Building Blocks: Limitation of liability clauses (part 1)

Limitation clauses in construction agreements, including building contracts, consultant appointments and warranties, are commonly requested as a way to limit the parties’ liabilities in the case of a dispute.

Let’s look at some of the most common ones and things to look out for:

Time limits for claims

Agreements are executed as a deed or a simple contract, with a 12 or 6 year contractual limitation period respectively.  However, it is common to try to seek to expressly limit time under the agreement, so that no actions or proceedings under the agreement will be able to be brought after the expiry of 12 or 6 years (as appropriate). This tends not to be controversial; however the market is changing given there may be longer limitation periods available under statutory rights (for example, the Building Safety Act 2022).

Financial cap on liability

This clause can be included in all forms of construction agreements, typically consultant appointments and warranties. A party will seek to introduce this clause as a way to mitigate its financial exposure if there is a breach of the contract.

This may comprise one of a number of different elements being a value and/or the basis on which funds will be available, such as ‘each and every claim’ or ‘in the aggregate’.

Equivalent rights of defence (“ERD”) clauses

This type of clause will typically appear in warranties. Depending on the particular wording of the clause, it will seek to set out that the warrantor will be entitled to rely on any defences available to it under the underlying contract (building contract, consultant appointment etc).  Here, it is essential to have sight of the underlying document to which the warranty relates as this will inform the extent of any cap on liability in a related warranty. Essentially, any limitations in the underlying document will flow to the warranty due to the inclusion of an ERD clause.

No greater liability clause

Again, this type of clause will typically appear in warranties.  It establishes that a party’s liability is limited to the specific obligations outlined in the underlying contract and doesn’t extend beyond this. 

In some respects, this type of clause mirrors the end result of an ERD clause in that whilst an ERD clause deals with defences to an action, this clause picks up points on liability stemming from specific obligations detailed in the agreement and importantly not those that lie outside of the contract (i.e. in tort).

There is another significant form of limitation clause that is commonly requested by consultants and contractors – a net contribution clause. This clause is included by default in some standard forms of construction agreements, such as those published by RIBA, ACE and CIC. We will review the fundamentals of a net contribution clause in part 2 of this blog.