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Does your contract contain an effective cap? Limiting liability for UK contractors and consultants

March 2025

In a difficult contractual market, a key risk management mechanism is to include appropriate limits on liability in contracts. These clauses are designed to exclude or cap the liability a contractor or consultant might face in the event of certain future claims and, if used correctly, can significantly improve exposure to risk (or loss) and help to safeguard financial stability overall. This update outlines core concepts related to limits on liability and how they can be drafted, together with recent case law on them.

What are liability limits and why are they important?

Limits on liability are contractual terms that exclude, restrict, or cap a party’s liability for, or the damages or compensation one party must pay to another for, a breach of contract, negligence, or other types of claims. These clauses have increasingly become market norm in the construction industry and public sector, for example as suggested in the Construction Playbook and standard industry contracts (such as the JCT Design and Build 2024 Edition and Guidance). However, it is still common to see contracts being issued in the public and private sector without a limit of liability being included, which means that liability under the contract is unlimited.

Limiting liability offers certainty and predictability, enabling contractors and consultants to manage their overall profit, solvency, and risk exposure more effectively (including risks or claims from clients, other project parties, or potentially third parties). By establishing and implementing appropriate contractual limits, parties can avoid or reduce losses that may threaten their future operations. Using effective and proportionate caps on liability may also assist entities in obtaining and renewing professional indemnity insurance, as well as helping reduce the risk of liability arising above the level of insurance (which is in both parties’ interest).

It is also crucial to understand that limits of liability should not be confused with the contract value/profit, nor with the limits of indemnity required under applicable insurance policies. This is a common misconception in some parts of the construction sector. Where a contract requires a party to insure a risk up to a certain amount, they may not solely be liable for that risk or may be held liable for more than that amount (i.e. the limit of insurance in place does not necessarily act as a cap unless indicated by the parties and this is reasonable).

Different types of limits of liability

By way of illustration, different approaches to such caps include:

• Aggregate limit of liability: an ‘aggregate’ limit is viewed as a total cap on liability in respect of the contract and will apply as agreed between the parties and to the extent permitted at law. It will also be important to consider the whole contractual matrix. For example, if a contractor or consultant is seeking to limit liability on an aggregate basis the parties should also consider how the cap applies to collateral warranties or third party rights notices under the contract, and other applicable project or contract documents.
• Per claim cap (or series of connected claims): a ‘per claim’ limit applies to each claim (or group of connected claims) made against the party under the relevant contract – meaning that the total cap will continue to increase commensurate with the number of claims received over the course of a project. Whilst liability will still be ringfenced, the per claim approach is less predictable and so exposes a contractor and consultant to greater risk than an aggregate cap.
• Single aggregate figure or annual cap which applies for the contract duration: such a cap can be defined by a fixed period (e.g., 12 months from the contract date) or a rolling period (e.g., 12 months ending from a specific event or when a claim is made). Such caps can often be unclear without clear drafting, in particular what the basis is for determining which yearly cap applies.
• Use of agreed sub-caps or exclusions: i.e. different caps to reflect different types of loss or insurance carve outs (such as for fire safety or asbestos), liquidated damages, and for other liability (such as for indirect or consequential loss). The specific wording of each cap and how this interacts with the other limit of liability will need to be considered and managed.

Examples of what cannot be limited

Efforts to limit liability under business and consumer contracts are governed by principles and legal requirements. Under English law, these include case law from the courts on the incorporation of contractual provisions, and their restrictive interpretation, and public policy considerations. Legislative measures, such as the Unfair Contract Terms Act 1977 (UCTA), also provide controls. This means that under English law, certain liabilities cannot be reduced or limited (including the examples outlined below). Contract terms attempting to limit such liabilities will be void.

