We often talk about the risk of contractually assuming liabilities higher than that for which you would otherwise be held responsible at law, and the potential impact on your professional indemnity insurance cover should a claim be made. On the flip side, you can create an artificial cap on, or exclusion of, liability under contract where at law your liability would be otherwise unlimited. The clause would apply to claims made by your client, but will not extend to claims by third parties. Many standard form contracts have a clause of this nature. See for example clause 29 in the Australian Standard 4122-2010.
In relying on contractual limitation of liability clauses, we have had success in defending claims against our insureds. In our experience, the courts are generally willing to uphold limitation of liability clauses however it is important you seek legal advice to ensure they are properly drafted. Note that claims brought under the Competition and Consumer Act 2010 (i.e. misleading and deceptive conduct) may circumvent a contractual limitation of liability clause.
When considering the drafting of a contractual limitation of liability of clause, you may wish to think about setting appropriate monetary and time limits, having consideration to that which has been upheld in previous court decisions, and any legislation. In recent decisions out of the New South Wales Supreme Court, the relevant contractual limitations were 1 year (i.e. from the date of the last tax invoice) and $300,000. However, it remains to be seen how a higher court will view contractual limitation clauses.
A significant number of the notifications and claims we see relate to the negligence of our insured’s sub-consultant in circumstances where our insured has not been negligent themselves. It is therefore important to ensure your sub-consultants do not contractually limit their liability (lower than your limit of liability) as any gap between the quantum of the claim and the contractual limit of liability you have accepted may be uninsured. For instance, a $500,000 claim in the face of a contractual limit of liability of $100,000 could see you responsible for the $400,000 shortfall. Put simply, if you are engaging sub-consultants do not allow them to contractually limit their liability.
Contractual limits of liability can help you manage your risk on a project. They are generally upheld by the courts however it is important to seek your own independent legal advice to ensure proper drafting. For more information, our Risk Management team has drafted a Risk Rule entitled “Limitation of Liability Clauses” which you may wish to peruse. Speak with your account manager about obtaining a copy or log onto our website for access to our suite of Risk Rules.
Hayley Landers – Claims/Risk Manager