When is a financial cap likely to be an effective cap?

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Elvanite Full Circle Limited v AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1191

Article by Sarah McNeill, Griffiths & Armour Professional Risks

The decision in Ampleforth Abbey Trust v Turner & Townsend was reviewed in a previous newsletter under the heading when is a financial cap not a cap?’ as an example of a consultant’s cap on liability being unenforceable. Is that always going to be the case? Should consultants cease to raise the subject of liability caps when negotiating contract terms? Certainly not. The more recent decision in Elvanite reflects much more positively the very real financial value of limitation and exclusion clauses – provided that they successfully satisfy the applicable tests.

Elvanite, a demolition and recycling contractor, brought a claim against AMEC, its professional consultant, for breach of contract. AMEC were alleged to have failed to submit a planning application before the deadline stipulated in their services agreement.

A buyer had agreed to purchase the site from Elvanite subject to a condition that planning permission had been obtained prior to the date of transfer. Elvanite brought a claim against AMEC for consequential losses when the purchaser pulled out of the proposed deal due to planning permission not having been obtained within the expected period. AMEC denied the allegations and counterclaimed against Elvanite for its outstanding professional fees.

At trial the Judge found against Elvanite on the facts, and from that point onwards the above clauses were unimportant. However, he thenhelpfully went on to discuss how those clauses fared under UCTA in the given circumstances and whether therefore they would have been enforceable in principle.

The Defence

Amongst other arguments in its defence, AMEC sought to rely on various exclusion clauses included in its standard terms and conditions, namely that:

  1. AMEC would not be responsible for any consequential, indirect or incidental losses.
  2. The total liability of AMEC would be limited to the total fee received by AMEC or £50,000, whichever was less.
  3. All claims would be deemed to have been relinquished unless ‘filed’ within one year of the substantial completion of the Services.

Elvanite contended that that these clauses were ‘unreasonable’ and therefore unenforceable under the Unfair Contract Terms Act 1977 (UCTA).

At trial the Judge found against Elvanite on the facts, and from that point onwards the above clauses were unimportant. However, he then helpfully went on to discuss how those clauses fared under UCTA in the given circumstances and whether therefore they would have been enforceable in principle.

Test of Reasonableness

The court considered whether the clauses were in fact ’fair and reasonable’ pursuant to section 11(1) and Schedule 2 of UCTA. Mr Justice Coulson took as his starting point the statement of Chadwick LJ in Watford Electronics v Sanderson CFL Limited[1] that the court should not interfere in an agreement negotiated by ‘experienced businessmen representing substantial companies of equal bargaining power’. This he believed was ‘the best judge on the question whether the terms of the agreement are reasonable’.

Here both parties were indeed ‘relatively substantial’. Whilst AMEC was a subsidiary of a much larger group of companies, it was held that this did not make any difference to the parties’ commercial standing. It was of critical importance that both parties were of equal bargaining power and that there was no evidence that Elvanite had not known what it was agreeing to – more than once they had been sent AMEC’s terms and conditions and had raised no objections. (This is an important difference to the situation in Ampleforth Abbey Trust v Turner & Townsend (see below) where a change to the consultant’s standard terms and conditions imposing a new limitation clause was not brought to the client’s attention.)

As a result, all three limitation clauses were found to be ‘reasonable’ for the purposes of UCTA.

  1. INDIRECT/CONSEQUENTIAL LOSS EXCLUSION

AMEC argued that the loss of profit claimed by Elvanite constituted consequential or indirect damage and that the losses claimed by Elvanite were therefore excluded.

Coulson J considered that ‘indirect damages’ referred to losses recoverable under the second limb[1] of Hadley v Baxendale[1]. AMEC had undertaken to use reasonable skill and care in its completion of the planning application for Elvanite, and therefore any loss of profit was indirect because it was conditional upon Elvanite having agreed to sell the site to a third party on specific terms.

AMEC was not aware that Elvanite was the owner of the site until after the appointment had been concluded. For that reason, the court considered that on this basis, it was also considered that the indirect losses claimed by Elvanite would have been too remote to be recoverable regardless of the exclusion clause.

  1. FINANCIAL CAP ON LIABILITY

AMEC argued that it had been paid £13,987 for its services and therefore that its liability was limited to this sum.

 

The court acknowledged that it is common for companies providing professional services to limit their liability by reference to pre-determined sums, usually the value of the fee or the limit of any relevant insurance policy. Coulson J referred to the decision in Ampleforth Abbey Trust v Turner and Townsend [2012][1] in which a limit of liability was held to be unreasonable on the basis of the ‘stark disparity’ between the purported £111,000 liability cap and the PI insurance requirement of £10M. AMEC on the other hand were not bound by any such insurance obligation in this case.

 

The court, therefore, concluded that the term was not unreasonable and that AMEC’s total liability would not have exceeded the amount paid by Elvanite for the services.

 

  1. TIME LIMITATION

AMEC also sought to rely on the clause stating that all claims by Elvanite would be deemed to have been relinquished unless filed within one year after the subsequent completion of the Services.

Coulson J observed that ‘the parties to a contract can vary the statutory six year limitation period’, reinforcing the decision in Inframatrix Investments Limited v Dean Construction Limited[1] that the statutory rules can be superseded by agreement.

However, AMEC nearly fell foul of rather loose drafting in this clause. They no doubt had intended to bar any proceedings issued at court more than one year after they had substantially completed their services – but this clause referred to ‘filing’, which is an unusual word to find in this context. The Judge determined that since claims are issued and not ‘filed’ this must have been a reference to serving a formal Letter of Claim. Elvanite had sent a letter notifying

AMEC of its claim within the limitation period, but the letter did not comply with the Pre-Action Protocol. Accordingly Elvanite’s claim was deemed to have been ‘relinquished’ under the terms of this provision.

Conclusions

While technically ‘obiter’ and thus not binding, the comments of Coulson J are a useful guide as to how the courts approach exclusion and limitation clauses and are a reminder that when clearly and carefully drafted a consultant can effectively rely upon them.

What is especially important to note here was the significance placed on the equal bargaining power of each of the parties and the court’s reluctance to intervene with contractual limitations when this is the case. Where the parties are on an equal commercial footing limitation provisions are much more likely to be regarded by a court as being reasonable for the purposes of UCTA than in cases where one party is clearly in a dominant commercial position over the other.

Both Ampleforth Abbey and Elvanite were decided on their specific facts and do not create new law. They are, however, useful reminders of long-standing principles of contractual formation and interpretation, particularly the need for clear and unambiguous language and the need to bring any unusual or onerous clauses to the other party’s attention.

On a final note, it is also worth remembering that having successfully negotiated a liability cap in an agreement, it is then critically important to check the rest of the document for potentially inconsistent terms.

References

  1. [2001] 1 All ER (Comm) 696
  2. Damages for breach of contract are recoverable under two limbs under Hadley v Baxendale: (i) Damages which may fairly and reasonably be considered as arising naturally from the breach; and (ii) Damages which may reasonably be supposed to have been in the contemplation of the parties at the time that the contract was formed as being the likely result of breach
  3. [1854] EWHC Exch J70
  4. The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited [2012] EWHC 2137 (TCC)
  5. [2012] EWCA Civ 64