Limitation of liability clauses in contracts for large-scale international projects


Master's Thesis, 2018

61 Pages, Grade: 2,0


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Structure

1. Introduction

2. Contracts for large-scale international projects
2.1. Contract management in megaprojects
2.2. International plant construction contracts
2.2.1. Contract type: International plant construction contracts
2.2.2. International elements: Templates for international plant construction contracts
2.2.2.1. FIDIC contract templates
2.2.2.2. The Orgalime contract template
2.2.2.3. Basic principles in international contract templates
2.2.3. National elements in international plant construction contracts
2.2.3.1. The type of plant construction contract in German law
2.2.3.2. Contract templates in German law

3. Limitation of liability clauses
3.1. Liability types
3.1.1. Typical regulatory needs of megaprojects
3.1.2. Typical regulatory needs of liability in international construction contracts and templates
3.1.3. Regulatory needs related to liability for megaprojects based on the CISG
3.1.4. Typical regulatory needs related to liability in megaproject contracts based on German law
3.2. Types of limitation of liability clauses
3.3. Limits to limitation of liability clauses
3.3.1. Limits to the applicable law clause
3.3.1.1. Control of general terms and conditions
3.3.1.2. Direct damages
3.3.1.3. Defects liability and defects clauses
3.3.1.4. Indirect damages
3.3.1.5. Liability based on tort of contractor
3.3.2. Limits to the jurisdiction clause
3.3.3. Limitation of liability clauses in international contract templates
3.3.3.1. Defects liability
3.3.3.2. Comparing limitation of liability clauses

4. Strategies for limitation of liability clauses
4.1. General regulatory needs
4.1.1. Agreement on applicable law
4.1.2. Choice of jurisdiction
4.1.3. International elements
4.2. Specific regulatory needs
4.2.1. Type of clause
4.2.2. Limits to the clauses

5. Conclusions
Bibliography
Appendix 1. Terms
Appendix 2. Figures

Management Summary

Participation in large-scale international projects (also called megaprojects) has a significant impact on multiple international parties, especially in the industrial plant construction sector. On the one hand, the participation of multiple parties can lead to higher levels of technological achievement. On the other, this participation also leads to greater risk and liabilities for parties. Contract management plays an increasingly important role in megaprojects; it is aimed at identifying and limiting risks that are typical to international industrial plant construction contracts and specific to megaprojects. However, to use these contracts optimally, it is essential to have a comprehensive overview of the main issues of liability. Nowadays, 89% of large German companies consider limitation of liability clauses to be highly important.1 This is why the main objective of this research was to explore knowledge and insight in regard to limitation of liability clauses. The core questions were addressed such as the important types of liability, the main types of limitation of liability clauses and the restrictions of the limitation of liability clauses. The methods applied to collect and analyze the relevant data were systematic approach, key word search, snowball system and discussions with legal experts from similar megaprojects.

The results of this research highlight that risk allocation strategies for limitation of liability clauses depend on many factors, in particular the type of international industrial plant construction contract used in a specific country and national and international contract templates are important. Other relevant factors include choice of applicable laws and jurisdiction. The findings of this research indicate that though many different risk allocation strategies are possible, according to statistics, most German companies agree on German law and opt for non-state courts.2 Moreover, many contracts are based on different contract templates with varied allocations of risk. In many cases, these contracts are considered to be general terms and conditions and can become invalid. In general, depending on the megaproject in question, different risk allocation choices can bear different risks. The author provides a checklist as a starting point for other researches and recommendation for legal experts in megaprojects. The results of this research suggest that legal experts should be aware of the typical and specific regulatory needs of megaprojects in order to incorporate these needs into contracts.

1. Introduction

As an exporting country and an important international player, Germany participates in many large-scale international projects. Interest and demand are rising; it is expected that by 2020, Germany’s yearly volume of investment in megaprojects will rise by 70% in the infrastructure, energy and space research sectors. Participation in these megaprojects will lead to higher prestige, greater technological achievement and other positive outcomes.3 However, such projects often involve higher risks and a more significant impact. Indeed, some such projects fail or even become financial burdens for the entire country because they lead to enormous costs and additional time. Examples include the Berlin Brandenburg Airport and the Sydney Opera House.

Contract management plays a special role in megaprojects and has become an integral part of risk and project management. In international contracts, relevant risks can be minimized, using various approaches and strategies. However, the topic is broad and complex, because different large-scale international projects use different contracts. For this reason, the scope of the research was reduced to the international plant construction contracts as they are the most relevant. Among all contractual provisions, limitation of liability clauses were chosen for research because they increasingly influence the decisions of risk minimization. Limitation of liability clauses are contractual provisions which specify the damages that the contracting party is liable for in the event of breach of contract. Therefore, it is important to explore how limitation of liability clauses can be optimized because in large-scale international projects, damages can amount to enormous sums.

When outlining the current situation, it is important to mention that international plant construction contracts combine national and international elements. While typically based on a national legal system, these contracts consider international usage and principles. Moreover, specific patterns and templates such as Fédération Internationale Des Ingénieurs-Conseils4 (FIDIC) and Organisme de Liaison des Industries Métalliques Européennes5 (ORGALIME) are established in the market and widely used. Most of such template contracts are known and have judicial decisions and cases. Consequently, companies’ and investors’ decisions to use them are usually considered less risky.

Nevertheless, regulatory gaps and the limits set by applicable laws, jurisdictions and usage should be considered in relation to limitation of liability clauses. In Germany, strict limits are placed on the control of general terms and conditions in limitation of liability clauses. This topic is highly relevant; the Federal Ministry of Justice and Consumer Protection has recently confirmed the need for reform in German law, and the 2018 coalition agreement supports this demand.6 The business sector in particular needs more flexible limits to liability to create economically reasonable and legally certain limitation of liability clauses.

The main problem of my research was the impact of limitation of liability clauses in international plant construction contracts. This is why the main objective of this research paper was to obtain relevant knowledge and insight concerning existing strategies aimed at optimizing the limitation of liability clauses in international plant construction contracts in large-scale international projects.

The core questions are as follows:

What limitation of liability clauses should be included in contracts to address risks?

What risks and liability are addressed in these clauses?

What is the threshold for limits to liability in general?

What strategies exist to change the thresholds for limitation of liability?

What impact does each strategy have on the decision-making processes of contract parties?

A systematic approach was employed to search for relevant sources and data. To understand the global picture and identify corresponding issues, the current study examined recent discussions, research and surveys on the practice of similar large-scale projects. These sources confirmed the necessity of further research. Despite the importance of the topic, few pertinent sources existed and those found mostly focused on limiting the risks of megaprojects. Further research focused on limitation of liability clauses in international plant construction contracts to evaluate a specific but typical and important issue related to other international projects. Other recent publications on the topic were found using keywords and snowball research. Recent judicial decisions and cases were also examined. Additionally, the survey conducted in 2016, by the German Chamber of Trade and Commerce, on behalf of the German Federal Ministry of Justice and Consumer Protection and which was supported by 1,200 German companies of different size was consulted. This survey made a significant contribution to this research.7

In the second chapter risks addressed in megaproject contracts and the specific nature of international plant construction contracts are discussed. The third chapter defines the most important regulatory needs in respect to limitation of liability, types of clauses and the threshold for limits to these clauses. In the fourth chapter, possible strategies are presented based on statistical data collected in practice. Gaps in the adaptation of liability clauses to megaprojects are identified, and possible solutions to improve these clauses are suggested.

Different parties involved in international megaproject contracts can use the proposed research to gain a broader overview and greater clarity on some of the most important liability clauses. Additionally, parties can obtain a greater understanding of the free room to maneuver in the formulation or adaptation of the limits of limitation of liability clauses. This knowledge will make understanding of the impact more transparent, provide possible solutions and simplify the decision-making process when using templates for megaprojects.

2. Contracts for large-scale international projects

2.1. Contract management in megaprojects

When defining the most important terms, it is essential to understand the specific characteristics of megaprojects and the link between the concepts of risk and liability. Risks can be defined as chances of danger or loss8 or the possibility of financial loss.9 Since chances cannot be precisely measured, risk management combines the forecasting and evaluation of risks with identification of procedures to avoid or minimize their impact.10 Liability is typically defined as the condition of being actually or potentially subject to a legal obligation.11 It can also be defined as legal responsibility for one's acts or omissions; failure to meet that responsibility can result in damages and have legal repercussions, such as a lawsuit or a court order to perform due to a contract breach or statute violation.12 Limitation of liability clauses are considered as one risk minimization strategy deployed in contract management.

Large-scale international projects are also called megaprojects and they are characterized by several features. They often have high costs, in particular, more than US$1 billion per project. Such projects involve many different processes and the creation of different constructions, buildings, plants and new technologies; as a result, they are often considered highly complex projects. Moreover, they have a long duration; it usually takes many years to accomplish them. They involve multiple public and private stakeholders and have impact on millions of people.13 Last but not least, they incorporate many risks.

The review of the literature revealed that only a few relevant studies examine risks in megaprojects, but optimal solutions are urgently needed in practice to control and reduce risks resulting from the impact of such projects.14 Esty suggests that this surprising asymmetry has two main explanations. First, megaprojects often have specific features and particular issues to solve. The specificity makes it difficult to consolidate the information collected and find systematic errors. The second explanation is that the data is protected and not easily accessible to the public.15

Some authors have analyzed possible reasons for megaproject failures in order to find similarities. Gausling argues that megaproject failures are mostly due to false estimations of risk in the preparation phase.16 For this reason, legal experts emphasize the importance of contract management as an integral part of project and risk management that should be considered from the first planning phase.

Plant construction law experts Malikwitz, Mettelstadt et al. analyzed various projects in practice to develop a guide for plant construction. The researchers identify chronological phases and functional activity areas for each phase, such as legal, economical, technical, and operational area. In each area they first highlight the standard risks associated with these phases and common risk management strategies. Then the researchers suggest other possible risks which can occur in different chronological phases and functional activity areas. For instance, in the activity area Contracts and Insurance for the chronological phase Project Preparation they emphasize that specific legal requirements for construction activities abroad should be considered because they can differ from local legal provisions in home country.17

Gausling identifies three types of strategies of risk minimization:18 risk allocation, risk reduction and risk transfer or substitution. Risk allocation or risk sharing is typical for the Project Finance. This type consists of the sharing of risks between the parties based on the evaluation of the risk capacities of the contract parties. The contract party usually can accept those risks, which do not exceed its risk capacity. Risk reduction includes all measures that can diminish the number of identified risks or the extent of the consequences if these risks occur. The type of risk transfer or substitution is based on relocation of the risks to third parties such as insurance companies. Other instruments to substitute the identified risks are a guarantee or a letter of credit issued by a credit institute.19

Risk reduction was mentioned most frequently in relation to contractual and legal risks that occur in foreign countries.20 In total, 52% of publications address risk allocation; most use contractual methods and identify various parameters for project success while also indicating the optimal risk allocation among parties. Further analysis revealed that 32% of publications discuss the combination of risk reduction and allocation and 32% address risk transfer or substitution. Most publications (64%) address risk reduction.

