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Position Paper On Liability: Asia Pacific Projects Update
Position Paper On Liability: Asia Pacific Projects Update
POSITION PAPER ON
LIABILITY
The impact of exclusive remedies clauses on
INTRODUCTION liquidated damages regimes
This paper sets out the legal principles that apply to key The rationale for, and meaning of, exclusive remedies
provisions in construction contracts and focuses on those clauses under construction contracts
issues that contractors raise in an attempt to limit their
The operation of the prevention principle
liability.
The operation of consequential loss provisions
It focuses on international market practice and the position
The application of implied warranties.
under English law, which most participants in the projects
and construction industry in this region are familiar with. It should be emphasised that this paper focuses on the
legal risks to employers; it does not focus on commercial
SUMMARY imperatives or technical issues.
Contractors often raise various arguments concerning
HOW LIQUIDATED DAMAGES REGIMES CAN
provisions relating to time and performance which, if
accepted, can have serious consequences for an BE INVALIDATED
employer’s ability to recover. If an exclusive remedies clause is inserted into a contract,
Contractors often argue for: the explicit remedies contained in the contract will take on
great significance. Under English law, from a construction
The insertion of an exclusive remedies clause for delay
law perspective, the presence of liquidated damages will
and performance liquidated damages and the removal
be crucial in providing remedies for delay and
of any failsafe provisions
underperformance.
The insertion of a general exclusive remedies clause
However, if a general exclusive remedies provision is
The deletion of provisions that attempt to obviate the inserted, the employer can have no recourse to common
effects of the prevention principle law damages if the liquidated damages regime is
No liability for consequential loss invalidated. Contractors attempt to invalidate liquidated
damages clauses in a number of ways. The most common
The exclusion of all implied warranties.
methods of circumventing these clauses are:
This position paper sets out the legal issues that employers
By arguing that the liquidated damages clause is a
need to be aware of in dealing with these issues.
penalty or void for uncertainty
Specifically, we explore:
By arguing that the employer has caused delay through
The operation of liquidated damages clauses and how an act of prevention.
they can be invalidated
LIQUIDATED DAMAGES NOT A GENUINE REMOVAL OF FAILSAFE CLAUSES FOR
PRE-ESTIMATE OF LOSS, BUT A PENALTY DELAY AND UNDERPERFORMANCE
If the sum agreed to be imposed by the parties as Failsafe provisions in construction contracts attempt to
liquidated damages is, in law, a penalty, then it will not be preserve the employer’s rights to obtain damages at law if
enforceable by an employer. The sum agreed to be for some reason the liquidated damages clauses are
imposed as liquidated damages will be regarded as a deemed unenforceable. A typical failsafe provision for
penalty if it does not represent a genuine pre-estimate of delay provides as follows:
the loss likely to be sustained by the employer as a result "If this provision (or any part thereof) is found for any
of a delay to completion. As stated by the Privy Council: reason to be void, invalid or otherwise inoperative so as
"…so long as the sum payable in the event of non to disentitle the employer from claiming delay liquidated
compliance with the contract is not extravagant, having damages, the employer is entitled to claim against the
regard to the range of losses that it could reasonably be contractor damages at law as set out in the damages at
anticipated it would have to cover at the time the contract law schedule for the contractor’s failure to attain
was made, it can still be a genuine pre estimate of the loss commercial operation by the date for commercial
that would be suffered and so a perfectly valid liquidated operation up to the aggregate liability for delay liquidated
damage provision." 1 damages."
The question of whether a clause is a penalty is one of Contractors often argue against such clauses and suggest
construction to be decided upon the terms and they should be deleted. They often argue for the inclusion
circumstances of each particular contract. If it can be of an exclusive remedies provision and the deletion of any
established that the sum is not a genuine pre-estimate of failsafe clause, suggesting that liquidated damages should
loss, the provision will be unenforceable. It makes no be an employer’s sole entitlement for the contractor’s
difference that the contract specifically states that the delay or underperformance. As explained below,
clause is not a penalty2 or in fact the contract uses the exclusive remedies clauses may prevent an employer from
word ‘penalty’ (as some still do) provided the sum is in claiming damages at common law in the event that the
reality an estimate of damage or is intended as a limitation liquidated damages regimes are for some reason found to
of damage and not in terrorem. 3 However, in all cases be unenforceable.
where the act in question is a breach of contract, the law If there is no exclusive remedies clause, then there is no
will inquire whether the payment provided for in the essential need for the inclusion of failsafe clauses.
contract is a "penalty", in a modern sense of the word, However, if an exclusive remedies clause is inserted –
meaning that it is not in reality an estimate of damage and which we advise against below – failsafe clauses must be
is excessive.4 included to protect the employer’s ability to recover. If an
exclusive remedies clause is present, failsafe clauses
TIME AT LARGE
provide essential protection if the liquidated damages
If an employer prevents the completion of the works in a regimes are for any reason invalidated.
