construction or interpretation of such a clause although, [to have effect,] a clause limiting liability must be clear and unambiguous”.
- The location of the limitation of liability as a sub-clause did not limit its application to claims under other clauses of the sub-contract. However, the case does highlight the dangers of having two separate clauses potentially addressing the same issue but using different language and also hiding a key provision away as a sub-clause rather than including it as a stand-alone provision.
- Take great care when incorporating bespoke amendments into a standard form contract.
- It has been reported elsewhere that the contract contained two separate clauses covering precisely the same ground. Indeed the Court itself seems to have regarded clauses 2.21 and 4.21 as providing two distinct grounds for liability. However, by analysing the precise wording of the clauses in question, it can be seen that was not actually the case. Nobody seems to have raised the fairly obvious point that clause 4.21 was not in fact a clause providing a separate basis for liability at all. In reality it was just a clause establishing some form of interim right of set-off given the “pending final determination of the matter” wording. Looked at in that light, it is perhaps entirely unsurprising that the Court held that the 10% cap on liability was all-encompassing.
- There was no discussion in the judgment about whether a 10% cap on liability would be upheld as being reasonable under the Unfair Contract Terms Act 1977 (“UCTA”) in circumstances where UCTA would be applicable. We suspect that this was the case because this was a heavily negotiated ‘bespoke’ contract between two large commercial entities and therefore an argument to apply UCTA would be difficult to invoke.