Is your liability cap watertight?

In McGee Group Ltd v Galliford Try Building Ltd, the court made it clear that a clause limiting liability must be clear and unambiguous. No special rules should apply to the construction or interpretation of such a clause and parties should avoid taking a non-commercial view of liability caps.

What was the dispute about?

McGee as the claimant sub-contractor sought declarations by virtue of a Part 8 claim as to the proper interpretation of its sub-contract with Galliford Try (as contractor) and in particular, of a contractual cap on its liability.

McGee sought a declaration that the amount of its liability for any financial claims brought by Galliford Try for delay and disruption was capped at 10% of the sub-contract sum.

The sub-contract was based on the JCT Design and Build Sub-Contract together with a large number of bespoke amendments. Galliford Try engaged McGee as a sub-contractor to undertake the design and construction of earthworks and related substructure works.

Clause 2.21 dealt with the sub-contractor’s failure to complete the sub-contract works on time, including achieving the “access conditions” by the access target dates. Clause 2.21B which dealt with late completion stated:

“Provided always that the Subcontractor’s liability for direct loss and/or expense and/or damages shall not exceed 10% (ten percent) of the value of this Subcontract order.”

Clause 4.21 provided that the sub-contractor was liable for any “loss, damage, expense or cost” suffered by the contractor as a result of any delay to the regular progress of the main contract works caused by the sub-contractor.

The sub-contract works were delayed and Galliford Try made deductions from sums otherwise due to McGee for “failing to regularly and diligently progress their works”. The parties disagreed over how clause 2.21B applied.

Galliford Try argued that:

• claims under clause 2.21 for loss and expense caused by the sub-contractor’s failure to complete the sub-contract works on time and/or to meet the access dates fell within the cap; but
• other claims for delay and disruption, such as loss and expense caused by the sub-contractor’s failure affecting the regular progress of the main contract (under clause 4.21) fell outside the cap.

McGee applied under CPR 8 for declaratory relief as to the proper interpretation of clause 2.21B.

What did the court decide?

The court granted the declarations sought by McGee: that all the contractor’s claims for loss and/or expense and/or damages for delay and disruption fell within clause 2.21B. Coulson J made a number of comments regarding the applicable principles for clauses that seek to limit liability as opposed to exclude liability altogether which clients in the construction industry should take note of.

Firstly, a clause which seeks to limit the liability of one party to a commercial contract, for some or all of the claims which may be made by the other party, should generally be treated as an element of the parties’ wider allocation of benefit, risk and responsibility.

Secondly, a clause limiting liability must be clear and unambiguous. No special rules should apply to the construction or interpretation of such a clause.

The court noted that the problem which had arisen in this case was a common issue in the construction industry where there is a potential mismatch between the JCT standard terms and amendments.

Finally, the judge was critical of the contractor’s interpretation of the contract, stating this was “artificial and uncommercial” and “had no basis in practical reality”. It was a reading of the sub-contract designed solely to avoid the agreed cap.

Practice points

In terms of practical takeaways from this decision:

1. Ensure liability caps are drafted in a manner which is clear and unambiguous. Make sure it is clear when and how the cap will apply, and that all parties agree on the interpretation.
2. Take a commercial and practical view of liability caps. Artificial arguments which seek to capitalise upon unclear contractual drafting are unlikely to be successful in proceedings.
3. Make sure the underlying construction contract still correctly operates as a whole when amending particular clauses in standard form contracts. Uncertainty of how to interpret terms inevitably leads to uncertainty and disputes.