Case note

Shepherd Homes Limited v Encia Remediation Limited and Green Piling Limited [2007] EWHC 70 (TCC) highlights the importance of considering the interrelationship between contractual limitations on liability and the existence of professional indemnity insurance.

The decision demonstrates that caps on liability will not necessarily be affected by assurances given in relation to the extent of professional indemnity insurance exceeding the amount of the cap. The decision stands as a reminder in any contracts negotiation or review, to consider both issues simultaneously.

Background

Shepherd Homes Ltd employed Encia Remediation Ltd as a civil engineering contractor for a large residential development. Encia Remediation Ltd employed Green Piling Ltd as a specialist subcontractor to design and carry out piling work. When properties on the site began to show signs of cracking due to settlement, Shepherd Homes issued proceedings against the contractor who joined the subcontractor as a third party.

The subcontractor’s proposed tender for ground and piling works was set out in a package of documents, which included the subcontractor’s standard terms and conditions. These standard terms comprised of ten terms, which were printed on a one-page document in clear and legible print.

One of the terms limited the subcontractor’s liability for all losses to the contract price of £100,000. One of the other documents in the package contained details for the subcontractor’s professional indemnity insurance, which provided cover of £1 million in the aggregate.

The parties discussed and amended the subcontractor’s payment term contained in its standard terms and conditions, increasing the period for payment from 14 to 28 days. However, the parties did not discuss the clause that limited the subcontractor’s liability to the contract price. The subcontractor later submitted its offer ‘as detailed in the attached documents’, which included the subcontractor’s standard terms. The contractor submitted a counter offer which was accepted.

Discussions then took place between the contractor, its engineers and the subcontractor about ways it might be possible to save costs by making some design changes. One aspect of those discussions related to the pile head design.

The engineers were not prepared to accept responsibility for the alternative pile head design proposed by the subcontractor. The subcontractor then offered to indemnify the contractor and the engineers in relation to its proposed pile design. At that point, the contractor asked: “This is covered by your insurance, is it not?”, or words to that effect. The subcontractor confirmed that it had professional indemnity insurance of £1 million.

It was common ground that there was no discussion of the cap or a discussion of the impact of the insurance on either the cap or the extent of the subcontractor’s liability.

The subcontractor later confirmed in writing that it had professional indemnity insurance for £1 million in the aggregate and that it would indemnify the contractor and engineers in relation to the pile head design.

Proceedings were issued after cracking due to settlement, alleging defective design of the piling system.

What the Court Considered

The court considered:

• whether the standard clause limiting the sub-contractor’s liability was incorporated into its agreement with the contractor
• whether the assurances given by the subcontractor in relation to the amount of its professional indemnity insurance, which exceeded the cap, were inconsistent with the incorporation of the cap on liability into the contract, and
• whether the clause capping the subcontractor’s liability satisfied the test of ‘reasonableness’ under the Unfair Contract Terms Act 1977 (UK).

Findings

(a) Whether the cap was incorporated into the agreement

The court found that the standard clause limiting liability was incorporated into contract, as adequate notice of the standard term had been given to the contractor. On the evidence, the contractor had read and considered the terms and conditions and therefore there was no doubt that the terms formed part of the agreement. Nonetheless, the court remarked that, even if the contractor had not read the terms and conditions, the subcontractor had done what was reasonably sufficient to give the contractor notice of the conditions.

The contractor originally argued that inadequate notice was given of the cap and therefore the cap did not form part of the agreement. The contractor relied on principles set out in Chitty on Contracts (paragraph 12-015) that where a particular condition is ‘particularly onerous or unusual’, the party tendering the document must show that it has been brought fairly and reasonably to the other’s attention. This argument was withdrawn as it was clear the contractor’s director had read and considered the terms and conditions.

Nevertheless, the court remarked that if it had been necessary to establish that the clause was particularly onerous or unusual, the court was not persuaded that a limitation of liability to the amount of the contract price fell into that category. The subcontractor had done what was necessary to give the contractor fair notice that the offer was subject to the condition that liability was limited to the contract price by submitting an offer ‘as detailed in the attached documents’, which consisted of five items including a one-page document setting out the ten terms and conditions in clear and legible print.

(b) Whether assurances given in relation to the amount of the subcontractor’s professional indemnity insurance were inconsistent with the incorporation of the cap on liability

The court found that there was no inconsistency between the cap on liability and the assurances made by the subcontractor confirming that it had £1 million of professional indemnity insurance in the aggregate. A number of findings supported this conclusion:

• During discussions, it was never suggested that the limit of the subcontractor’s liability under the piling contract was to be measured by the extent of the insurance cover.
• The court found that the discussion of the subcontractor’s insurance position arose in connection with the separate offered indemnity in respect to the pile head design, and not the piling contract. Therefore, while the indemnity in relation to the pile head design was not itself affected by the cap, the cap applied to the piling contract. The consequence of this is significant, since the pile head designed was not alleged to be defective.
• The court found that the insurance cover of £1 million in the aggregate would potentially be required by the subcontractor to satisfy even limited liability. It could be required to satisfy claims under other contracts across a wide range of projects in the policy year.

(c) Whether the cap was ‘reasonable’

Section 3 of the Unfair Contract Terms Act 1977 (UK) provides that where a contracting party’s written standard terms of business include a term excluding or restricting liability in respect of a breach, the term must satisfy the test of reasonableness. The requirement of reasonableness is that the term must have been a fair and reasonable one to be included, having regard to the circumstances which were in the contemplation of the parties when the contract was made.

In determining the reasonableness of a term which seeks to restrict a party’s liability to a specified sum of money, section 11(4) provides that it is relevant to regard (a) the resources which that party could expect to be available to meet the liability, should it arise; and (b) how far it was open to that party to cover itself by insurance.

The contractor argued that since the parties contemplated that the contractor would have the benefit of up to £1 million of insurance cover, any term that denied them the full extent of such a benefit was neither fair nor reasonable, with the result that the cap was inapplicable.

Following the guidelines in section 11(2), the court found that while the subcontractor was a small company, the contractor proclaimed itself to be part of a large international group and had superior bargaining power. It was the customer. It could have contracted with a number of larger companies on terms that did not contain a cap. The contractor was also aware that other large piling contractors had terms which included a similar cap. However, the contractor secured favourable terms for an immediate start with the subcontractor. In these circumstances, the term was a fair and reasonable one to have included in the contract.

The court held that the cap did not cease to be reasonable because the subcontractor had greater insurance cover, which would also be needed for claims under other contracts. It did not alter the fact that the cap was to be a contractual term nor was it inconsistent with it.

Judgment

The court held:

• the standard clause limiting liability formed part of the contract, as adequate notice of the standard term had been given to the contractor
• the subsequent statement regarding the insurance position bore no effect on the existence of the contractual cap on liability; it related to the proposed indemnity for the pile head design. There was no inconsistency between the insurance and the incorporation of the cap into the contract, and
• the cap on liability was a fair and reasonable term under the Unfair Contract Terms Act 1977 and was therefore enforceable.

Implications

The case stands as a graphic reminder of the need in any contract review or negotiation to consider the relationship between any limitations or exclusions of liability and the existence of any professional indemnity insurance. The decision reinforces the need to make sure that both those issues are reviewed together.