Gausling analyzed the results of all recent publications (from 1990 to 2014) on risk management in large-scale projects and found that 73% of authors discussed contractual risks while 67% focused on legal risks in foreign countries. In discussions of risk in the international context, authors mentioned the collision of legal norms and different interpretations of legal concepts.21

Slaghuis believes that contract management of megaprojects should include analysis of interests, possible behaviour scenarios and its impact on all parties involved as a preparation for contract negotiation. German literature unfortunately often does not actively discuss the phase of contract negotiation, however this phase should be clearly considered. Slaghuis highlights the risk of incomplete contracts. Incomplete contracts are contracts with unclosed regulatory gaps; such gaps are usually based on conscious decisions not to regulate all risks in contract. Unclosed regulatory gaps can be fixed through renegotiation. The strategy behind such decisions involves saving costs because negotiation will only be necessary if the identified risks occur. Incomplete contracts often include provisions which should close typical regulatory gaps. Moreover, Slaghuis believes that strategies to minimize risk often impact both the contract negotiations and contract draft and should be adapted so that an optimal contract draft can be created.22

Strategies to minimize risk in megaprojects are suggested in several publications and they are mostly based on specific characteristics of the megaprojects. The first of these strategies involves reducing complexity in megaprojects; because it is easier to identify and reduce more risks in smaller projects.23 According to the next strategy, it is important to have the special knowledge, preparation, data collection and additional special education needed to manage risks.24 Many publications mention the importance of balanced risk allocation and consider the interests of the multiple parties involved, including creditors, international contractors and different countries. Optimal contractual solutions allocate risks to all parties so that a project can be completed on time and in a cost efficient and profitable way. For this reason, not only possible risks but also potential (e.g. legal) outcomes for all parties must be identified.25 Another strategy involves optimizing estimation of risks in the preparation phase26 and determining the completeness of risk assessments. Oftentimes, a larger picture of risk management based on fixed risk management standards is missing. According to the black swan theory, an unexpected event can potentially lead to the failure of an entire project. The black swan theory considers atypical events or risks that are difficult to forecast but have a significant impact. A fixed risk management model only considers the factors that can be expected and known, or "known unknowns", and ignores the "unknown unknowns. “Unknown unknowns" mean risks that cannot even be predicted so that they cannot be managed at all.27

Including contract management in all phases is essential. Special methods and solutions can be developed for risk strategies. Not all risk management strategies have been efficient in practice; at the same time, parties’ confidence in such risk estimates increases.28 Hubbard suggests that the optimal solution is based on more sophisticated quantitative methods.29 In contract management, different solutions are offered, such as statistical data and comparative analysis of contractual solutions for various countries.30

2.2. International plant construction contracts

Identifying risks in megaprojects is a complex and significant issue. Decisions can impact millions of people31 and lead to enormous costs.32 It is essential to develop optimal solutions for managing megaproject contracts. While the main risk minimization strategies in such projects can be reduced to three main categories (risk allocation, risk reduction and risk transfer or substitution), the optimal contractual solutions for each project can differ. Not all risks can be minimized through contract clauses; even more needs and requirements must be met to achieve effective protection in megaprojects than in smaller projects. However, possibilities for optimal contract design should be explored. For this reason, the current chapter determines the regulatory needs for international plant construction megaproject contracts. These needs have been recently identified as most important to the limitation of liability.

2.2.1. Contract type: International plant construction contracts

It is crucial to explore the concept of international plant construction contracts because the contract type shapes the content. This contract type is highly ambiguous for many reasons. For instance, international plant construction contracts differ from national contracts, though the former type is influenced by elements of the latter. The most important feature of international plant construction contracts is their dual nature: they always incorporate both international and national elements.

Neither a unified definition of such contracts nor a unified contract exists. For instance, case law of the International Centre for Settlement of Investment Disputes (ICSID) qualifies a long-term construction contract as an investment. A contractor assumes many risks, such as the potential of “any unforeseeable incident that could not be considered force majeure and which, therefore, would not give rise to a right to compensation.”33 Nevertheless, it is challenging to create a unique definition for such contracts in an international format, especially considering the various concepts, interpretations of definitions and components that are as considered to be fundamental in different countries.

The degree of variation in the types of plant construction contracts, risk allocations and legal supports used in different countries is astonishing. In Germany, for instance, the classic model of a plant construction contract is based on contract law for work and labor. The contractor usually bears all responsibility for construction because he or she can control all risks as a result of his or her know-how and experience; this arrangement impacts remuneration. In comparison, in Finland there is no similar model of a plant construction contract as in Germany. Moreover, the principle of freedom of contract allows choosing any model, because there are no specific rules for the contract law for work and labor or construction contract law. In practice, however, Finnish General Conditions for Building Contracts (YSE 1998) are applied.34

No perfect national law or contract type for international plant construction exists. Contract types vary from country to country and feature different national and international elements because contracts are often based on the experiences and values of one country but adapted to the practical needs of other countries. In this way, contracts often feature different advantages and regulatory gaps.

Unified contract elements are needed. In international plant construction contracts, international issues play an important role. These contracts address complex construction projects of a long duration that involve many international parties and risks, including atypical and unknown risks. Moreover, these contracts feature specific characteristics, customs and practices, which are established within the international community.35 This is logical because large international institutions and institutions in relevant business sectors recognize such elements. Including unified contract elements can increase familiarity and confidence among international partners. Consequently, this predictability results in more effective risk allocation. This is why the regular incorporation of unified contract elements in different international plant construction contracts has resulted in the creation of templates for international plant construction contracts. Some countries have such frameworks at national level (e.g. Germany, VOB/B). At international level, various institutions have developed templates based both on international experience and those of different countries.

2.2.2. International elements: Templates for international plant construction contracts

Various templates exist and are based on the regulatory needs identified in practice. These templates address similar issues and offer pre-formulated clauses. Templates help to prevent known risks; they are often considered as checklists used to ensure that all standard regulatory needs specific to foreign legal systems are addressed in the contract draft. Various international organizations have created templates for international plant construction contracts. Notable templates include those of the FIDIC, Turnkey Contracts for Industrial Works of ORGALIME, The Model Form for Process Plant Construction of the Engineering Advancement Association of Japan (ENAA), The Model Form of Contract for the design, supply and installation of electrical, electronic and mechanical plant (MF/1) of the Institution of Engineering and Technology (IET), jointly with the Institution of Mechanical Engineers (IMechE) and The Forms of Contract of the Institution of Chemical Engineers (IChem).

Templates do not create a substitute law or offer a perfect structure; contracts aim to close the legal gaps and allocate the risks within the allowed limits of applicable laws. In other countries, both gaps and risks diverge from the regulatory needs of German plant construction contracts. The regulatory needs of foreign legal systems are often systematized in templates to increase the awareness of parties involved. Risks and regulatory needs for each individual project resulting from specificity require investigations by contract managers and lead to additional costs.36

Typical regulatory needs include price stability, obligations to cooperate, transfer of know-how and protection of know-how, tests, changes in economic or political regime, cost and schedule reliability and limitation of liability. Templates split all risks into general and specific groups of clauses.37 Limitation of liability and special risk clauses are specific clauses.

Specific regulatory needs address foreign contract laws for work and labor. While foreign sales laws have been extensively compared and developed, foreign contract laws for work and labor require solutions. The International Institute for the Unification of Private Law (UNIDROIT) Principles, the United Nations Convention on Contracts for the International Sale of Goods (CISG) and Principles of European Contract Law also focus primarily on sales law. According to Article 3 of the CISG, if “the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services”,38 the Convention does not apply. It remains challenging to compare foreign contract law for work and labor.39 Moreover, German contract law for work and labor is considered as difficult to apply in international context with legal certainty.40

2.2.2.1. FIDIC contract templates

FIDIC contract templates feature a regulatory framework that incorporates the most important and detailed provisions recommended by major international organizations, such as the World Bank. Each template has an individual color label and applies to a specific area. The three templates applicable to and commonly used for megaprojects are the Red Book, the Yellow Book and the Silver Book . They were designed for use between employers and contractors; however, they often cover engineers. A contractor is defined in FIDIC Books as the person or persons named collectively as contractor in the letter of tender accepted by the employer.41 An engineer is the person appointed by the employer to act as the engineer for the purposes of the contract.42 An employer is the person named as the employer in the contract data43, this person chooses and appoints the contractor and/or engineer to fulfill responsibilities named in the respective contract template. The main differences between these templates are project type and responsibilities of the parties – contractor, employer and engineer. Figure 1 shows the exact allocation of responsibilities between the parties.

Conditions of Contract for Works of Civil Engineering Construction: The Red Book and Conditions of Contract for Electrical and Mechanical Works including Erection on Site: The Yellow Book was first published in 1987 and updated in 1999. The Red Book can be used to create design and build contracts for projects in which the employer is responsible for nearly all design and project planning. In practice, the Red Book is used in complex projects such as buildings and infrastructure. In addition, it is used by the World Bank in bank financed projects.44

The Yellow Book was initially designed for electrical and mechanical works, in practice it is often used when a contractor is supposed to perform all or part of the design and planning works. The employer is liable for all risks not expressly allocated to the contractor, such as those related to consequential damages. The contractor assumes all unforeseen risks at the building site45 and fitness-for-purpose obligations related to the completed project.

The Silver Book was initially drafted for design and build contracts for engineering, procurement and construction turnkey (EPCT) projects. The contractor is liable for commissioning plant construction. This template is considered to be less risky and more expensive for employers, as the contractor assumes even the unforeseen risks related to the building site.46

The question about the most suitable template for megaprojects cannot be answered with certainty. For instance, Hök emphasizes that the Yellow Book was designed for international plant construction contracts while the Silver Book was designed for build, operate and transfer (BOT) contracts;47 all three frameworks were developed for the purpose of tenders. However, despite the initial design purpose, practice shows that the FIDIC Yellow and Silver Books are more frequently applied in the wind power industry, to infrastructure and large-scale projects and to projects without design obligations.48

To make decisions about FIDIC contract templates, different risk allocation possibilities must be considered. For instance, if the contractor cannot control unforeseen risks at a building site, use of the Silver Book template is not advisable because in this case the contractor is liable for them. Consequently, FIDIC contract templates are mostly aligned to the requirements of the World Bank and other financial institutions. This is why contract templates pay special attention to the price, costs and calculation of risks. The design of FIDIC Books follows this special philosophy of financial institutions so that the main difference between FIDIC Books is based on risk allocation and the scope of performance.49

FIDIC Books are based on a specific risk categorization framework that considers the results of recent studies. Different types of clauses in FIDIC templates deal with different risks and require different risk allocation between parties. These risks can be categorized into five groups and sub-groups: political and social, economic and legal, natural and behavioral risks.50 Figure 2 provides a brief overview of these risks. Most of the political and social risks are allocated to the employer in the Force Majeure Clause. Political risks include such risks as war, disorders and strikes. Social risks encompass such risks as theft and vandalism. The most frequent economic risks are the fluctuation of material prices, labor and equipment and they are usually shared between the employer and the contractor. Legal risks include the changes and new laws which are introduced to legislation after the contract has been signed. In FIDIC Books such legal risks are allocated to the employer. Naturally occurring risks, including risks concerning climatic and geological conditions and other natural catastrophes, such as typhoons and hurricanes, are usually shared between the employer and the contractor.

