Lessons from Failure: Use Simple Effective Terms

If you are writing a contract, you should really make sure that its terms are simple and effective.

You need to ask:

  1. do both parties understand what it does?
  2. what is it meant to do?
  3. does it actually do?
  4. when would it apply?
  5. how does it transfer risk?

Lessons from failure

In a house renovation project, the architect had written its own net contribution clause stating:

Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you

On the project was a main contractor, the architect, and specialist contractors appointed directly by the Wests to provide a glass box conservatory, wood floors, spiral staircase and kitchen.

Simple?

A term is simple if both parties understand what it does (Q1).

The clients said they did not consider the clause when the appointment was being made. The architect may not have understood it (as he never explained it). As the courts involved interpreted it differently,  I cannot say that the term was simple.

Effective?

The term was intended to ensure that the architect would only be liable for its share of any losses suffered or compensation claimed by the clients (Q2).  It overturns the principle of joint and several liability ie each responsible party can be sued for all losses.

What the term actually does (Q3) was disputed. Did it cover any contractors or just the specialists?

  • The TCC construed the limitation clause to include these specialist contractors but not the main contractor.
  • The Court of Appeal disagreed and reinstated the contractor into the clause.

The term applies (Q4) when more than one company on a project is responsible for the same losses – typically a combination of poor design/supervision (the consultant) with poor workmanship (the contractor). The actual impact of this term became critical due to the insolvency of the main contractor. Under the principle of joint and several liability, the architect would be responsible for all losses caused by their poor design, including those resulting from poor workmanship.

One side-effect of the term is to protect the architect from the risk of the contractor becoming insolvent – and not being able to pay their share of the damages. Essentially, the term requires the clients to bear  the risk of the contractor’s insolvency (Q5) – a fact they were completely oblivious to! Even the architect accepted that there were no circumstances in which the term would benefit the clients.

What should you do?

Next time you are writing a term into a contract, see how many of the five questions above you and your client can answer.

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