Mumbai, Oct. 6 -- Limitation of liability provisions are essential instruments of commercial risk allocation in large-scale construction, engineering and infrastructure projects. Such projects involve substantial financial exposure arising from delay, defective workmanship, design failures, disruption, third-party claims, loss of revenue and loss of profit. Parties, therefore, commonly negotiate contractual provisions that determine, in advance, the extent of their potential liability. These may take the form of an aggregate monetary cap, exclusions of specified categories of loss, claim-specific limits or express carve-outs for serious misconduct.
The commercial rationale for such provisions lies in the principle of freedom of contract. Sophisticated commercial parties are generally entitled to allocate risks between themselves and to reflect that allocation in the contract price. A contractor may, for example, accept liability for defective performance subject to a defined ceiling, while an employer may retain risks relating to site conditions, approvals or changes in law. A liability cap may consequently assist parties in pricing the project, arranging insurance and assessing their maximum financial exposure...
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Published by HT Digital Content Services with permission from Construction World.