Behavioral risks are risks caused by the behaviors of the parties: employer, engineer, contractor and subcontractor. Behavioral risks are allocated to the party which controls these risks. For instance, Defects in Materials, Plant and Workmanship and Damage caused by Transportation of Goods are risks which are allocated to the contractor, whereas the contractor and the engineer are liable for the late attendance to tests or inspections. It is important that mainly behavioral risks areaddressed in limitation of liability clauses and this issue is discussed in the following sections.51

2.2.2.2. The Orgalime contract template

The Orgalime EPCT contract template is an alternative to the Silver Book; it is more balanced in terms of risk allocation. This template does not allocate all risks to the contractor and it does not include an engineer. The only two parties included are the contractor and employer,52 who are generally free to choose what risks they will assume. This arrangement does not raise any objections within German contract law.

It is expected that contractors will prefer the Orgalime template over the Silver Book because not all risks in the Orgalime EPCT contract template are allocated to the contractor. However, they will likely want to change many clauses and the limitation of liability clause in particular.

The Orgalime contract template is designed in the format of a checklist; this can be seen as a strategy to guard against latent risks.53 Latent risks are possible risks that can arise after activating risk control measures. They are not obvious and are usually revealed through the evaluation of risk control measures.54

2.2.2.3. Basic principles in international contract templates

It is important to mention that in practice, one template can sometimes be insufficient, especially if a project involves the usage of complex technology or know-how. Several types of templates can be combined to maintain the focus on the risk allocation and control and reserve primary rights, such as those resulting from the defect liability.55

It is essential to highlight that the FIDIC books and other templates are mainly based on common law principles. These principles do not include a default risk allocation that could heighten the perception of latent risks. In common law, the contractor assumes the majority of the risks that the employer does not expressly accept.56 In this way, the contract should identify all relevant risks before the contract negotiations.57 This is why international contract templates essentially remain the only benchmark for risk allocation.58

The American Institute of Architects has adopted the position that contractors should take on the responsibility for the risks that neither party can control and for damages resulting from those risks. Such latent risks are not usually covered in contractual provisions. This approach is based on Abrahamson’s approach to risk allocation and is shared by the US government. It hinges on the basic principle that risks should be assumed by the party that has a greater ability to control them. However, this approach also suggests that these (latent) risks should be insured and covered.59 This position is reflected in the FIDIC templates, as Clause 18 Insurance of the Silver Book states that insurance is extended to the time of tests after completion.60 Additionally, this approach suggests that more risks results in higher prices; if the employer is liable for unforeseen risks, provisional sums can be a solution to these risks.61

2.2.3. National elements in international plant construction contracts

2.2.3.1. The type of plant construction contract in German law

In German law, the type of plant construction contract has no clear shape. This contract consists of several components taken from other contracts types, such as purchase contracts, works contracts and contracts of service. However, rules of contract law for work and labor play the major role and it is most relevant to practice, especially in relation to insurance and liability issues.62

German work and labor law is mainly regulated in the civil code of Germany, Bürgerliches Gesetzbuch (BGB), and it regulates the relationship between the employer and contractor. According to § 631 BGB, work and labor law has the greatest impact on the content of plant construction contracts.63

Additionally, the typical characteristic of plant construction contracts is a functional description of the specifications. Risk allocation usually depends on the scope of performance that a contractor must fulfill, whether a contractor is liable as the sole contractor or as a general constructor.64 However, when taking over construction of a plant, the employer usually assumes all risks.

2.2.3.2. Contract templates in German law

Since plant construction contracts combine different components, they are often complex. This is why an adequate risk allocation among parties and identification of latent risks can be challenging. Plant construction contracts are often based on extensive local experience with plant construction; over time essential and repetitive data is collected to improve and accelerate processes. For this reason, Vergabe- und Vertragsordnung für Bauleistungen Teil B65 (VOB/B) and Verdingungsordnung für Leistungen Teil B66 (VOL/B) were created. These frameworks offer standard provisions and aim to balance parties’ conflicting interests and are also considered relevant to private commercial projects in the procurement sector. Public contracting authorities must include the VOB/B in construction contracts.67

It is crucial to mention here that the VOB/B enjoy certain privileges. It is considered to be a set of general terms and conditions. General terms and conditions are terms and conditions that have been formulated in general terms for use in more than one contract. The person who draws up the general terms and conditions is called the user of the general terms and conditions, whereas the company which accepts them is called the other party.

According to settled case law in Germany, as long as the VOB/B are agreed upon as a whole,68 it is not necessary to check whether these terms are valid. This process is also known as control of general terms and conditions. However, even smaller changes may result in a loss of this privilege and render several contract clauses invalid. In comparison, VOL/B do not enjoy such privileges as VOB/B, so that the terms in VOL/B have to be examined through the control of general terms and conditions.

3. Limitation of liability clauses

3.1. Liability types

3.1.1. Typical regulatory needs of megaprojects

Regardless of the chosen international and/or national templates (if any) on which a contract draft is based, the legal experts in charge for drafting contracts for megaprojects should have a comprehensive understanding of where and how such templates can be changed and be adapted to the risks and regulatory needs of megaprojects, especially regarding liability. This is why it is imperative to have an overview of the main regulatory needs, liability types and types of limitation of liability clauses.

It is essential to understand that a perfect contract cannot exist. Indeed, it is practically impossible and economically unnecessary to address all possible risks and liability issues in contracts and doing so is not the goal of a contract. The contract drafting process must meet the standard and specific regulatory needs of each megaproject presented in the previous chapter. The varying regulatory needs of different legal systems are described.

A certain degree of freedom to change and adapt provisions exists, but certain limits are set by the applicable laws and jurisdiction and different legal systems set different limits for contract-drafting processes. The starting point of an optimal strategy of risk allocation is based on the decision about applicable law and jurisdiction clauses.

The applicable law clause is a provision of a contract in which the parties designate the law according to which disputes between the contracting parties shall be determined. The jurisdiction clause is a provision of a contract in which the parties specify the court that will have the right to adjudicate these disputes. This decision determines both regulatory needs and limits and requires knowledge of the specific practical needs of megaproject contracts. This is why it is important to focus on the regulatory needs that are essential for megaprojects, such as liability for deadlines, liability for defects and legal acceptance, limitation of liability, payment securities and insurance.69

Apart from applicable law clause and jurisdiction clause, as a second point for negotiations and optimal strategy of risk allocation, it is essential to differentiate between the liabilities of employers and contractors because these parties have different powers to control risks and conflicting interests. Such differentiation is customary in standard international templates such as those of the FIDIC. Furthermore, there is an important differentiation between direct and indirect damages. Direct damages are defects or damages that occur due to one’s own behavior and indirect damages are damages that result from these defects. The contractor aims to exclude or limit his or her own liability for all direct and indirect damages, limiting both certain types of liability and total liability. From the employer’s perspective, the contractor should be liable for all direct and indirect damages. The employer will seek to minimize his or her own liability. Both parties will attempt to transfer liabilities to each other and success will depend on the market power, company size or negotiating power of each.

The third step is to consider contractual liability and liability based on tort law. Contractual liability arises from the breach of contract, whereas tortuous liability results from the breach of a duty which is determined by law.70 Breach of contract usually involves assuming liability for all possible damages. In this framework, attention should be drawn to the distinction between concepts in continental European law and English common law. In English common law, strict liability is no-fault liability, which might take the form of a guarantee. A guarantee means that the party should take responsibility for the contractual obligation even if it is not at fault. It should be decided on a case-by-case basis whether the provision refers to a qualified obligation which results in fault-based liability.71

In practice, special attention is given to clauses concerning the quality of work. These clauses regulate and limit the defects liability up to a certain point in time. Additionally, these clauses often limit the extent of total liability and legal experts strongly advise totally excluding liability for certain aspects.72

3.1.2. Typical regulatory needs of liability in international construction contracts and templates

Comparing different international construction contracts and templates, such as FIDIC templates and ORGALIME template, in particular, behavioral risks clauses, typical regulatory needs of liability for megaprojects can be identified. There are several types of liability that are usually addressed in the clauses of international plant construction contracts. The first type is contractual liability of contractor and contractual liability of employer. Contractual liability of a contractor mainly addresses such risks as delays, defects liability, breach of contract, damages to works and infringement on third parties’ intellectual property rights. Contractual liability of an employer deals with unreasonable measures to accelerate the work, additional costs due to the risks of the contractor, breach of contract, false information in the tender documents, damages to the construction, change requests not covered in the contract. Secondly, international construction contracts and templates include liability based on tort of a contractor, such as liability for circumstances that occur as a result of contract execution and third party liability of the contractor.73

3.1.3. Regulatory needs related to liability for megaprojects based on the CISG

The CISG applies to contracts concerning the sale of goods (not services); it regulates the effective conclusion of a contract, rights and responsibilities of the purchaser and seller and liability for auxiliary persons. It does not regulate the validity of the contract, impact of the contract on property rights, liability for personal injuries (such as § 823 BGB, Produkthaftungsgesetz) or general contract law (e.g. cession, the limitation period). However, according to the article 74 of the CISG, total compensation can be limited to the calculable risks at the time of a contract’s conclusion: “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.”74 Nevertheless, efforts to address limitation of liability clauses reveal the existence of regulatory gaps that must be filled by national legal norms.75

3.1.4. Typical regulatory needs related to liability in megaproject contracts based on German law

Parties are generally free to agree on other legal patterns of liability (the principle of the freedom of contract, pacta sunt servanda). The clauses that regulate liability can diverge from or amend contracts as long as the clauses remain within the bounds of what is permissible by law. The law establishes limits differently depending on agreement type. Basically there are only two types of agreements - general terms and conditions, for which stricter requirements exist, or individual agreements, which can be more flexibly modified by the contracting parties. Moreover, German law differentiates between the legal basis of contracts (e.g. defect liability) and torts (§823 BGB and ProdHaftG). Contracts are agreements with legal obligations determined by the contracting parties and the torts are the duties imposed by the law.

