Are your standard liability caps still safe?

A liability cap can be one of the most contentious issues in a contract negotiation. Many companies have policies setting the liability caps they may accept, helping them manage risk consistently across their commercial contracts. However, comments in a recent High Court judgment have raised doubts about the enforceability of some liability caps and may reduce the comfort businesses take from relying on their standard terms.

In Convrgnt Value Engineering LLC v Kennedys Dubai LLP, the High Court considered several issues concerning the respondent’s potential liability to the claimant. The construction firm Convrgnt brought a claim against its former legal counsel, Kennedys, alleging that their negligence had caused it to lose the opportunity to recover an additional £16 million in damages. Kennedys denied liability but argued that, even if it were found liable, the retainer limited any damages payable to Convrgnt to £3 million. Convrgnt maintained that the cap was unreasonable under the Unfair Contract Terms Act (UCTA) and should therefore not apply.

Whilst the judge ultimately found that UCTA would not apply due to jurisdictional issues, they did consider whether the liability cap would be deemed reasonable, finally determining that it would not be. As such, if UCTA had applied, the liability cap would have been struck out.

The determination goes against traditional assumptions that contract terms between commercial entities of relatively equal standing will be deemed reasonable. The reasons given by the judge for their findings were (i) the cap was not negotiated, the £3 million cap being part of Kennedys’ standard terms of business, (ii) the cap was below the highest value of a claim should Kennedys breach the retainer, and (iii) Kennedys had PII and other resources to address a claim that exceeded the stated cap.

Although the judge’s comments on the liability cap are not binding, they create uncertainty about the enforceability of caps in some contracts. A party cannot assume that a liability cap will provide the intended protection, particularly where it appears in standard terms accepted without negotiation. Businesses seeking to cap their liability should ensure that the restriction is clear and is specifically brought to the other party’s attention, a practice already well used in the US. They should also be able to explain why the cap was set at that level, especially where it is substantially lower than the other party’s potential loss or significantly below the value of relevant insurance cover and other resources available to meet a claim. Prominent drafting may help draw attention to the provision, although clarity and a defensible commercial rationale are more important than drafting style alone.

The above reiterates the importance of ensuring terms in commercial contracts, particularly those that may have a material impact on the other party, are clear, relevant, and can be justified if the worst should happen. Whilst standard terms help with efficiency and certainty, they should always be considered in the context in which they are being used, otherwise the position on liability may become unexpectedly unclear.

What does this mean for in-house teams?

For in-house teams, the key point is that a standard liability cap should not be applied automatically.

Businesses should be able to explain why a liability cap has been set at a particular level and whether it is appropriate for the contract in question. That means looking at things like the potential loss, the value and nature of the contract, available insurance cover and whether the cap has actually been negotiated.

Standard positions are still useful for helping teams manage risk consistently, but this case shows why they need to be considered against the circumstances of each contract.

How IHLS can help

IHLS supports in-house legal teams with commercial contracts, from individual negotiations to reviewing standard terms and liability positions.

We can also provide extra legal resource where teams need more capacity to manage contract volumes or a particularly busy period.

If you’d like to discuss your current liability positions or need support with commercial contract negotiations, contact us.