The fifth in this series of articles on collateral warranties looks at limitation provisions and limits on liability.
Limitation clauses have three purposes. First, they are intended to establish a single deadline by which all claims under collateral warranties relating to a project must be made, so that the beneficiary does not have to worry about different limitation periods applying to different parts of the development.

Second, they identify clearly the date by which claims must be brought. The general law does not do this and it is often not possible, without a decision of the court, to work out with certainty the limitation period for a particular claim.

Third, contractors can, by skilful negotiation, use limitation clauses to restrict the length of time for which they are liable under collateral warranties.

The usual limitation clause will state that liability continues for 12 years from practical completion of the development and any claims brought after that date will be too late. There are circumstances in which the contractor’s liability could last for longer than this, and it is of benefit to the contractor to have certainty on the limitation period. The beneficiary also benefits from that certainty and, assuming the warranties are in the same terms, he benefits from a single limitation period for all claims.

If the collateral warranty or the underlying contract are not executed as deeds but as ordinary contracts, the limitation period stated in the limitation clause should be six years, not 12.

Limitations on liability are clauses that expressly restrict the liability of the contractor under the warranty.

The most common form of limitation of liability appears in warranties granted to tenants where the contractor’s liability is restricted to meeting the cost of making good any defects in the development. This is often acceptable, although my view is that a fairer clause would include removal costs, if the tenant has to find alternative accommodation while repairs are carried out, and the additional costs incurred if the tenant is still paying rent on the defective building while renting alternative premises.

Limitations on liability are rare and most beneficiaries take the view that contractors have assessed the risk of loss – the value of that risk being incorporated in their price

Other limitations on liability do appear in collateral warranties although their acceptability will depend very much on the circumstances. One sometimes sees in warranties to purchasers, clauses that are similar to the limitation referred to above for tenants, although this is usually unacceptable for a purchaser buying the development as an investment, not to occupy it. Equally, a freehold purchaser or a long lessee may suffer different and greater losses than an occupational tenant paying a rack-rent.

The other most common circumstances in which limitations on liability are seen (although these are still rare) are very high-value developments, where professional indemnity insurance available at reasonable cost falls far short of the value of the development, and small work packages of low value where the potential consequences of a defect are out of all proportion to the value of the work.

In these cases, one sometimes sees a limitation of liability to the cost of repairing the defects in the development (including any consequential damage) together with a financial limit on liability for other losses. This financial limit is often equal to the amount of professional indemnity insurance which the contractor holds.

It must be emphasised that, apart from limits relating to occupational tenants, limitations on liability are rare and most beneficiaries take the view that contractors take on work to make a profit, hold themselves out as competent to do the work that they take on and have assessed the risk of loss – the value of that risk being incorporated in their price. Whether this is correct or not is another matter, but that is the view that most beneficiaries take and they therefore argue that limitations on liability are not appropriate.

The final article in this series will deal with a number of administrative provisions commonly seen in warranties, such as notices and law and jurisdiction.