Typical regulatory needs related to liability include contractual liability of contractor and liability based on tort of contractor (mainly §823 BGB and ProdHaftG). Within contractual liability of contractor there are three relevant types which should be considered at first by the contracting parties, defects liability, direct and indirect damages.

First of all, legal experts suggest several risk allocation strategies in regard to defects liability. In the case of the non-fault-based defects liability it is essential to formulate the criteria for agreed quality or intended use and to exclude any guarantee commitments if possible. In the case of the fault-based liability, partial modification of defects liability or total exclusion of defects liability is recommended.76 In addition, considering the standard limitation period for defect liability the parties can choose shorter or longer time limits.77

Secondly, there are different risk allocation strategies in regard to direct damages and claims for damages. Legal experts believe that contractual provision for personal injury is not necessary, whereas provision which limits physical damages is necessary and such damages can be limited to a certain amount. Moreover, the liability for damages to property should be excluded or limited to a certain amount.78 Additionally, some legal experts highlight that the clear differentiation between physical damages and damage to property in contract might be beneficial, when harmonizing contractual provisions with insurance conditions.79

Thirdly, different risk allocation strategies can be applied in regard to indirect damages. In particular the liability for loss of production and loss of profit should be excluded or at least limited to a certain amount.80

3.2. Types of limitation of liability clauses

Risk minimization measures addressed in risk allocation strategies in regard to liability can be grouped into three main types. First of all, the basic type is risk allocation and sharing, which is used in international practice to identify which of the contracting parties can more effectively control various risks. These grounds usually impact the choice of contract template, applicable law clause and jurisdiction clause. The second type of risk minimization measures is risk transfer or substitution. This type depends on negotiating power and insurance. The contractor attempts to reallocate risks to the contract partner or insurance (all direct damages, defects or damages due to the contractor’s behavior and indirect damages such as those resulting from defects). The third type of risk minimization measures is called risk reduction, its purpose is to totally or partially eliminate or limit liability. This type depends on the limits of the applicable law and jurisdiction clauses as well as the template used for contract design; these topics are addressed in chapter 3.3. English common law is considered to be particularly friendly for the design of these clauses because there are fewer limits to limitation of liability. The most relevant limit is that the formulation of the clauses should be unambiguous and clear. In comparison, French law is considered to be less friendly because French law sets stricter limits to the limitation of liability.81

The main types of limitations of liability clauses and types of risk minimization measures are correlated. The choice of three types of risk minimization measures has an impact on the choice of the type of contractual clauses. Basically, the main types of limitations of liability clauses mirror these types of risk minimization measures. The contracting parties can decide, firstly, to totally or partially eliminate the liability. Secondly, they can transfer certain types of liability to third parties such as insurance companies or share it with other contract parties. Thirdly, where it is not possible to limit or to transfer liability, they still can limit liability by capping the time, sum or scope of obligations.

The main types of limitations of liability clauses include liability exclusion clauses, liability sharing, transfer and substitution clauses and limitation of liability clauses. The aim of liability exclusion clauses is total or partial elimination of liability. Oftentimes liability exclusion clauses are not compliant with the applicable laws.82 The ultimate aim of liability sharing, transfer and substitution clauses is to allocate risks optimally and promote realization of a project. Latent risks that cannot be foreseen by the controlling party should be insured and covered.83 However, even when other contract parties and insurance companies share liability for most risks, regulatory needs must be considered. For this reason, limitation of liability clauses are the most used clause format.84

The first effective method is aimed at limiting the scope of performance. This method consists of reducing the number of obligations and is based on the principle that a party cannot be liable for an obligation that is not agreed upon in the contract, as long as such reduction of obligation is generally compliant with the nature and the type of contract.85 The second method does not necessarily change the obligation; it uses limitation of liability clauses to limit obligations. This method is at the center of negotiations and development of the optimal strategy for megaprojects.86

Changes can be made to the legal consequences or conditional part of a clause.87 The following is an example of a change made to the conditional part of the clause: “The consultant will provide all the expert advice and skills which are normally required for the class of services for which it is engaged.” An example of a change to the legal consequences part of the clause is the following: “The total liability of the contractor for all claims in respect of the warranties shall not exceed ...EUR.” Changes can involve capping the liability at a maximum sum, time, or scale of fault; all changes must be permissible under the applicable laws. In German law, scale of fault is set by the §276 BGB; the maximum allowable sum can be found in all legal norms that regulate tort liability (e.g. §10 ProdHaftG).

3.3. Limits to limitation of liability clauses

It is essential to present the most relevant limits set by national (applicable law and jurisdiction clauses) and international elements (specific regulatory needs of plant construction contracts and templates). German law is applicable in 70% of international contracts for large-scale projects in Germany88 and it is impossible to address all configurations in this thesis. For these reasons, the current chapter only considers German law as applicable.

3.3.1. Limits to the applicable law clause

3.3.1.1. Control of general terms and conditions

In cases where German law is applicable, it is essential to differentiate between individual agreements and general terms and conditions. The law protects parties from unfavorable and risky terms and conditions imposed without the possibility of negotiating. If a clause is considered to be a general term according to § 305 BGB, stricter legal rules are applied to some of the contract provisions. Three criteria of §305 should be met. Firstly, these should be pre-formulated clauses. It is not important how the clauses were pre-formulated and from which types of templates they were taken. Secondly, the purpose of such contract provisions is their multiple uses; this criterion is assumed in the business-to-business (B2B) sector. Thirdly, the contracting parties usually have no possibility to negotiate the clauses. Moreover, these clauses should also be included in the contract at the time of the contract’s conclusion.

Control of general terms and conditions has three levels. The first level includes the examination of whether these clauses are prohibited clauses with the possibility of evaluation according to § 308 BGB. On the second level the clauses are checked to ascertain whether they are prohibited clauses without the possibility of evaluation according to § 309 BGB. The third level considers the general clause § 307 BGB. However according to the § 310 I 1 BGB, only § 307 BGB applies to the B2B sector. In practice, this rule prohibits unreasonable discrimination against a contract party and imposes a requirement for transparency according to § 305 c BGB. While it is recommended that all three levels be respected in practice, in cases of doubt created by imprecise clauses, the courts will decide against the clause user.

It is generally possible to agree on an individually negotiated limitation of liability clause. In particular, the setting of the maximum limits has become an established feature, as in the supplier business sector.89 However, several limits mentioned in the previous chapter should be always respected, including the requirement for transparency established in § 307 I 2 and §138 BGB; these clauses together establish the limits for the limitation of liability. In individual contractual agreements as well as in general terms and conditions, no liability can be excluded in advance due to the liability for willful intent.

3.3.1.2. Direct damages

Reducing liability for direct damages in general terms and conditions is limited first and foremost by the general clause § 307 BGB. As indicated above, the general clause § 307 BGB is applicable to the B2B sector and clauses § 309 BGB and § 308 BGB should be respected as well. Clause § 309 No. 7 a BGB prohibits limitation of liability clauses that exclude liability for injury to life, body or health and liability “due to negligent breach of duty by the user or intentional or negligent breach of duty by a legal representative or a person used to perform an obligation of the user.”90 Moreover, clause § 309 No. 7 b BGB prohibits limitation of liability clauses that exclude liability for other damages “arising from a grossly negligent breach of duty by the user or from an intentional or grossly negligent breach of duty by a legal representative of the user or a person used to perform an obligation of the user”.91 Thus, freedom to maneuver is available for all other limitations of liability related to physical damages or damages to property due to slight negligence.

According to a principle of settled case law in Germany, any limitation of liability clause can be rendered invalid if it limits the cardinal (meaning essential) obligations of a contract.92 The criteria of essentiality can be concluded from the wording of legal norm §307 II BGB: “An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision […] limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardised.”93

The only type of limitation of liability accepted by settled case law in Germany is capping in cases of slight negligence in which cardinal obligations are addressed. The capping is usually limited to the coverage of the product liability insurance and aims to adequately cover the risks involved. This clause is only valid in the B2B sector due to limited access to the conditions of product liability insurance and a lack of knowledge and understanding of the conditions by consumers in the Business to Consumer (B2C) sector.94

Considering three limits mentioned above, the possible solution for the limitation of liability clause would be: “For damages caused by defective products arising from a slight negligent breach of duty by the user, with the exception of damages from injury to life, body or health, our liability is limited in terms of substance and up to the amount of coverage of our product liability insurance and capped up to the amount of ... euro.”95

In other cases, freedom to maneuver remains part of the secondary obligations of a contract. This is why legal experts recommend precisely formulating the essential and secondary obligations of a contract. However, such cases of slight negligence even for physical damages or damages to property should not affect liability for defects. Furthermore, liability for a defect cannot be excluded in cases where fraud or a guarantee is present, according to Section 444 of BGB: “The seller may not invoke an agreement that excludes or restricts the rights of the buyer with regard to a defect insofar as the seller fraudulently concealed the defect or gave a guarantee of the quality of the thing.”96 Considering this limit, the possible solution for the limitation of liability clause would be: “We are further fully liable for damages due to defects of the delivered goods covered by our expressly given guarantee or fraudulently concealed by our company.”97

The final limit is that the limitation of liability clause cannot exclude the liability from §14 ProdHaftG. At least capping at a maximum sum is permitted under the Product Liability Act (§10 ProdHaftG).98 Considering this limit, the possible solution for the limitation of liability clause would be: “Buyer's claims pursuant to § 14 Produkthaftungsgesetz99 (ProdHaftG) shall remain unaffected.”100 Such exclusions or limitations of liability may be of significant importance and exclusion as a type of limitation of liability is usually used.

Considering all limits, the possible solution for the complete limitation of liability clause would be: “We shall not be liable for other damages arising from a slight negligent breach of secondary obligations by the user, which are not caused by defective products, with the exception of damages from injury to life, body or health, fraudulent behavior or guarantee.”101

3.3.1.3. Defects liability and defects clauses

It is generally accepted that limitation of liability for physical damages cannot be considered separately from defects liability; this understanding is particularly important in relation to general terms and conditions.

Considering remedy of defects clause, a general recommendation for risk allocation is precise formulation of the criteria for agreed quality, such as technical parameters; complex criteria can reference a specification sheet.102 In cases of deviation from agreed quality, German law differentiates between contract law for work and labor and sales law. German law provides a framework of legal norms that regulate standard cases.103 However, new contract laws for work and labor should be considered; an employer can request changes in the scope of the success of the plant construction works and specifications.104

In individual agreements, the exclusion of defects liability is not permitted unless special reasons exist. Otherwise, the exclusion of defects liability will infringe on the principle of good faith. Solutions for the design of contract clauses for this case can be different. The contracting parties can exclude the right of withdrawal or limit claims for damages up to contract volume.105

In general terms and conditions, the exclusion of defects liability is not allowed; contract parties should be given the right to subsequent performance and a choice between the right to reduce the purchase price or withdraw from the contract.

