Beware of the Cap

01.01.07

Beware of the Cap

The recent case of Shepherd Homes Limited v Encia Remediation Limited and Green Piling Limited discussed whether or not the level of professional indemnity insurance required to be maintained under a contract could impact on the validity of a financial cap and also highlights the importance of reading the other party's terms and conditions carefully.

The case relates to Shepherd's development of homes at Hartlepool where some of the houses started to show signs of cracking which was caused by settlement. Shepherd brought an action against Encia claiming that it's defective piling design resulting in the cracking. Encia blamed Green Piling, its sub-contractor.

The preliminary issue put to the court related to a cap in Green Piling's sub-contract. Green Piling's liability was limited by their standard terms and conditions (which had been accepted by Encia) to the contract price which was just under £250,000. It is worth noting that the overall losses incurred were estimated to be in excess of £10M.

Encia argued as follows:- firstly that the cap was unfair in terms of the Unfair Contract Terms Act 1977, secondly Encia argued that they had been misled over discussions relating to Green's PI cover. Green Piling held and were required to maintain PI cover at £1M. Encia argued that the obligation to maintain PI cover at £1M was a waiver of Green's cap on liability.

Justice Clark held that the obligation to maintain £1M PI cover in the aggregate was not contradictory to a cap at a lower figure as the insurance may have to be split between a number of claims. He also held that the cap was not concealed, was not unusual and Encia enjoyed a stronger bargaining position - therefore it was not unfair in terms of the act.

This case shows that caps will be interpreted strictly by the courts and highlights that terms and conditions should be reviewed carefully. Encia assumed that because there had been detailed discussions regarding the level of PI cover that the cap would somehow be extended to £1M.

For more information please contact Lesley Mackenzie on 0131 656 3737 or at lesley.mackenzie@brodies.com