Limiting liability in building contracts

The devil is in the detail – a brief consideration of the use of liability caps in the JCT 2011 suite of contracts.

Negotiations over the detail of building contracts will often include a debate over whether or not to cap a Contractor's liability under the building contract to some degree. Under the JCT 2011 suite of contracts, the contracts which contain a design element come ready with a 'built-in' option which the parties can select.

The JCT cap (contained in the most commonly used Design & Build form of contract at clause 2.17.3) limits the Contractor's liability for economic and consequential losses arising from its negligent design. The scope of damages covered by this cap is important to note for both Contractor and Employer. It limits only the Contractor's liability for the consequential losses that flow from negligent design – for example, losses such as the cost of relocation, should such be necessary, or loss of profit where the negligent design prevents trading from the premises. From the Contractor's perspective it is important to note that the cap does not limit the Contractor's responsibility for direct losses which flow from negligent design (for example, damage caused to adjacent property or the costs incurred in rectifying the defect itself) and would also not apply to any losses (whether direct or otherwise) flowing from defective workmanship by the Contractor nor to the levying of liquidated damages by the Employer for late completion of the works.

One important caveat to the application of the 2.17.3 cap is that it may only apply insofar as it does not concern the provision of dwellings. A party 'taking on work in connection with a dwelling' is defined by reference to section 1 of the Defective Premises Act 1972 and where the work that is the subject of the contract falls within this definition the cap will not apply – even when it is stipulated to do so in the contract particulars. So, where the parties to a contract for a new apartment block together with a car park had agreed a 2.17.3 cap of £5 million, the cap would bite solely on the 'non-dwelling' element of the works, the car park. The impact of this alongside the narrow scope of losses covered by the cap could operate so as to give the Contractor far less protection than he envisaged gaining from the cap. From an Employer's point of view the inclusion of such a narrowly drawn cap could mean that it does not see the benefit in terms of reduction in the contract sum that inclusion of a cap on liability would usually bring.

The solution is evident – it is important when contemplating a cap on liability under the JCT contracts that consideration is given to the extent of its actual application, to whether bespoke drafting may better cover the position that the parties are seeking to achieve, and indeed whether a cap on liability is appropriate or commercially acceptable.

For further information or advice, please contact our Developers team.