In case of guarantee commitments, the clauses should formulate, specify or restrain legal consequences, depending on negotiating power (restraining for constructing party).106

Considering standard limitation period and maximum limitation period setting time limits for liability is possible in any case and may be necessary. However, the Federal Court of Justice (BGH) considers any reduction in the time limit of the standard limitation period as a limitation of liability. As a result, the above-mentioned limits to limitation of liability apply and should be included in the clauses.107 Time restrictions placed on the standard and maximum limitation periods are regulated by article §199 BGB. However, the extent to which time limits for liability can be altered is restricted. Nevertheless, individual agreements can further reduce these legal limits. The time frame can be reduced from 24 to 12 months in the general terms and conditions of contracts in the B2B sector.108 However, specific limits included in the new settled case law in Germany should be respected. According to § 307 No. 7 BGB, every clause that restricts the standard limitation period should not exclude or limit liability for damage from injury to life, body or health. If this type of damage is not excluded, a clause will be rendered invalid.109

The standard limitation period for defect liability begins delivery in sales contracts and (legal) acceptance in contracts for work and labor. When examining contract law for work and labor, new laws should be considered. These laws entered into force from 1.1.2018 for contracts that are not subject to VOB/B. The legislature has introduced modifications, added construction contract norms in § 650 a-v BGB and changed the wording for fictitious acceptance in § 640 II BGB n.f. According to the new wording, employers must explicitly identify at least one specific defect to refuse acceptance. However, as a defect, an employer can name even an insignificant defect and it will serve as an impediment to the fictitious acceptance.110

When addressing contracts related to sales law, the commercial obligation of examination and notification of defects included in clause § 377 HGB should be considered. This clause applies only in the B2B sector and it cannot be excluded. Use of the clause is recommended if a technical standard is provided for the goods.111

3.3.1.4. Indirect damages

According to Article 74 of the CISG, it is possible to include all other damages in the maximum damage cap as long as the offending party could see all of these damages: “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.”112 German case law accepts these limits.113

Except in relation to unforeseen damages, in these cases it is not permitted to limit liability to a certain sum, exclude indirect damages or limit total liability to certain amount of the insured sum. The legal pattern of liability states that a contract party is liable both for the loss in product value and damages caused by a defect; the law does not envisage a limitation of liability. Depending on negotiating power, the consequences can be disastrous if the value of the damaged part is disproportionately larger than the cost of the resulting damages. However, this liability limitation should be negotiated in individual contractual agreements because the law places greater restrictions on the limitation of liability in general terms and conditions.114

Possible strategies for limiting and allocating contractual risks include limitation of liability with a lump sum, product liability insurance, indemnity claims in the event of third party claims, reimbursement of costs in the event of product recalls and limitation of product recalls and agreement on a lump sum in the event of notifications of defects.

3.3.1.5. Liability based on tort of contractor

Clauses §823 BGB and ProdHaftG regulate third party liability that cannot be excluded or limited. In the event of product defects, legal experts recommend using the risk allocation strategy based on ProdHaftG because the parties are held jointly (contract parties are liable jointly) and severally liable (each contract party is liable individually). This is why use of a contractual provision that regulates allocation of risk between parties is recommended.

Various formulations exist and it is essential to highlight two factors. The formulations should provide a solution for recourse in form of contract clause and this solution should make it easy to maneuver in cases of impeded legal enforceability. Such cases might include large product recalls that will cost a manufacturer significant time and money and may cause insolvency for small companies. In such cases, limitation of liability through product liability insurance is the optimal solution for a contract clause. Product liability insurance is not compulsory for defects liability, but it can be a subject in a contract clause.

In cases of liability related to §823 BGB, each party can be held liable separately, and the suggested risk strategy involves precisely describing the defects for which a partner is liable.115

3.3.2. Limits to the jurisdiction clause

Individually negotiated clauses are not subject to the control of general terms and conditions; the opposite conclusion should be drawn from this as well. A clause that is economically unattractive to a contract party cannot be changed by law if the clause was individually formulated and negotiated. However, the quality of the negotiation can be decisive in court; the limits set by law are the ambiguity of clauses and prohibitions from §138 BGB (contra bonos mores) and §242 BGB (good faith).116

Conflicting general terms and conditions is a highly controversial issue that is not discussed in this paper. Legal experts recommend checking whether any conflicting provisions exist.117

3.3.3. Limitation of liability clauses in international contract templates

3.3.3.1. Defects liability

An employer must perform plant construction works according to the agreed upon contractual specifications and is liable for defects; the plant construction should be fit for purpose. In comparison, in German law the liability is based on the fault, in international contract templates the liability depends on the success, which means the plant construction should fit the purpose defined by the contract.118 The Silver Book template regulates additional types of defects that the contractor must correct. Templates give special attention to the agreed quality or provisions which regulate whether and when the plant construction is fit for purpose. The term purpose requires further interpretation but fulfills the safety function for the employer. Essentially, purpose means that the contractor agrees that the work will meet the employer’s demands. The contract parties have a certain freedom to either establish further details related to the purpose or intentionally expand the purpose.119 Compared with German law, contractors are increasingly caught between the contractual obligation to reach both the agreed quality and the success, meaning the finalization of the project. In cases where the performance requires use of specific know-how methods or instruments, the project cannot be finalized using only the methods agreed upon in contract. Moreover, in these cases contractors remain liable both for the agreed quality and finalization of the project. In this way, templates can offer legal loopholes.

It is recommended that parties use clauses that limit defects liability to a certain time period. “Defect notification period” and “maintenance period” are not synonymous. Moreover, these clauses often limit total liability and legal experts strongly advise total exclusion of liability for certain aspects.120 Similar to the takeover certificate (TOC) in the Red Book, the Silver Book includes a contractual fiction in form of a performance certificate. Partial takeover is excluded in the Silver Book, but it is possible in the Red Book.121

3.3.3.2. Comparing limitation of liability clauses

Clause 17.6 of the FIDIC’s Silver Book states that “Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under…” The limitation of liability clauses in the Orgalime and FIDIC Silver Book templates can be compared. In the Orgalime contract template, parties are liable for all direct and indirect damages. Damages not agreed upon in the contract are excluded. In the FIDIC Silver Book template, liability is limited to the contract price. Some direct and indirect damages are excluded as long as this is agreed upon in the contract (“Neither Party shall be liable”).

However, the structure of FIDIC books changed in 2017 to address the most relevant issues in practice. Clause 17 of the 2017 forms is now titled “Care of Works and Indemnities.” The new FIDIC books aim to minimize risks by pre-allocating responsibility for risks and establishing more reciprocity between parties.122 However, the main goal was to remove the concept of employer risks because it led to confusion in the past. Clause 17 focuses on the legal consequences of certain risks, such as liability for losses or damages to works. As stated previously, it is challenging to distinguish between this liability and certain risks, such as natural risks, that are addressed separately.123

In particular, Sub-Clause 17.6 was transferred to Sub-Clause 1.15 (Silver Book Sub-Clause 1.14) (Limitation of liability clause). Some legal experts and FIDIC consider this step a sign that the main limitation of liability clause shall apply more generally and not only to contract parties’ indemnities.124 According to Sub-Clause 1.14, neither party is liable to the other for any loss of use of the works, loss of profit, indirect or consequential loss. Moreover, contractors’ total liability is established in the contract data or by default in the accepted contract sum.125 However, the new Clause 17 has not changed significantly, the contractor remains responsible for any loss or damage to the plant construction works until the issuance of a taking-over certificate, except in the cases where damages were caused by risks for which the employer is responsible, according to the clauses 17.1. and 17.2. of FIDIC Silver Book 2017.126 These risks are nearly the same as the employer's risks identified in the 1999 versions.127 Moreover, insurance plays an important role and is addressed by Clauses 17 and 19. Relevant types of insurance include those covering indemnities for personal injury, death and property damage as well as PI insurance for errors or omissions in carrying out the obligations specified in a contract.

The most significant change is that the scope of carve-outs was expanded. Earlier versions of FIDIC Books had only two types of carve-outs; carve-outs from exclusion of liability for loss of profit and indirect and consequential loss. The updated FIDIC Books have five additional carve-outs from the exclusion of liability: delay damages, variations, claims under the IP indemnities, for losses incurred following termination for convenience (new Sub-Clause 15.7) and also for losses incurred in respect of omissions of work to give it to third parties (Section 9).128

Another important change is that Clause 17 includes a total cap on the contractor’s liability to the employer; however, the clause essentially remains the same if the employer’s indemnities are no longer excluded from the cap.129

A further relevant change is that a limitation of liability cannot cover gross negligence. The contractor’s liability is uncapped in cases of fraud, gross negligence, deliberate default or reckless misconduct. This approach is generally recognized in many European countries and in continental law, but not by common law.130

Two new indemnities are incorporated, the employer indemnity related to property damage and the contractor indemnity related to fitness for purpose obligations. Indemnity is generally understood as exemption from legal responsibility of the contracting party. These indemnities are excluded from cases involving loss of profit and indirect losses and their consequences. However, these indemnities are included in the overall cap on liability.131

4. Strategies for limitation of liability clauses

Having addressed the main limits of relevance to limitation of liability clauses, the current chapter presents possible strategies to implement these limits in practice. The starting point is deciding on crucial applicable law and jurisdiction clauses that will impact the design of the limitation of the liability clauses. According to the chosen legal framework, the next steps are to identify the regulatory needs of the resulting variety of choices, consider liability types and examine limitation of liability clauses that should be addressed in the contract. Restrictions to limitation of liability clauses should be respected; these restrictions can limit freedom to maneuver in the drafting and negotiation of international plant construction contracts.

In practice, many factors and interests are involved and the outcomes of the interactions of these elements can result in many different configurations. Useful solutions are needed in the drafting of international plant construction contracts and contracts for megaprojects in particular.

