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Limiting liability for intentional breach
Would a limit on liability still apply in relation to intentional breach? While citing a UK case, STUART JORDAN* stresses that in the Gulf the agreed terms of a contract will always be considered in the context of their compliance with local code and/or with basic legal principles.
01 June 2021
Our industry runs on exclusion and limitation of liability. Particularly in the energy and industrial engineering sectors, contracts of all types will typically include provisions to limit overall contractor, supplier or service provider liability. These terms are so well-established that we don’t discuss their presence in the contract: we argue about the size of the cap and the carve-outs from it.
Our question for today: Would a limit still apply in relation to intentional breach? Well, the answer depends a great deal on the applicable law.
In Gulf jurisdictions, the consensus answer is no. The approach to limitation provisions generally is restrictive. As one example, Article 390 of the UAE Civil Code covers agreements to fix damages in advance. Although this point is often discussed in the context of liquidated damages, it applies equally to liability limits. Article 390 allows parties to pre-agree damages but adds that a judge may always review the agreed damages and adjust them to match the actual loss suffered.
Considering the focus in Middle Eastern law on just outcomes from contracts, the unenforceability of contract terms which are considered immoral; and the requirement of good faith in performance of contract obligations, all the signals point to a refusal – on public policy grounds – to uphold a limitation clause in the event of intentional breach – as they do with fraud or gross negligence.
In contrast to that, we have new guidance on this question from the English law perspective. Consistent with the English approach to interpretation, the focus is not primarily on morals or outcomes, but on the clarity and completeness of the deal agreed. The main objection to the idea of a party being protected from the consequences of its intentional breach, is that it might remove the whole force of a contract. The judge in an earlier leading case noted that: if a party is able effectively to choose whether or not to comply with a contract, that “would reduce the contract to a mere declaration of intent”.
In the recent case (Mott Macdonald Ltd vs Trant Engineering Ltd), Trant engaged Mott Macdonald for consultancy services related to the construction of a power station at a military base on the Falkland Islands. The parties fell out but resolved their differences by agreeing a Settlement and Services Agreement which included a clause:
“Notwithstanding any other term to the contrary in the Agreement…and whether the cause of action for any claim arises under or in connection with the Agreement in contract or in tort, in negligence or for breach of statutory duty or otherwise…the total liability of the Consultant in the aggregate for all claims shall be limited to £500,000 ($709,300).”
The parties still couldn’t get on and eventually Mott Macdonald issued proceedings for non-payment. Trant counterclaimed, alleging that Mott Macdonald’s actions (including locking Trant out of the Building Information Modelling database) amounted to fundamental, deliberate and wilful breach. On that basis, Trant argued that the £500,000 cap would not apply to Mott Macdonald’s liability. The latter denied the liability, deliberate or otherwise, but argued that the cap would apply anyway to such breach.
This question came to the Technology and Construction Court which decided, in Mott Macdonald’s favour, that the cap was worded sufficiently broadly to apply even to intentional breach. The court approached this liability cap as a normal interpretation task, and not with any presumption against upholding the clause.
It will have surprised many commentators that the court upheld a generally-worded limitation clause which did not expressly cover intentional breach. Conventional advice on drafting is that any limit or exclusion provision needs to be very clearly worded in order to be effective.
The court did acknowledge that intentional breach may amount to a fundamental breach, entitling the innocent party to treat the contract as rescinded, but the court also noted that Trant had not taken any steps to do that. We should also note the difference between this £500,000 limitation clause and a full exclusion of liability. If there had been no liability at all for intentional breach, this might have reduced the contract to “a mere declaration of intent” and the outcome could have been different.
We have here another interesting contrast between Middle Eastern and English legal principles – and another illustration that English Law, globally, is the least interventionist – or the most permissive of bad behaviour, whichever way you look at it.
Finally, we should note, as usual, that the Gulf approach to this question will not be avoided by adopting English governing law on a contract performed in the Gulf. The agreed terms will always be considered in the context of their compliance with local code and/or with basic legal principles. Take advice.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
