Subscribe to LexTalk to stay on top of today’s legal issue and trends.
Catapult Your Career |
Industry Insights & Trends |
Product Training & Tips
One Stop Shopping Monday – Look no further than engineering, procurement and construction (EPC) contracts! An EPC contract allows a real property owner to enter into a single contract with a firm for the engineering design, construction and procurement of project materials rather than entering into multiple contracts with different parties. Read on to get some tips for managing liability in EPC contracts.
What Is a Limitation of Liability Provision?
A contractual limitation of liability provision limits a party’s liability for damages related to the contract by way of a financial cap. A limitation of liability provision, when included in an EPC contract is typically capitalized, bolded or otherwise made conspicuous so the party against which it is to be enforced will be hard-pressed to claim insufficient notice of the clause. An example of such a clause is as follows:
TO THE FULLEST EXTENT PERMITTED BY LAW, EXCEPT FOR DAMAGES DUE TO GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, CONTRACTOR’S LIABILITY FOR DAMAGES OF ANY TYPE RELATED TO OR ARISING OUT OF THE WORK SHALL NOT EXCEED THE CONTRACT SUM, WHETHER SUCH LIABILITY IS BASED IN CONTRACT, TORT, STRICT LIABILITY OR ANOTHER THEORY OF LIABILITY.
Why Would an Owner Agree to a Limitation of Liability Provision?
A responsible contractor seeks to manage its risk. Sometimes, it can do this through administrative measures such as safety protocols, quality assurance, and quality control. But such measures are not always adequate from the contractor’s perspective—for example, the work may be inherently dangerous, the workspace might have to be shared with other contractors, or the consequences of faulty work may have extremely costly consequences, especially in light of the contractor’s available capital. In these circumstances, if a project owner does not agree to include a limitation of liability provision, it may have no qualified contractor willing to undertake its project, or none will do so without a significant amount—a cushion—added to the contract amount. Faced with either scenario, an owner often agrees to a limitation of liability provision. This is however not a one-way street. Owners also limit their liability through a combination of provisions, such as change order and notice provisions establishing the conditions for payment for extra work, and waivers of other types of payments and damages, such as delay, indirect, and consequential damages (such provisions are beyond the scope of this practice note).
Amount of the Limitation—Possible Amounts and Factors
As noted in the sample provision above, the amount of the limitation can be related to the contract sum. The contract sum is the amount that the owner is to pay the contractor for the work to be performed under the EPC contract. The limitation amount can be equal to or a portion of that contract sum. Alternatively, it may be a multiple of the contract sum, especially where there is applicable insurance. The amount of the limitation can also be a fixed-dollar amount unrelated to the contract sum.
Five factors that drive down the amount of the limitation, and thus are relevant in negotiation of the limitation of liability provision, are as follows:
Of course, the last two circumstances are generally relevant to the negotiation of any significant contract clause.
Issues to Be Aware of When Tying the Limitation of Liability to Insurance
Liability for damages related to the EPC contract may be limited to the amount of the contractor’s applicable insurance coverage as opposed to the contract sum or a portion thereof. If the owner and the contractor plan to tie the liability limitation to the contractor’s insurance coverage, then the following issues must be considered when drafting the contract language to avoid uncertainty in the event of damages:
Nothing less than the Insurance Bargained for in the Contract. Most would agree that the contractor should bear the risk if it fails to carry the amounts and types of insurance required of it under the EPC contract. For this reason, the parties should consider adding language similar to the following, to any insurance-based limitation of liability provision:
“If the Contractor fails to maintain the contractually required insurance, in no event shall the Contractor be liable for an amount less than the coverage amount that would have been provided if the Contractor had maintained such insurance.”
Finally, it should be kept in mind that the option of tying the liability limit to insurance and to a specific monetary amount can be combined. For example, liability for damages related to the contract may be capped at the higher of available insurance proceeds or a set amount—for example $500,000.
Common Exclusions from the Limitation of Liability
When drafting a limitation of liability provision in an EPC contract, the items detailed below are commonly excluded.
Lexis Practice Advisor: For comprehensive coverage of a host of transactional law topics, including more practical guidance and forms related to construction contracts, visit Lexis Practice Advisor. Click this link for a free 7-day trial.