In this chapter, the results focus on providing practical solutions for the liability types identified in chapter 3 that are most relevant to practice under German law. All steps are supported by recent results, including a survey of the German Chamber of Trade and Industry conducted in 2016 on behalf of the German Federal Ministry of Justice and Consumer Protection and supported by 1,200 German companies of different size. While the survey focused primarily on the impact of restrictions on the effectiveness of contract design and general terms and conditions included in § 305 et seq. BGB, the results can be used for various purposes.132 The results demonstrate the importance of limitation of liability clauses in practice and statistical data reveals the most used and important clauses. Additionally, the questionnaire addressed two different perspectives on such limits; that of the buyer and seller as well as the employer and contractor.133 The survey also expressly addressed several relevant issues including the reasons why contracts should include limitations of liability clauses. Additionally, the survey explored how the limits of German law impact strategies. It also explored why German companies choose certain applicable law and jurisdiction clauses and certain limitation of liability clauses.134 The results can be spread depending on company size and projects; delivering statistical data on the usage of certain contract clauses in megaprojects. For instance, 210 large companies participated in the survey.135 Furthermore, the survey data can be used to support the hypothesis made in the introduction.

4.1. General regulatory needs

The international nature of a megaproject has a major impact on contract design, which means megaprojects are international in scope as many parties from different countries and various legal systems are involved in these high-cost and time intensive projects. An optimal contract design strategy must involve agreements on applicable law (if the legal system offers freedom to choose the law), jurisdiction, contract templates and compliance with mandatory legal norms. Providing legal certainty through these phases can lead to optimal allocation of risks among parties and impact the outcome of the whole project.

These steps are essential because they create the applicability framework for all clauses, including limitation of liability clauses that depend on the limits of applicable law and court mandated rules for contract interpretation. Additionally, limitation of liability clauses should respect restrictions that appear in frequently used templates and the mandatory legal norms of applicable laws.

4.1.1. Agreement on applicable law

The contract clauses are based on the principles of applicable law; the first strategy is to choose the most favorable law (or choose not to choose). The applicability of German law would not likely be questioned in a standard German project. In international projects, a key question is what national laws are applicable since the parties come from several countries. The construction is in one country and national laws and practices often differ drastically and conflict with each other.136

The law of the European Union has a significant impact on the design of member states’ legal norms. For example, 80% of German business law is based on EU legal provisions.137 Attempts to create unified law in Europe have failed because greater harmonization of European countries’ legal systems is needed, especially in regard to liability and insurance.138

Presently, an alternative basis on which to design international contracts is the CISG, a unified international law that often has priority over national laws.139 Many publications also consider lex mercatoria as unified international business law. Lex mercatoria was developed in medieval Europe and consists of trade usages, (unwritten) commercial customs and best practices which are recognized by the international community140 and can be applied in arbitrary courts. The UNIDROIT Principles of International Commercial Contracts are often applied to interpret contracts which are based on lex mercatoria. Nevertheless, both the CISG and the UNIDROIT Principles of International Commercial Contracts can only be applied to sales law, they do not address the law for work and labor which is essential to international plant construction contracts.141 However, this topic is controversial and is not addressed further in the current paper.142

In this framework the parties have main strategies on which they can agree. The first strategy is to decide on the applicable law clause and choose the most favorable law if contract parties’ legal systems provide the freedom of choice of law. The second strategy covers the cases where the legal systems do not provide the freedom of choice of law or contract parties decide not to choose the applicable law or include an applicable law clause. In such cases contract parties rely on the decision of courts because the courts will determine the applicable law using rules of international private law. International private law is a set of rules of procedural law that govern the legal relationship between parties from different countries.143 The legal systems of all EU member states are based on the concept of freedom of contract (private autonomy); contract parties are free to use this step to choose the optimal legal system and risk allocation strategy. Throughout the European Union, uniform choice-of-law rules are applied based on the Rome I Regulation (Art. 3 and 4 Rom I in conjunction with Art. 3 1b EGBGB). The courts use the Rome I Regulation to determine the applicable law for European states. Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 (Rome I Regulation) applies to contractual obligations of all EU member states except Denmark. In some cases it might be beneficial if the contract parties decided not to choose the applicable law. The contract parties try to foresee the possible decision of a court, which is mostly based on prior decisions in similar cases. If the benefits overweight the risks, and the contract parties have included jurisdiction clause, the decision may be reasonable. In many other cases it could be too risky. Regardless of whether the parties decide to choose the applicable law, the third strategy is to consider the rules of international private law and the Rome I Regulation for European states, in particular principles of ordre public and overriding mandatory provisions. Even if the parties agree to use the law of another country, if the place of performance is Germany, mandatory provisions of German law override the provisions made in the contract.144 According to Article 6 of the EGBGB, which encompasses the principle of ordre public, if a clause does not comply with the fundamental principles of German law, it will be replaced with compatible legal provisions from German law: “A provision of the law of another country shall not be applied where its application would lead to a result which is manifestly incompatible with the fundamental principles of German law. In particular, inapplicability ensues, if its application would be incompatible with civil rights.”145 The principles of ordre public and overriding mandatory provisions are also established in the Rome I Regulation. Hök presents many interesting examples in the construction sector in which overriding mandatory provisions have replaced contract clauses.146

Many factors can impact the decision on the applicable law; benefits and risks of each possible law should be analyzed and balanced. Various guides can highlight the risks of projects and assist parties in adopting optimal plant construction projects. A few applicable guides include Guide sur la rédaction de contacts relatifs à la réalisation d’ensembles industriels147, Münchener Vertragshandbuch148, UNIDROIT principles of international commercial contracts. However, the specific regulatory needs for megaprojects should also be considered.

The parties can choose one or several laws depending on type of performance, familiarity with the law, degree of risk and number of gaps to fill in a contract. However, several laws can lead to conflicts and it is important to consider the mandatory rules of the law of the place of performance that can override the chosen law. Additionally, no perfect legal system exists and different laws allocate risks in various ways.149

The parties can choose the law of the place of performance or a neutral law, such as Swiss law, that is not connected to any of the parties. A neutral choice can offer more benefits, but a lack of familiarity with the law can make the situation riskier. The parties must be provided with complete information about the law and legal system prior to making a decision. It is also necessary to provide this information if the law of the place of performance differs from the parties’ laws. Moreover, the parties must consider whether a neutral law complies with the law of the performance place if this neutral law is not the same as the law of the performance place.150

If the parties choose a neutral law, they must ensure that a jurisdiction clause is also included. In the absence of such a clause, the courts would most likely decide in favor of the law of the place of performance based on past legal decisions and Art. 4 1b Rom I.

The parties can decide to choose a court rather than a law. This creates a more favorable arrangement for interpretation and allows the court to decide on cases where an agreement is lacking. The court will use rules of international private law to identify the applicable law and refer to Rome I Regulation when applicable for European states. However, this decision is risky because it is difficult to predict the decisions of courts in all cases with certainty.151

The parties can choose the CISG or the parties can forgo using the CISG, but is crucial to intentionally exclude the CISG to prevent it from taking precedence over the applicable law.

Such decisions can be made based on several factors, such as familiarity with the legal system, risk allocation principles in the type of contract used in the country, (risky) mandatory provisions and the ordre public principle, general terms and conditions and other types that can be used, such as the VOB/B in Germany. Other important factors are familiarity with the grounds of interpretation and earlier decisions of a court, familiarity with templates used in a country and the laws on which the templates are based, type of template in terms of risk allocation (turnkey or other), policies of financial institutions, companies, financing partners or partners with more decisive power. FIDIC recommends that member associations choose legislation that recognizes the validity of contractual limitations of liability.152 Model Contracts of the International Chamber of Commerce (ICC) promote the prevailing practices and principles of international trade generally recognized by domestic laws, lex mercatoria, as well as the UNIDROIT Principles of International Commercial Contracts. In such contract templates the applicability of national laws are excluded.

Countries often create different types of plant construction contracts based on their own experiences, values and practical needs. As a result, these types have different advantages and regulatory gaps that should be considered after specific applicable law and jurisdiction clauses are chosen.

The survey revealed some consequences: large companies claim that in 25.2% of their contracts, German law is not the applicable law. In 11.5% of cases, contracts are established between domestic parties trying to escape the stricter limits of the German law. In 32.1% of cases, parties seriously consider this option in the contract design process.153

4.1.2. Choice of jurisdiction

No unified international court exists, but as long as contract parties’ legal systems provide freedom of choice of jurisdiction, the parties can choose the most favorable jurisdiction for them. Moreover, they can choose between state courts or arbitrary courts (or another institution such as Dispute Adjudication Boards (DAB) in FIDIC). The applicable law must not be the same as that of the court’s country. Even when legal disputes do not arise, these decisions belong to the strategy-building process. The parties will analyze the probable position of the court and duly consider all financial and legal risks of a decision.154 For this reason, the applicability of law and jurisdiction of the court is a necessary part of the optimal contract design strategy. Many parties often prefer to agree on the applicability of a familiar or more favorable law and both strategies are considered to be less risky. Even when megaprojects are built in developing countries, it is often mandatory to harmonize the applicable law of contract with the law of the construction site. Even if the law of a developing country is considered incomplete, the contract should respect and comply with it. This compliance is necessary so a project can be executed and to guard against problems in case the court must interpret legal disputes.155

Jurisdiction clause determines the governing procedural law, meaning which court will decide on a legal dispute. It is crucial to simulate the court’s probable position and interpretations in order to understand whether state courts, arbitration156 or another institution, such as the DAB in FIDIC templates, is preferable. State courts and certain interpretations typical for these courts can be avoided.157 Moreover, different interpretation methods can be used in contract templates. For instance, the Clause 8 – UNIDROIT Model Clause 4 provides an example of how additional interpretation methods can be formulated: “This contract shall be governed by the law of [State X] interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2010)”.158 Different interpretation methods should be taken into consideration because it was found that 1.91% of large companies invoke limitation of liability clauses against their partner, but the survey results also revealed that 66.3% of legal disputes were settled out of court.159

It is important to consider usage and traditions, especially if templates are employed. For example, courts will likely opt for interpretation based on common law in cases involving FIDIC templates.160 In 1999, FIDIC Red Book Clause 20 FIDIC notably introduced its own dispute resolution system, the Dispute Adjudication Board (DAB), with the goal of making the procedure more effective. The FIDIC offers a jurisdiction clause that gives the DAB the power to make non-binding advisory decisions161 and generally promotes amicable settlement and dispute prevention methods. A key topic in the revised FIDIC Books is the increased emphasis on dispute avoidance that in general follows the FIDIC’s philosophy. In comparison, in ICC Model Contract for the Turnkey Supply of an Industrial Plant, parties may choose to submit possible disputes to arbitration or an identified national court. However, the enforceability of DAB decisions remains controversial. The enforceability of judicial decisions should be considered as a major factor. Contract parties can forgo choosing a court, but this is a risky strategy.

