When Might a Cap on Liability be Unenforceable?

The Technology and Construction Court’s (TCC) judgment in Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137 considered, among other things, whether a liability cap in a contract for professional services was enforceable.

The Trustees of Ampleforth Abbey Trust (“Ampleforth”) appointed Turner & Townsend Project Management Ltd (“TTPM”) as project managers in the construction of new boarding accommodation at AmpleforthCollege, having previously instructed TTPM on two other projects.  A third party building contractor was commissioned to complete the works.  In order to avoid delays in starting the works, TTPM recommended that Ampleforth enter into letters of intent with the contractor.

The contractor failed to complete the construction on time and Ampleforth sought damages for its loss.  However, as only letters of intent had been agreed and not a binding contract, Ampleforth was unsuccessful.

Ampleforth then made a claim against TTPM on the grounds that TTPM failed to exercise reasonable skill and care in failing to obtain an executed contract from the building contractors. 

In previous dealings TTPM had been appointed by Ampleforth on TTPM’s standard terms, which did not impose a cap on TTPM’s liability.  This time, TTPM’s standard terms were to apply again.  However, the terms had been altered to include a provision limiting TTPM’s liability to either the amount of the fee payable under the contract (which was £111,321), or £1,000,000, whichever was less.  TTPM did not notify Ampleforth of this material change to its standard terms.

The contract also required TTPM to maintain professional indemnity insurance of £10,000,000 for any single occurrence.

The TCC held that: (i) TTPM had been negligent; and (ii) the contract between Ampleforth and TTPM had been entered into on TTPM’s standard terms, which included the cap on liability.  As Ampleforth’s claim exceeded the cap, the TCC had to decide whether the limitation clause was enforceable.  This depended on whether it was reasonable under the Unfair Contract Terms Act 1977 (UCTA).

It was held that the limitation clause was unreasonable, on the grounds that the contract required TTPM to maintain indemnity insurance and the cost of that insurance would be passed on to the client within the fees payable.  The effect of upholding the limitation clause would be to render unavailable to Ampleforth insurance cover which it had effectively paid for, which was seen as unreasonable in the absence of an explanation as to why the liability cap was so much lower than the stipulated amount of insurance cover. 

It seems likely that the decision to find in favour of Ampleforth was influenced by TTPM’s actions in introducing a draconian limitation clause into its standard terms without notifying Ampleforth of the change and thus abusing the relationship of trust that had been established in previous dealings.  However, the stated rationale behind the decision is less understandable.  Firstly, the level of insurance cover maintained by TTPM would not have affected the fees paid by Ampleforth, as TTPM’s insurance cover was maintained on a block policy basis.  Therefore, it seems tenuous to place such high importance on the costs of the cover being passed onto Ampleforth when finding the liability cap unreasonable.

Secondly, the assumption that the liability cap and the level of insurance cover maintained should be the same is not realistic.  Insurance policies are taken out to manage risk and policy holders will want to keep claims to a minimum.  Additionally, most policies will have an aggregate cap and so it would be unwise and unsatisfactory for a policy holder to potentially commit all of its cover to a single claim from one customer.  Accordingly, there are justifiable reasons why liability should be capped at a lower amount than the level of insurance cover.

What can we learn from the Ampleforth case?

1)    Parties need to be clear and upfront when including limitations clauses in their contracts. Where a party attempts to conceal a limitation, it may be easier to persuade a Court to strike it down.

2)    Where possible, avoid committing to maintain insurance for an amount that is vastly higher than the amount of the liability cap.

3)    Where there is a disparity between the liability cap and the level of insurance held, an explanation for the difference should be included in the contract.

4)   A customer may be able to use the amount of insurance held by a supplier to negotiate any cap on liability.