Why excluding and limiting liability in commercial contracts should never be overlooked.
Marine businesses regularly enter into some of the most technical and valuable contracts in the commercial world. Many leading cases on commercial matters arise out of marine-related events. Sadly, it’s a fact of life that matters do go awry and when they do, a business will find a great deal of comfort if they took steps to ensure that the contract removed or limited liability. All too often though, contracts from the larger entity will try and extend liability to costs and expenses encountered by the other party arising from the claimed default. In the marine sector, problems at sea can rapidly escalate liabilities way out of proportion to the value of the contract.
But marine businesses can even the contract by giving careful thought to the amount of liability they are prepared to accept in the event of a contract breach. This might be by way of capping overall liability and/or the matters for which the party will or will not take responsibility.
The recent case of Persimmon Homes, Taylor Wimpey and BDW Trading v Arup (not a marine case but the principles still apply) demonstrates that when negotiating levels of liability for breach of contract and negligence, the parties should not rely on the courts to rescue them from a bad bargain.
Persimmon Homes, Taylor Wimpey and BDW Trading (referred to as the consortium) purchased a development site in Wales for £53m and appointed Arup to provide consulting engineering services for the proposed residential and commercial development. Asbestos was subsequently discovered at the site, which the Consortium claimed Arup had failed to properly advise them about.
The consortium sued Arup for negligence, breach of contract and breach of statutory duty and sought to recover £2m, which it claimed reflected the price they would have paid for the land if they had been properly advised, plus its additional costs.
Arup denied liability and relied on an exclusion clause in the contract which limited their liability to £12m, and specifically excluded any claim relating to asbestos.
The court took the view that the clause was sufficiently clear and therefore effective. The court further commented that it was not their place to unpick the negotiations between sophisticated commercial parties of equal bargaining power and change the agreed allocation of risk and liability. Arup succeeded in limiting their liability and was, therefore, not liable for any of the losses which the consortium suffered, due to the discovery of asbestos: their limitation clause not only preserved the sum that it received for its services, but also saved a £2m liability plus the attendant legal costs.
As a business in the marine sector, it is imperative that you take the time during the negotiation process to allocate your risks and cap liability to a commercially acceptable level. If you are assuming more risk under the contract, then you should consider negotiating a more restrictive limit on your liability. You will need to ensure that the contract clause itself if clearly worded, as it is evident (as this case demonstrates) that in the case of a dispute, the court will look to apply the natural meaning of the words used in the contract.
They say that a picture is worth a thousand words but in this case a few words are worth several million pounds…
Our experienced Marine team can help you in handling such cases correctly. If you would like further information on this or any other specialised marine issue, please contact our Marine team on 01872 265100 or firstname.lastname@example.org