Heard the one about the contractor/consultant/client laid low by a few innocent-sounding sentences in their contract? In the first of a series, Helen Garthwaite looks at a cap on liability
A structural engineer had a tough time recently on a couple of listed building projects that went awry, requiring the engineer to make modest claims on his professional indemnity insurance policy. Upon the annual renewal of his policy, his insurance broker suggested a cap on claims relating to listed building work undertaken by the engineer to help reduce its exposure and keep premiums low. After all, apart from the listed buildings incidents, the engineer had a good claims record.
Prudently, the engineer put in place appropriate risk management procedures to ensure the same mistakes would not occur on listed building projects in future. But, lo and behold, the following insurance year the engineer found himself facing a ground conditions claim owing to a mistake on a listed building project by a specialist subcontractor it had engaged. Worse still, the subcontractor was insolvent.
So what of the client? The client, a small business renovating a listed barn for use as its office, needed to carry out substantial remedial works, so it came knocking on the door of the engineer and its insurer. The engineer and the client had agreed to use terms of engagement based on ACE Agreement B(1), a well-known form used by engineering consultants. The terms of engagement contained the clause 8.2 (see box).
The claim of the small business was scuppered by the detail of the engineer’s policy. The fact that there had been a serious error by a ground condition specialist employed by the engineer (for whom the engineer undertook responsibility) had been caught by the specific cap in relation to listed buildings claims inserted in the insurance policy as a result of past claims.
The limitation on the engineer’s liability could just as easily have related to an asbestos claim or a contamination claim, for which limits on a consultant’s insurance cover commonly apply. (The terms of engagement based on ACE Agreement B(1) already included express limitations for these risks.)
Standard industry terms of contract and amendments to them are often the subject of heated debate. Many advocate that industry-recognised forms should be accepted with no amendment. However, hidden dangers lie in terms such as clause 8.2, which need to be assessed with care depending on the project and commercial context to which they apply. The force lies in detail elsewhere – in this case, the insurance policy. This detail (and so liability) may also change during the period of engagement.
A risk allocation balance must be struck between an engineer (or other professional) and its clients. If specific limitations on liability are to be included, this should be made clear up front.
In a situation such as this, where parties contracting are of a similar standing – small local business and small local engineer – a single financial cap only on liability would be a better solution, perhaps set by reference to the level of professional indemnity insurance. That would allow both parties to know clearly where they stand from the outset.
One-off clients such as the small local business should not have to wade through the detail of its consultant’s insurance arrangements (full terms of which are seldom disclosed) in order to understand the scope of terms such as clause 8.2.
Liability not to exceed amount of Insurance
8.2 Further and notwithstanding anything to the contrary contained in this Agreement and without prejudice to any provision in this Agreement whereby liability is excluded or limited to a lesser amount, the liability of the Consultant under or in connection with this Agreement whether in contract or tort, in negligence, for breach of statutory duty or otherwise for any claim shall not exceed the amount, if any, recoverable by the Consultant by way of indemnity against the claim in question under professional indemnity insurance taken out by the Consultant and in force at the time that the claim or (if earlier) circumstances that may give rise to the claim is or are reported to the insurers in question. This limitation shall not apply if no such amount is recoverable due to the Consultant having been in breach of his obligations under B8.11 or the terms of any insurance maintained in accordance therewith or having failed to report any such claim or circumstances to the insurers in question timeously.
Association for Consultancy and Engineering publishes Agreement B(1) 2002 (revised 2004) for Civil/Structural Engineering.
Helen Garthwaite is head of construction and engineering in Taylor Wessing