Common examples where liability cannot be restricted in business to business contracts, excluded or capped include:

• Unreasonable under UCTA: UCTA requires all limits of liability to be “reasonable.” Several factors are taken into account when considering whether a limit of liability is reasonable, including the respective bargaining strength of the parties, the scope of contractual remedies or exclusions, insurance considerations, and the choice of terms, all of which are important and influential. Additional guideline factors may include which party proposed the terms (and whether these are standard terms), the rationale behind the clause, any inducements offered, past practices, dealings, or trade customs, subsequent dealings between the parties, ability to pay, financial implications, and the extent of visibility or clarity of the notice of the specific limitation clause during pre-contract negotiations.
• Certain statutory rights: under UCTA, limitations on liability for breaches of implied terms concerning the quality and fitness of goods are generally unenforceable. Further, clauses limiting or restricting liabilities under specific statutes, such as liability in respect of the Defective Premises Act 1972 will be void. In Mr and Mrs Vainker v Marbank Construction Ltd & Others [2024] EWHC 667 (TCC), a standard RIBA net contribution clause was held to be inconsistent with the legislative position in Section (3) of that Act and was ineffective in limiting the architect’s liability in this regard.
• Death or personal injury caused by negligence (or a lack of reasonable care): such exclusions or restrictions on negligence liability are ineffective under Section 2(1) UCTA. In addition, where UCTA applies, limiting financial or property damage sustained because of negligence will also be deemed void unless this provision satisfies the reasonableness test.
• Fraud, including fraudulent acts or omissions or fraudulent misrepresentation by a contracting party: exclusions have not been enforced for public policy reasons, although allegations that a pre-contractual representation was fraudulent must meet a high burden of proof. A fraudulent misrepresentation may be made knowingly, without belief in the statement’s truth, or even recklessly.
• Rights arising by operation of law: explicit and unambiguous language is required for a party to waive legal remedies for a breach of duty or other legal rights.

It is important that any limit of liability considers or reflects the above. Each type of provision will be fact sensitive and considered by reference to the various factors outlined above, under statute, and in case law.

In addition, certain sectors or clients may seek to present carve outs to the agreed cap. Given that such carve outs erode the benefit of the clause, these must be carefully reviewed and/or resisted as appropriate. For example, concepts of ‘wilful default’ or ‘gross negligence’ should be defined in the contract and any exclusions limited accordingly. Further, attempts to carve out any sums covered by insurance or insurance proceeds may have a significant impact on the overall risk profile, meaning that the limit of liability provision will provide limited protection. There could also be fertile ground for factual or evidential disputes as to the application of such carve outs to claims between the parties in practice.

Key commercial considerations

The extent of any cap is driven by the commercial context and the scope and risks of the contract. For example, the cap may be an agreed amount or determined by reference to the contract value, a fee percentage, or (most commonly) the supplier’s insurance limit. In doing so, it will also be important to consider the whole contractual matrix.

An exercise should be conducted to decide and define which liabilities to accept, cap, or exclude by reference to the nature of the contract, scope of services, the parties’ intent, applicable insurance requirements, and how the courts may ultimately interpret and apply the relevant provisions. Other factors influencing the apportionment of risk include the availability and cost of insurance cover, political and economic considerations, relationships and commercial negotiation strength, and the specific project type. Parties may be more willing to assume responsibility for a risk if they are well-placed to manage it and understand that their exposure is not boundless: limitation of liability is therefore commonly associated with risk allocation processes.

What the courts say and recent case law

In addition to the statutory rules that govern such terms, there have been several recent court decisions in relation to the enforceability of caps. These emphasise the importance of clear, precise, and unambiguous wording in limitation or exclusion clauses, whilst also making clear that the commercial context and the bargaining power of the parties will be key in determining whether a cap is enforceable.

