Case Study :€“ Limitation of liability clauses in construction contracts

Case Study : Limitation of liability clauses in construction contracts (Harvinder Deol)

In our case study in this edition, we consider the recent case Willmott Dixon Partnership Ltd v London Borough of Hammersmith and Fulham [2014] EWHC 3191 (TCC) in which the Technology and Construction Court considered clauses for termination for convenience clauses.

Willmott Dixon Partnership Ltd v London Borough of Hammersmith and Fulham [2014] EWHC 3191 (TCC)

We recently commented on a Technology and Construction Court decision that shed some light on Termination for Convenience clauses. We reported that the decision in Comau UK Limited v Lotus Lightweight Structures Limited [2014] EWHC 2122 (Comm) held that a limitation of liability clause served to reduce damages which might otherwise have been recoverable under the contract by Comau. This was essentially on the basis that Lotus could have terminated for convenience at any time and in such event, Comau would not have been entitled to loss of profit. This was irrespective of whether there was any evidence of causation to suggest that Lotus would have actually exercised its right. This issue has been subject to a recent Technology and Construction Court decision.

The decision relates to a claim brought by a repair and maintenance contractor, Willmott Dixon Partnerships Limited (‘WDP’), against the London Borough of Hammersmith and Fulham Borough Council (‘LBHF’). WDP was the incumbent provider of services to LBHF and lost out in a bidding process to secure a new contract for the same services to a competitor company, Mitie Property Services (UK) Limited.

WDP launched a challenge under the Public Contracts Regulations 2006 against LBHF’s procurement. The failure by LBHF not to award was the central issue in the case but WDP also sought to recover loss of profit it asserted that it would have legitimately expected to earn had WDP been successful. On this basis, the Court was asked to look at the question of the period over which it was to be taken that any hypothetical contract would have been performed by WDP had they been successful.

The contract put out for tender was for a 10 year initial term with an option for LBHF to terminate for convenience upon the provision of six-month’s notice after the end of the first year of the initial term. LBHF submitted that WDP’s claim to damages (if any) should be limited to around 18 months accordingly. It was further argued that WDP would not as a matter of course have been entitled to any further work beyond that period because LBHF may have re-procured the contract at the end of 18 months. WDP asserted that had they been successful in securing the contract, they were entitled to loss of profit for the 10 year initial term.

The court rejected WDP’€™s claim on the central issues in the case, but ruled in its favour on this specific point.

This ruling would appear to contradict with the recent Technology and Construction Court decision in Comau. In Comau it was held that damages ought to be assessed on the basis that the defaulting party would in all likelihood have exercised its right to terminate for convenience at the earliest possible stage. This would substantially reduce the level of damages payable.

Despite many authorities being cited in the WDP case, it was notable that the Comau decision was not cited.

The differing conclusion in Comau and WDP means that the judicial position on the issue of ‘termination for convenience’ clauses is unclear. Ideally, further clarity will be provided by a superior court. However, in the interim, commercial parties should be alive to the fact that such clauses may (in specific certain circumstances) result in a limitation of liability for future loss of profit in the event of breaches of contract. The underlying commercial intent and the drafting of such clauses should be visited with this point in mind.