"Limitations of Liability": When Can Damages Exceed Liability Caps?

Fraud or Willful Misconduct:

In construction contracts, the limitation of liability clause is generally not enforceable in cases of fraud or willful misconduct. If a party intentionally engages in deceitful or harmful behavior, courts or arbitration panels often rule that such limitations do not apply.

This is because most contracts, as well as many legal frameworks, expressly exclude liability caps for actions involving fraud, gross negligence, or deliberate misconduct. The reasoning is that allowing a party to limit its liability for willful wrongdoing would incentivize unethical behavior, which is contrary to public policy.

For example, in an oil & gas project, if the contractor intentionally uses substandard materials to cut costs, resulting in equipment failure or environmental damage, the limitation of liability may be disregarded.

Breach of Fundamental Obligations:

In some jurisdictions, the limitation of liability clause may not cover breaches of fundamental obligations. These are obligations that are central to the purpose of the contract. For example, if a contractor fails to deliver the project on time or violates critical safety standards, this could be considered a breach of a core contractual duty.

Courts/ Arbitration Tribunals may decide that such fundamental breaches are too severe to be shielded by a liability limitation. In such cases, the affected party may claim damages beyond what the contract’s limitation of liability clause specifies, especially if the breach undermines the contract’s overall objectives.

In a power plant construction project, if a contractor fails to complete the installation of crucial safety systems, this fundamental failure could negate the limitation clause, allowing the client to claim full damages for the resulting losses.

3. Statutory Exceptions:

Legal obligations imposed by national or local laws may override a contract’s limitation of liability clause. Statutes related to health and safety, environmental regulations, or consumer protection laws often impose obligations that cannot be waived by private agreements.

For example, failure to comply with strict environmental standards or workplace safety regulations could expose a contractor to liabilities beyond the contractual limitation. In such cases, statutory exceptions ensure that parties remain accountable for non-compliance with critical legal standards, even if the contract tries to limit liability.

Building regulations in residential construction may prohibit contractors from limiting liability for non-compliance with fire or safety codes, ensuring accountability despite contractual clauses.

Unenforceable Clauses:

A limitation of liability clause can be rendered unenforceable if it is found to be overly broad, unfair, or unconscionable. Courts may strike down such clauses, especially if they were imposed by a party with disproportionate bargaining power or if they create a significant imbalance in the parties’ responsibilities.

For instance, if a contract allows one party to escape almost all forms of liability, a court may find this unfair to the other party and refuse to enforce it. The principles of fairness and reasonableness play a key role in determining the enforceability of such clauses.

Consequential Losses and Carve-Outs:

Many contracts include specific carve-outs from the limitation of liability for certain types of damages. Consequential losses, such as loss of profit or business, are often excluded from such clauses.

Additionally, specific provisions related to liquidated damages for delays or intellectual property infringement might be explicitly excluded from the liability limitations. If these carve-outs exist, the aggrieved party may recover these excluded damages, even if the rest of the contract is subject to a limitation of liability clause.

In oil & gas EPC contracts, damages related to project delays or performance shortfalls may be excluded from the limitation, allowing the employer to recover substantial sums for lost production.

Indemnities:

Indemnity clauses can provide another pathway for recovering damages beyond the limitation of liability. Contracts often contain indemnities for particular risks, such as third-party claims, property damage, or personal injury, which may not be capped by the general limitation of liability.

This means that even if a limitation of liability applies to direct contract breaches, the indemnified party may still be able to claim full recovery for specific liabilities covered under indemnity provisions, offering broader protection.