Background
The concept is not new – parties committing to provide work or services decide to write down what each expects of the other: a scope of work, a mechanism for payment, some general provision for timelines, changes, and warranties or the like.
More sophisticated engagements may (or may not) track with more sophisticated contracts, but it is always critical to review and understand anything intended to be a confirmation of what is committed. A balanced contract is one that is equitable in the assignment of duties, authority and risk. While anticipating how the job will proceed successfully, it also maps contingencies if circumstances should go sideways. Clarity is key to ensuring that no one should be caught short or surprised to learn what they have committed.
Standard Forms
Especially where standard forms of agreement are presented, there is often reluctance to ask for or make any changes. In their original form, documents generated by representatives from across the industry, like the Canadian Construction Documents Committee (CCDC), are usually fairly balanced but if they have been amended, usually by supplemental conditions, you need to be aware of the implications. Suggesting that you want to discuss revisions – that a contract should be negotiated – should not itself raise suspicion: it is intended to ensure that the contract is a good fit with expectations. Questions should be taken as a sign of prudence and amendments proposed as appropriate so that the agreement reflects what is acceptable to everyone. The likelihood of misunderstandings, deviations in scope, disputes, and litigation increases significantly if the contract is not clear or does not accurately represent what the parties agreed. There should be no harm in asking about any opportunity to discuss contract terms (remembering always that, in procurement situations, you need to know up front if you have already agreed to use the form set forth simply by participating, and be careful if there is concern about presenting qualified bids).
Contract Negotiation
In most basic terms, there are two concepts to consider for managing potential liability: (a) anticipating and limiting potential liability and (b) providing for how that liability will be covered. Coverage is often tackled by clear insurance obligations: setting out who will arrange to have what coverage and who is covered by such policy of insurance. Anticipating and limiting liability is accomplished by express terms within a written contract that allocate risks between the parties – limitation of liability clauses. Usually, they confirm who will be responsible in the event of identified circumstances and confirm, limit, or cap that party's liability. Common limits will restrict liability to a fixed dollar amount, to re-performance of the work, and to claims occurring within a fixed time and/or of a specified type (such as direct, indirect, consequential, liquidated, or profits).
Managing Liability
Intuitively, limitation of liability clauses should be preferred by all parties to the contract as a means to effectively manage potential exposure and align risk with available coverage. When circumstances result in them being called into service the first consideration is whether the loss or claim falls within the clause. Even when it does, one side may regret having agreed to the limiting terms. Limitation of liability clauses may be challenged if they are seen to be contrary to public policy or unconscionable, or if they are in breach of the fundamental obligation between the parties (as to what each expected of the other), but as a general rule, they are upheld by the Courts as a legitimate as parties generally have freedom to contract.
A Familiar Example
As a familiar example to many, the CCDC-2 Stipulated Price Contract (2020) at GC 13.1 addresses liability between the parties for a variety of claims and losses and, subject to the specific terms thereof, limits the obligations of one party to indemnify the other:
- for losses for which insurance is to be provided, to the applicable insurance policy, and
- for losses for which insurance is not required to be provided, to the greater of either the contract price or $2,000,000, up to a maximum of $20,000,000.
It also limits liability of one party to the other to direct loss and damage, and excludes indirect, consequential, punitive or exemplary damages. It expressly carves out and does not limit liability to third parties, and it is important to remember that, as a basic concept, parties are free to deal with their own rights and obligations as they see fit but usually do not have the authority to do so for others.
Best Practices
Where possible, best practice is to start a conversation as to how risk will be managed. The CCDC-2 example may not be available or appropriate for every situation, but can illuminate what is reasonable: addressing and tying risk to insurance or to contract value, and the types of losses that are intended to be covered. From the perspective of the contractor, best options would include limiting "any and all claims" to a specific amount or policy limit and not excluding types of claims from the limitation of liability clause, but in any event, terms should always be concise and unambiguous. Timely advice from a contracts professional should be considered an investment in a successful project. Knowing the risk allows more competitive pricing than having to carry risk contingencies, and you never want to gamble your business on a single job.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