way not covered by an extension of time clause, then it
loses the right to claim liquidated damages. If this occurs, EXCLUSIVE REMEDIES GENERALLY
the contractor cannot complete by the set completion date Contractors typically attempt to insert a provision stating
and it is said that time under the contract has been set "at that the remedies expressly provided for under the
large". This means that the contractor’s obligation is to construction contract are to the exclusion of any remedies
complete the works within a reasonable time. Time is said at common law. Contractors also typically attempt to
to be set at large due to the operation of the prevention delete any reference to recourse to damages at law.
principle. What is a reasonable time to complete once time
The insertion of an exclusive remedies clause may have
has been set at large is a matter of fact dependent on the
far-reaching consequences as it may limit an employer’s
circumstances as to how time has become at large, the
rights to those explicitly articulated in the construction
date on which it was set at large and the materials to be
contract. This potentially leaves the employer without
able to make a calculation.5 On page 4, we discuss the
remedies for the contractor’s breaches of the construction
operation of the prevention principle.
contract, as we explain below.
The potential for the liquidated damages clause to be
declared invalid or otherwise inoperative indicates the EXCLUSION OF COMMON LAW DAMAGES
importance of failsafe clauses and other provisions that
Commonly, if a liquidated damages clause is found to be
preserve an employer’s rights to claim damages at law.
unenforceable (because it is a penalty, void or otherwise
unenforceable), the employer, while prevented from
principals must expressly provide that contractors are 17 Hudson’s Building and Engineering Contracts, 11th edition, volume
2, para 10.040.
liable for all categories of loss for which they intend them
to be liable. This can be done by expressly defining those 18 [1970] 1 BLR 111 at 121.
categories of loss as direct and excluding those direct 19 See I. N Duncan Wallace QC, "Prevention and Liquidated Damages:
A Theory Too Far?" (2002) 18 BCL 82.
losses from the operation of the exclusion of liability
clause. 20 Turner Corporation Ltd (Receiver and Manager)
21 [1838] 3 M&W 387.
EXCLUSION OF IMPLIED WARRANTIES 22 Hudson’s Building and Engineering Contracts, 11th edition, volume
2, para 10 025.
Contractors often propose to delete reference to warranties
23 [1984] 29 BLR 5.
implied by law. A general exclusion may be expressed as
follows: 24 Ibid at 19, cited in Keith Pickervance, "Calculation of a Reasonable
Time to Complete When Time is at Large", (2006), International
"The parties agree that the warranties in this clause and Construction Law Review 167 at 177.
any other warranties expressed elsewhere in the contract 25 [1984] 29 BLR 5 at 19.
are the limit of the contractor’s warranties and are to the 26 Hudson’s Building and Engineering Contracts 11th edition, volume
exclusion of any implied warranties at law." 2, para 10 040.
Despite such a clause, certain warranties cannot be 27 [2004] SASC 151 at [12].
excluded by contractual agreement. 28 Philips Hong Kong Ltd v Attorney General of Hong Kong [1993] 61
BLR 49 at 58.
Nevertheless, we would agree to the inclusion of such a
29 [1854] 9 Ex 341.
clause excluding implied warranties only if the list of
30 FG Minter Ltd v Welsh Health Technical Services Organisation
express warranties is comprehensive. These warranties
[1980] 13 BLR 1.
will usually be project specific, but employers should take
31 [2008] VSCA 26.
great care to ensure that their ability to recover is
32 [1940] 2 K.B. 99.
protected.
33 [1999] 1 Lloyd's Rep 387.
FOOTNOTES 34 [1940] 2 KB 99.
1 Philips Hong Kong v AG of Hong Kong [1993] 61 BLR 49 at 59. 35 [2000] BLR 218 at 226.
2 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] 36 Ibid at 227.
AC 79 at 86.
3 This point was strongly suggested by the Court of Appeal judgments in
the Widnes case ([1931] 2 K.B. 393) and finally and satisfactorily KEY CONTACTS
concluded by the Supreme Court of Canada in Elsley v J.G. Collins
Insurance Agencies Ltd. [1978] 83 DLR (3d) 1.
Damian McNair
4 Hudson’s Building and Engineering Contracts 11th edition, volume 2, Partner, Head of Finance & Projects Australia
paragraph 10.002.
T +61 3 9274 5379
5 Keith Pickervance, "Calculation of a Reasonable Time to Complete
damian.mcnair@dlapiper.com
when Time is at Large", (2006) International Construction Law Review
167 at 168. www.dlapiper.com
6 Keating on Construction Contracts, 8th edition, paragraph 10.023.
7 [1970] 1 BLR 111. DLA Piper is a global law firm operating through various separate
8 [1968] 1 WLR 471. and distinct legal entities.
9 [1980] 1 All ER 556. For further information, please refer to www.dlapiper.com
10 [1987] 39 BLR 30. at 12. Copyright © 2011 DLA Piper. All rights reserved.
11 [1987] 39 BLR 30 at 39. 1110411473 DLA204 0611