4.1.3. International elements

Contract templates help prevent known risks; they can be used as checklists to ensure that all standard regulatory needs are addressed in the contract draft.162 On the basis of such templates and the gathered information, the clauses can be formulated to address all regulatory needs of specific megaprojects. Incomplete information in the first and second steps will impact whether a contract draft will meet regulatory needs.163 The most popular templates for plant construction contracts are based on common law and the extent to which these templates comply with the German law has barely been studied.164 In cases where German law is applicable, many additional specific risks should be considered. If the contract is based on an international contract template, the most typical issues related to limitation of liability clauses include unified interpretation of terms used in common law and control of general terms and conditions. Moreover, unified translation of the terms into English from German law should be provided. Special attention should be given to the English common law terms, which are widely used especially in FIDIC Books. Furthermore, if either VOB/B or VOL/B is agreed upon, compliance with these national contract templates and compliance with mandatory legal norms in German law should be ensured.

4.2. Specific regulatory needs

According to the survey conducted by Leuschner and Meyer, a company’s decision to use pre-formulated templates or not mainly depends on the achievable benefits, such as the costs and efforts of negotiation. As contracts increase in volume, the efforts and expenses associated with them also increase, as does the involvement of additional legal experts and the need for limitations of liability. As the results of the survey indicate, it is not advantageous for some companies to individually negotiate clauses with contract parties due to the high costs involved.165 Generally, it is recommended that parties use the Guidance for the Preparation of Particular Conditions if they are also using the FIDIC Books or other checklists and recommendations from legal experts to tailor provisions to the specific needs of a project.166

It was found that 89% of large German companies stress the importance of limitation of liability clauses.167 According to the survey, the main reason is that the liability risks would be disproportionate to the value of the contract (89% of respondents). Other reasons stated include the importance of quantifiable liability risks as a precondition for the price calculations (34.3%) and the passing of limitations of liability from suppliers (50.5%). For large companies, internal policies play a major role (49.9% of respondents).168 According to the survey, 69.3% of large companies include limitations of liability in contracts, the decision of whether or not to include this information depends on company size.169

4.2.1. Type of clause

German companies stressed the importance of limitations on certain types of liabilities, including indirect damages (62.6%), loss of profit (32.5%) and certain types of negligence.170 However, no connection was established between a company’s size, negotiating power and freedom to maneuver by negotiating limitation of liability clauses.171 The three main types of clauses can be used. The first type, liability elimination and exclusion clauses, are often restricted by the limits of German law, in particular, general terms and conditions. The second type, liability sharing, transfer and substitution clauses often depend on negotiating power of the contracting parties. Large companies with more market power have more negotiating power; 62.9% of such companies stated that they can impose their contract clauses in most cases.172 Additionally, 87.2% of large companies stated that they generally provide (partially) sufficient insurance coverage,173 59.2% claimed that the insurance covers their contracts.174 However, insurance is not supposed to act as a substitute for limitation liability clauses, the third type of clauses. Insurance is generally limited to certain coverage amounts (insured sums). It is important to create liability limitation clauses whose limits will match these insured sums.175 In the survey, 60.2% of large companies considered these companies to be important.176

4.2.2. Limits to the clauses

The most important conclusion from the survey conducted by Leuschner and Meyer is that due to the increasing volume of contracts, companies feel that German law does not provide sufficient freedom to maneuver to limit liability.177 The main barrier is ensuring that clauses comply with general terms and conditions so that companies will try avoiding the situation by choosing another applicable law when possible (23% of cases).178 Another strategy is to refrain from negotiating so that the clauses are compliant with general terms and conditions.179

However, the survey assumes at the same time that many companies underestimate the importance of controlling limitation of liability clauses in relation to compliance with general terms and conditions. In the survey, 39.2% of large companies admitted that to strengthen their negotiating power, they consciously agreed to limitation of liability clauses even when they were unsure whether these provisions were compliant with general terms and conditions.180

The survey indicates that in larger companies, legal experts have more available resources to question the existing limits and use the freedom to maneuver. Notably, the lack of enforceability and customs in a sector can impact a company’s decision as a purchaser (34.7% of respondents).181

International contract templates, the VOB/B and provisions based on the German Civil Code’s contract law for work and labor are based on various risk allocation strategies. In the FIDIC Silver Book, most risks belong to the contractor, but in the FIDIC Red Book the employer is liable for the most risks. The German VOB/B is considered to balance risk allocation between parties. The provisions of the Contract Law for Work and Labor in the German Civil Code are a highly controversial issue. These provisions are even more controversial if contracts are based on FIDIC provisions and at the same time German law is applicable. If German law is applicable, the question of whether provisions based on the FIDIC templates are general terms and conditions arises. If this is the case, it must be determined whether these provisions are valid general terms and conditions.182 The FIDIC templates do not enjoy the same privilege as the German VOB/B and the control of general terms and conditions reveals that several provisions can become invalid.

An examination of which FIDIC template is the most suitable option in various contexts raises several questions. In Münchener Vertragshandbuch , Rosener highlights the Red Book as the best option because if German law is applicable, the Silver Book is partially invalid as general terms and conditions.183 However, this regulatory framework enjoys a high level of recognition worldwide. The EU often uses the Red Book in construction projects and the World Bank recommends this framework.184 In practice, it is often agreed that all disputes that may arise should reach an amicable settlement or be addressed in arbitration courts in order to avoid state courts. However, the legal position and risks of seeking a fair and balanced settlement should be analyzed. Regardless of the contract template on which a contract draft is based, if any contract templates were chosen at all, legal experts in charge of drafting contracts for megaprojects should have a comprehensive overview of where and how such templates should and could be legally changed. Several possible strategies were discussed in this chapter and the results are summarized in the following chapter.

5. Conclusions

Both in theory and in practice, limitation of liability clauses are considered highly important as risk minimization measures in international plant construction contracts. The review of the recent researches highlights that contract management should become an integral part of all phases of a megaproject and risk management strategies as early as possible. These results clarify the main research problem and underline the impact of limitation of liability clauses in international plant construction contracts is indeed considerable. Megaprojects are large-scale international projects that usually focus on plant construction. Many conflicting interests are often involved as well as many international partners, legal systems and risks. It is a complex issue and risk management strategies impact all parts and parties of a project from the beginning. As a result, all contract parties should be aware of the risks. Megaprojects have an enormous impact on many countries, which is not surprising because many resources are involved in such projects. A US study found that finding and implementing the most appropriate contract content and optimal clauses can save 5% of project costs.185 Risk minimization is a debatable issue in megaprojects, as high costs and degrees of liability are involved.

The main objective of this research was to obtain relevant data concerning existing strategies and to highlight several strategies that aim to optimize the limitation of liability clauses in international plant construction contracts in large-scale international projects. Such general questions were addressed as types of liability and types of limitation of liability clauses relevant to international plant construction contracts. The main questions were explored more precisely, what restrictions exist on limitation of liability clauses and what strategies can be applied to change those restrictions in megaprojects and what impact the strategies have.

International plant construction contracts used in megaprojects are not unified. These contracts incorporate elements of different national laws and often include international contract standards. International contract templates are a solid and internationally recognized basis to design and negotiate a contract. Conversely, in some cases, and in megaprojects in particular, such templates can be considered only as a checklist or a starting point to identify an optimal risk strategy for all parties.

Various strategies are used to limit risks through contract clause, but they all fall into three main categories of risk allocation strategies: risk and liability allocation and transfer; risk and liability exclusion; and risk and liability limitation (capping). In this research, results show three main types of limitation of liability clauses which correlate with the main types of risk allocation strategies.

My research findings in regard to restrictions on limitation of liability clauses highlight that certain strategies have different impacts and are not always usable. In general risk allocation strategies depend on the decisions of applicable law, jurisdiction and the type of the international contract template. The usage of international standard templates is widely recognized by different international institutions. These templates can offer a common denominator and effective solutions, but they should be cautiously implemented for various reasons. The terms are based on English common law and the English language; partners from different countries often misunderstand and mistranslate these terms. These templates encourage parties to negotiate and reach greater levels of reciprocity. Negotiations are an integral part of optimal strategies for contract design: the counter reactions and interests of contract parties should be evaluated since projects have a long duration. Elements of different national laws should be incorporated harmoniously, which means matching the limitation of liability clauses congruently with the international standard templates, other legal documents (such as VOL/B), company's articles of association and other internal legal documents. It is not possible to generalize and limit all liabilities as an insured lump sum. It is necessary, yet challenging, to examine the exact conditions and consistently match limitation of liability clauses with the insurance conditions.

The research findings of this thesis concern strategies which can be applied to change the restrictions on limitation of liability clauses. It can be concluded that the instruments for liability exclusions or limitations are restricted, in particular in German law. Though German law provides more freedom through individual agreements, it is almost impossible to negotiate with every partner over limitation of liability clauses in larger projects.

The results of my research regarding the impact of the strategies that can be applied to change those limits to limitation of liability clauses, have led to critical opinions in practice and literature. The survey of the Federal Ministry of Justice and Consumer Protection can serve as a good example for this criticism. The aim of the survey was to study the impact of the restrictions in § 305 et seq. BGB concerning the effectiveness of contract design and general terms and conditions in particular. The research results of this thesis partially confirm the opinion that general terms and conditions make it difficult for large companies to effectively limit their liability in contracts in Germany compared to other countries. For years, Verband Deutscher Maschinen- und Anlagenbau e.V.186 (VDMA) and Zentralverband Elektrotechnik- und Elektronikindustrie e.V.187 (ZVEI) have succeeded in promoting a joint initiative for urgent reform of the law of general terms and conditions, so that in 2018 the coalition agreement supports the demands of this initiative. The excessively restrictive control of the general terms and conditions of contracts, especially with regard to limitation of liability clauses, has indeed frequently resulted in avoidance of German law and a switch to foreign legal systems. The results of the survey by Leuschner and Meyer have revealed that in certain cases, companies avoided negotiating over clauses even when doing so would have led to more effective risk allocation.

As an additional insight to complete the main research objective, a checklist was created, based on the results of my research and presented in the Figure 3 in the Appendix, which aims at optimizing the limitation of liability clauses. At the beginning of a megaproject, it is recommended to examine both typical and specific demands of different contract parties, make necessary adaptations and identify an optimal strategy. However, it can be challenging for specialized legal advisers to formulate appropriate and legally accurate limitation of liability clauses, in particular, meeting the specific demands of complex megaprojects. This effort becomes even more challenging for megaprojects due to the many conflicting interests; legal documents, various interpretations and understandings of terms based on cultural and language differences as well as multiple legal systems need to be considered. The process remains difficult even when international standard templates are utilized.188 189

An essential part of an optimal strategy remains the examination of possible restrictions on the limitation of liability clauses and strategies to deal with them. At present, the business sector in Germany requires more flexible limits to liability and more freedom to create economically reasonable and legally certain limitation of liability clauses. General terms and conditions in German law are even seen as having severely detrimental effects on Germany’s competitive situation and general economic efficiency in the future. However, even widely recognized international contract templates FIDIC Books were updated in 2017. In particular, limitation of liability clauses were changed in regard to the better risk allocation. In this way limitation of liability clauses remain a highly discussed topic and relevant in practice. This is why results of my research can be a starting point for further surveys, researches and optimal contractual solutions.

