Caps on liability: ensuring that an "aggregate" cap means just that

Where the liability of a party under a contract is stated to be limited to a certain amount, that party will want to be sure that the cap applies in all situations, except where the contract expressly states otherwise.

A decision of the Technology and Construction Court delivered on 10 October signals that the Courts may adopt an unexpected interpretation of such capping clauses so it is important to make them absolutely clear.

Case and facts

The case was Sabic UK Petrochemicals Limited v Punj Lloyd Limited and others.¹ Sabic (the "Employer"), a manufacturer of petrochemical products, entered into a contract with Simon Carves Limited (the "Contractor") under which the latter agreed to design, procure and construct a plant to produce low density polyethylene.

Before the first year was out, it was clear that the stated date for completion would not be met and the parties entered into two agreements under which significant changes were made to a number of the contract terms and as to price. Importantly, the parties agreed a date upon which ethylene could first be introduced into the plant for the purposes of commissioning (the "Ethylene In Date "/" EID" date), which was to be the critical date going forward.

Further difficulties and slippage to the timetable occurred and just three months later, the Employer issued a warning letter to the effect that it would be terminating the contract for the Contractor's failure to exercise due diligence. A month later, it terminated the contract.

The Court held that the Employer had validly terminated the contract under the express provisions.

The effect of the cap

Clause 30.9 of the contract contained an "additional costs to complete test", i.e. if the total cost to the Employer in completing the Works exceeded the total cost that the Works would have cost if they had been completed by the Contractor (and the contract had not been terminated), the difference would be recoverable by the Employer from the Contractor either by way of set off or as a debt.

A separate clause provided that the "aggregate liability of the Contractor under or in connection with the Contract (whether or not as a result of the Contractor's negligence and whether in contract, tort, or otherwise at law) ... shall not exceed 20% (twenty per cent) of the sum of the Contract Price".

The question for the Court was: did the aggregate cap of 20% apply to the Employer's claim under Clause 30.9 (its cost to complete the Works) so that it could recover no more than an amount equal to 20% of the Contract Price?

The Court held that the cap did not automatically apply to limit the sums recoverable from the Contractor under the additional costs to complete test. The cap applied to liabilities incurred as a result of breaches of contractual or tortious obligations only. If, and to the extent that, liability for breach of contract formed a constituent part of the calculation under Clause 30.9, it would be limited (capped), but otherwise the cap would not apply.

The reasons for the Court coming to that unexpected conclusion were as follows:

• The language of the capping clause (applying to liability "whether or not as a result of the Contractor's negligence and whether in contract, tort, or otherwise at law") was language typically associated with clauses referring to liabilities arising out of breaches of contractual and tortious obligations.

• Clause 30.9 could be triggered not just as a result of a breach of contract by the Contractor but also in other circumstances, including, the insolvency of the Contractor. None of those other circumstances that could trigger termination required actual breach of contract or tort by the Contractor.

While the case obviously turned on the precise words used, it is interesting that words which may have been added in an attempt to be all-encompassing ("whether or not as a result of the Contractor's negligence and whether in contract, tort, or otherwise at law") were actually held to have had a limiting effect on the ambit of the capping clause.

The case highlights the fact that, where clauses are intended to limit liability to an overall cap in all circumstances, they need to be very clearly drafted and, if only from the perspective of the party seeking to rely on the cap (i.e. usually the Contractor), perhaps in a slightly different way to that which has previously been the norm.

1.  [2013] EWHC 2916 (TCC)