Contractual risk management and limiting liability is more important than ever

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Following her presentation at a recent FIDIC webinar, Slaughter and May associate Chloe Halloran gives her perspective on contractual risk allocation in the UK market.

Slaughter and May associate Chloe Halloran believes that achieving the correct balance between price and risk has become increasingly difficult over the past nine months. “The forthcoming briefing notes to be published by the FIDIC Risk, Liability and Quality Committee on Limitations of Liability, Fitness for Purpose and Indemnities will be essential reading for consulting engineers operating in all parts of the construction market,” she said.

“Given global circumstances and an inflationary market where price and profit margins are under pressure, it is now, arguably more than ever, important to ensure your contractual risks are clear and appropriate to your role on the project at hand,” says Halloran.

She also noted that it is now almost universal in the UK market for a consultant’s financial exposure under a professional appointment to be limited to some extent (and that this aligns with the position taken by the FIDIC White Book).

There are three key strands to limitations of liability – (i) the amount, (ii) the basis (i.e. each and every claim or in the aggregate) and (iii) the exclusions. Whilst it is tempting to give most attention to the amount, Halloran explained that it’s equally as important to consider the basis and to keep a close eye on the exclusions which are often a key battleground in negotiations. Typical exclusions other than those required at law include willful default, breach of copyright provisions and key indemnities.

Halloran said: “It’s essential to make sure that all parties understand the significance of any exclusions or ‘carve outs’ to a liability cap. Such ‘carve outs’ will mean that liability for certain matters is technically unlimited. From the consulting engineer’s standpoint, this may mean uninsured losses that sit outside the scope of professional indemnity insurance and for a client, this may lead to higher risk premia or a nervousness to innovate.

“Whilst ‘carve outs’ for matters that cannot be limited at law (usually death, personal injury from negligence, and fraud) are justified and appropriate, other exclusions such as those noted above can undermine the purpose of the limit in the first place. With this in mind, there is clearly a balance to strike so as not to render the liability cap redundant to the consulting engineer.”

Discussing market conditions, Halloran added: “After a long period of low and relatively stable inflation, indexation has become something of a ‘forgotten clause’ within the construction industry. Given the long-term nature of construction projects and professional appointments, I expect that this will quickly make a resurgence.

“Whilst pricing provisions are now at the forefront of minds, it’s interesting to think about the impact of inflation on any financial limitations of liability – if inflation continues to rise, in real terms, there will be a year-on-year reduction on the amount a client might recover in the event of a breach.”

Chloe Halloran is an associate in the commercial construction team at the law firm Slaughter and May.