• Cap lower than insurance unenforceable: Ampleforth Abbey Trust illustrates how the overall visibility of a standard term, here in a professional consultant’s appointment, can influence its reasonableness and subsequent enforceability under the requirements of UCTA[1]. When negotiating with a client who lacks commercial experience or legal advice, it is important to direct their attention to any applicable cap on liability before finalising the contract, especially if the terms differ from those included in earlier contracts.
• Furthermore, the judgment suggested that a liability cap might be unreasonable and enforceable if it is substantially lower than the level of professional indemnity insurance required under the appointment (i.e. a lower amount or the total contract fee). This does not mean that a cap lower than the required level of insurance will always be unenforceable, but if a cap is lower or substantially lower than the insurance level, those relying on the cap should take steps to become comfortable based on the context of the contract that it is not open to challenge. To avoid uncertainty, it may be advisable to document the communications or negotiations exchanged before entering into a contract.
• Asbestos Exclusion: Persimmon Homes Ltd and others concerned limitations and exclusions concerning pollution, contamination, and asbestos in a professional appointment for design and development services at a site where contamination was acknowledged by the parties[2]. These provisions were enforced by the court and later upheld on appeal. This case illustrated that courts are increasingly willing to uphold agreed limitations or exclusions when these have been agreed upon by commercial parties of equal bargaining power, especially where risk has been allocated accordingly.
• Need for clear language: potentially vague terms may result in a different interpretation than intended – in Tata Consultancy Services Ltd a single, aggregate cap on all the relevant claims, losses and damages was applied (as opposed to multiple, separate caps on liability)[3]. The court recognised that the relevant clause was “…far from a model of clarity…” whilst considering the correct construction of it. Without using careful wording within the cap, and consideration of how this relates to claims received, a party on the wrong side of a decision may face a different, or greater risk or financial consequence than may otherwise have been anticipated.
• Exclusions in Standard Terms: in South East Water Ltd the court considered the enforceability of a limitation clause included in standard contracts in light of UCTA, reinforcing the value of transparency and the need for clear drafting reflecting the parties’ intent during contract formation[4]. The provision aimed to restrict South East Water’s claim related to a faulty electronic automated meter reading unit to the cost of an equivalent replacement device and any incidental expenses of the warranty. Here the relevant clause had been openly introduced in the parties’ communications following a request for clarification during negotiation of the contract. The clause was therefore considered to be reasonable. This underlines the importance that caps are clearly drawn to the other parties’ attention, negotiated, and not hidden within lengthy standard terms of business or terms and conditions in order to maximise the likelihood of these being applied.
• Interest and set off: Topalsson GmbH highlighted the importance of clear drafting including by reference to other clauses or contractual mechanisms[5]. The Court held that “Liability… under this Agreement” did not impact contractual interest and the application of the agreed cap to set-off, was also considered. The decision suggests that it is sensible to outline whether or not the cap on liability applies before (or after) calculating the balance due to a party once all claims and cross-claims have been considered.

It is important that the points arising from these decisions are considered when drafting and negotiating limits of liability going forward.

Concluding thoughts

Understanding, negotiating, and drafting effective limits of liability is crucial for managing risk in construction and consultancy contracts. Such provisions not only protect a business but also provide clarity and predictability in future contractual relationships. By actively considering risk allocation and implementing clear and effective limitations on liability where appropriate, the parties will have a better understanding of the associated risks and costs when agreeing scope and on a price. This approach can also simplify the final contract negotiations and make the contract itself more cost-effective.

Recent case law has set out some important points in relation to caps of liability, including providing helpful comfort that clear limits of liability between commercial parties of equal bargaining power should be enforced. This, along with helpful industry developments provide support for those looking to limit liability. It is important though that when drafting and negotiating limits of liability the key points from these decisions are taken into account, as well as the general limits on capping liability which we mentioned above.

For further guidance to navigate the complexities of limits of liability or bespoke advice on any of the topics covered above and how these can be used in your contracts in the meantime, please contact Beale & Company’s Andrew Croft or the Contracts and Project Advisory Team.

[1] Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012]

[2] Persimmon Homes Ltd and others v Ove Arup & Partners Ltd and another [2015] & Persimmon Homes Ltd v Ove Arup and Partners Ltd [2017]

[3] Tata Consultancy Services Ltd v Disclosure and Barring Service [2024]

[4] South East Water Ltd v Elster Water Metering Ltd [2024]

[5] Topalsson GmbH v Rolls-Royce Motor Cars Ltd [2024]

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