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Appendix 1. Terms

Terms from German law with typical English translation in alphabetical order

Abbildung in dieser Leseprobe nicht enthalten

Appendix 2. Figures

Figure 1. Comparison between FIDIC Books190

Abbildung in dieser Leseprobe nicht enthalten

Figure 2. Overview of project risks191

Abbildung in dieser Leseprobe nicht enthalten

Figure 3. Checklist for the design of limitation of liability clauses

1. General regulatory needs

- Applicable law clause
- Jurisdiction clause
- Contract type or contract templates for international plant construction megaproject contracts

2. Specific regulatory needs (only in respect to clauses that regulate limitation of liability)

- Type of clause

- Liability elimination and exclusion clauses
- Liability sharing, transfer and substitution clauses
- Limitation of liability limitation clauses

- Limits to the limitation of liability clauses [Word Count: 15,557 words in the main text]

[...]


1 Leuschner and Meyer 2016, pp. 37, 41

2 Leuschner and Meyer 2016, p. 65

3 Gausling 2015, pp. 1–3

4 English translation – the International Federation of Consulting Engineers

5 English translation - the European Engineering Industries Association

6 Steinberger 2018

7 Leuschner and Meyer 2016

8 Hill and Hill 2018

9 Oxford University Press (Ed.) 2018

10 Oxford University Press (Ed.) 2018

11 The Gale Group, Inc. (Ed.) 2008

12 Hill and Hill 2018

13 Flyvbjerg 2014

14 Gausling 2015, pp. 1-4

15 Esty 2004

16 Gausling 2015, pp. 36–37

17 Malkwitz 2017, pp. 131–132

18 Gausling 2015, pp. 36–37

19 Gausling 2015, pp. 26-27

20 Gausling 2015, pp. 36–37

21 Gausling 2015, pp. 36–37

22 Slaghuis 2005, pp. 1-3, 34-36, 43-47

23 Graaf and Sovacool 2014

24 Gausling 2015, pp. 3–5;Saïd Business School at Oxford University 2018

25 Gausling 2015, pp. 36–37

26 Gausling 2015, pp. 36–37

27 Hubbard 2009, pp. 46–47

28 Hubbard 2009, pp. 49–51

29 Hubbard 2009, pp. 49–51

30 Krokowski and Regula 2012

31 Flyvbjerg 2014

32 Gausling 2015, pp. 3–5

33 ICSID arbitral award made on 23.1.2001, 42 ILM 609 (2003) –Salini v. Morocco, paragraph 37-40, 53, 55

34 Hök 2012, pp. 14–15

35 Weselik and Hamerl 2015, p. 292

36 Hök 2012, p. 246

37 Hök 2012, p. 246

38 United Nations 2010

39 United Nations 2010

40 Hök 2012, VII

41 FIDIC 2017

42 FIDIC 2017

43 FIDIC 2017

44 FIDIC n.d.-b

45 Weselik and Hamerl 2015, pp. 295–296

46 Weselik and Hamerl 2015, pp. 295–296

47 Hök 2012, p. 248

48 Hvarre 2017

49 Weselik and Hamerl 2015, pp. 295–296

50 Han and Diekmann 2001

51 Zhang et al. 2006

52 Hök 2012, p. 466

53 Hök 2012, p. 248

54 Tamparopoulos 2003

55 Weselik and Hamerl 2015, p. 303

56 Hök 2012, p. 296

57 Hök 2012, p. 295

58 Hök 2012, p. 296

59 Hök 2012, p. 296

60 Weselik and Hamerl 2015, p. 316

61 Weselik and Hamerl 2015, p. 307

62 Hök 2012, p. 14

63 Hök 2012, p. 14

64 Wiesner 2015, pp. 14–15

65 English translation - German regulatory frameworks Construction Contract Procedures Part B

66 English translation - Conditions Concerning Contracts for Supplies and Services Part B

67 Rustmeier 2016, p. 17

68 Bundesgerichtshof, decision dated 24.07.2008, VII ZR 55/07

69 Hök 2012, p. 395

70 Bar 2014, p. 152

71 Hök 2012, p. 395

72 Hök 2012, p. 395

73 Hök 2012, p. 394- 395

74 United Nations 2010

75 Gama 2015

76 Hök 2012, p. 395

77 Kröger 2009, pp. 16-17, 174, Ullrich 2017, pp. 116-122

78 Ullrich 2017, pp. 106-114

79 Exali GmbH (Ed.) 2013

80 Hök 2012, pp. 394- 395

81 Hök 2012, p. 396

82 Hök 2012, p. 396

83 Hök 2012, pp. 295–296

84 Hök 2012, p. 396

85 Hök 2012, p. 394

86 Hök 2012, p. 394

87 Hök 2012, p. 396

88 Leuschner and Meyer 2016

89 Heuer 2007, pp. 17–19

90 Federal Ministry of Justice and Consumer Protection 2018

91 Federal Ministry of Justice and Consumer Protection 2018

92 Heuer 2007, pp. 17–19; BGH, decision dated 21.7.2005, VIII ZR 121/04, page 43 f.

93 Federal Ministry of Justice and Consumer Protection 2018

94 Heuer 2007, pp. 17–19

95 The formulation provided by the author

96 Federal Ministry of Justice and Consumer Protection 2018

97 The formulation provided by the author

98 Spindler and Rieckers 2011, p. 91

99 English translation - German Product Liability Act

100 The formulation provided by the author

101 Heuer 2007, pp. 17–19

102 Heuer 2007, pp. 17–19

103 Heuer 2007, pp. 17–19

104 GMBl 2017

105 Heuer 2007, pp.17–19

106 Heuer 2007, pp. 17–19

107 BGH, decision dated 29.05.2013 – VIII ZR 174/12

108 Heuer 2007, pp. 17–19

109 BGH, decision dated 29.5.2013, VIII ZR 174/12

110 GMBl 2017

111 Heuer 2007, pp. 58–62

112 United Nations 2010

113 Säcker et al. 2016, p. 1164; BGHZ 77, 126, 130,BGH NJW 1993,335,336; OLG Köln VuR 1997, 363; Hoeren 2002, p. 69

114 Heuer 2007, pp. 17–19

115 Heuer 2007, pp. 17–19

116 Heuer 2007, pp. 17–19

117 Heuer 2007, pp. 17–19

118 Weselik and Hamerl 2015, pp. 294–295

119 Balchin 2018

120 Hök 2012, p. 395

121 Weselik and Hamerl 2015, pp. 312–313 Butcher et al. 2018

122 Butcher et al. 2018

123 Butcher et al. 2018

124 Trinity International LLP 2018

125 International Federation of Consulting Engineers 2017

126 International Federation of Consulting Engineers 2017

127 Butcher et al. 2018

128 International Federation of Consulting Engineers 2017

129 International Federation of Consulting Engineers 2017

130 Butcher et al. 2018

131 Butcher et al. 2018 Leuschner and Meyer 2016, 5-6, 9-10

132 Leuschner and Meyer 2016, 5-6, 9-10

133 Leuschner and Meyer 2016, 5-6, 9-10 Leuschner and Meyer 2016, 5-6, 9-10

134 Leuschner and Meyer 2016, 5-6, 9-10

135 Leuschner and Meyer 2016, 5-6, 9-10

136 Hök 2012, pp. 3–4

137 Hök 2012, pp. 3–4

138 Hök 2012, pp. 3–4

139 Hök 2012, pp. 3–4

140 US Legal, Inc. 2016

141 Hök 2012, pp. 3–4

142 Molineaux 1997

143 US Legal, Inc. 2016

144 Hök 2012, p. 85

145 Federal Ministry of Justice and Consumer Protection 2015

146 Hök 2012, p. 85

147 English translation - Guide on drawing up contracts for large industrial works

148 English translation - Munich Contract Handbook

149 Hök 2012, p. 244

150 Hök 2012, p. 244

151 Hök 2012, p. 244

152 FIDIC 2018

153 Leuschner and Meyer 2016, p. 62 Hök 2012, pp. 3–4

154 Hök 2012, pp. 3–4

155 Hök 2012, p. 243

156 Hök 2012, pp. 3–4

157 Rustmeier 2016, p. 17

158 ICC n.y.

159 Leuschner and Meyer 2016, p. 65

160 Weselik and Hamerl 2015, pp. 36–37 Hök 2012, pp. 463–464

161 Hök 2012, pp. 463–464

162 Heuer 2007, pp. 10–11

163 Heuer 2007, pp. 10–11

164 Hök 2012, p. 296

165 Leuschner and Meyer 2016, p. 52

166 Hök 2012, p. 462

167 Leuschner and Meyer 2016, 37, 41

168 Leuschner and Meyer 2016, 37, 41

169 Leuschner and Meyer 2016, 37, 41

170 Leuschner and Meyer 2016, 37, 41

171 Leuschner and Meyer 2016, 37, 41

172 Leuschner and Meyer 2016, 37, 41

173 Leuschner and Meyer 2016, 37, 41

174 Leuschner and Meyer 2016, 37, 41

175 Leuschner and Meyer 2016, 37, 41

176 Leuschner and Meyer 2016, 37, 41

177 Leuschner and Meyer 2016, 37, 41

178 Leuschner and Meyer 2016, 37, 41

179 Leuschner and Meyer 2016, 37, 41

180 Leuschner and Meyer 2016, 37, 41

181 Leuschner and Meyer 2016, 37, 41

182 WIESNER 2015, p. 11

183 Schütze et al.; Schütze et al.; Schütze et al. 2018

184 Weselik and Hamerl 2015, V

185 Hök 2012, p. 297

186 English translation - The Mechanical Engineering Industry Association

187 English translation - The Central Association of the Electrical Engineering and Electronics Industry

188 Weselik and Hamerl 2015, p. 317

189 Weselik and Hamerl 2015, p. 317

190 FIDIC n.d.-b

191 Zhang et al. 2006, p.37

61 of 61 pages

Details

Title
Limitation of liability clauses in contracts for large-scale international projects
College
University of Applied Sciences Mainz  (Wirtschaft)
Grade
2,0
Author
Year
2018
Pages
61
Catalog Number
V981817
ISBN (Book)
9783346341716
Language
English
Tags
Limitation of liability clauses, Limitation of liability, international projects, AGB, International plant construction contracts, FIDIC contract templates
Quote paper
Tatiana Istomina (Author), 2018, Limitation of liability clauses in contracts for large-scale international projects, Munich, GRIN Verlag, https://www.grin.com/document/981817

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