IACCM Contract Management Forum

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2020-06-08 13:37:01

Limitation of Liability on Engineering Subcontractor's warranty coverage

In my opinion, besides redesigning, they should also cover the Contractor's damages in case of material/equipment replacement for faulty design. What is the dominant market standard?
 •   2020-06-10 09:49:31
Dear Muhammed
It is a little difficult to be precise without knowing a bit more context but on the face of it, if all the sub-contractor is committing to do is to redesign any design which turns out to be faulty, that sounds incredibly restrictive. It means that all of the risk of delays and the additional cost of procuring and replacing the faulty element sits with the prime contractor.

Whilst it is normally reasonable for any specialist sub-contractor in that situation to look to cap their potential liability, I think you should expect the sub-contractor to at least bear some element of the resulting financial damage. The exact level of any cap is obviously a matter for commercial negotiation and the value of the sub-contract in question will have some influence on what that cap should be. One must also factor in whether a contract which simply limits liability to redesign would be subject to challenge. Again, this depends upon many factors but certainly under English law it is quite likely that a contract that accepts no financial liability beyond undertaking a redesign would not be enforceable.

If you are speaking with the sub-contractor, you might suggest a financial cap of some sort. Quite apart from improving the chances of the contract being upheld, such an approach shows confidence in the sub-contractor's abilities and makes concluding contracts easier (saving both time and money). I have also emphasised to clients in the past that increasing any cap on liability does not necessarily increase risk since risk is primarily a factor of how likely an event is to happen and if the likelihood is very low then increasing the cap has minimal impact on the level of risk.
 •   2020-06-10 09:55:45
The answer depends on the sub-contractor's remit of obligations. If the sub-contractor is designing the equipment, then the Contractor should ideally be able to flow down to the sub-contractor all damages incurred by the client up to an agreed financial Cap where the underlying cause is the sub-contractor. Sometimes this is not that easy to prove, though, if the design and manufacture are separated. It will also depend on the size of the sub-contractor as to the amount of liability it could reasonably absorb. Insurance may also be a relevant factor.
 •  TRADING AND AGENCY LTD  •   2020-06-10 10:24:11
@ Anonymous • 2020-06-10 09:49:31

Thanks a lot for the response.

Notwithstanding my own confirmation bias, I fully appreciate the reasonableness in your response. It is quite difficult for me to understand why Engineering Subcontractors would limit their responsibility to just redesign and not take any responsibility/liability in rectifying the resulting damages such as procurement and reinstallation costs when actually their Professional Indemnity insurance is actually meant to cover such damages? Especially more so when Limitation of Liability provided under the insurance coverage is generally way higher than the value of Contract.
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