High Speed Rail: Limit of Liability, Who Says It Is Not Possible?

The contractor’s contractual protection to limit its overall liability in a public construction contract or supply contract to the total contract price it received is possible, albeit with great difficulty. It is easier to limit daily liquidated damages at the maximum of 10% of the contract value. Neither is barred by Thai law but the government project-owner’s rejection would be so rigid that the two issues can be among the last to be resolved before the contract can be signed.

The myth that limits of the contractor’s liability are not possible has left some international contractors out of the Thai infrastructure market for concerns of expensive litigation and arbitration that could lead to uncontrolled levels of damages beyond the contract value that the contractor might have to suffer.

Toughest Issue of All

None of the bidding announcements for the various sections of the 253-kilometer northeastern Thai-Chinese high-speed rail mentions anything related to limits of liability of the contractor.

Any state project-owners will fight tooth and nail if the contractor tries to include the provision in the construction contract before signing—most likely citing the wrong reason that the Office of the Attorney General (OAG) will disallow it.

The fact of the matter is the OAG does not have any power to allow or disallow a limit of liability provision. It never demands to review any draft contract. It is totally up to the government project-owner in any state-run project, especially large projects, to decide whether or not it should submit a draft contract to the state legal advisers for review.

For some significant well-known state enterprises regularly transacting businesses with international corporations, they routinely ignore the public prosecutors and make all the business and legal decisions themselves, including allowing in a limit of liability clause, and sign their contracts without bothering the legal arm of the administration.

Project-Owner’s Effective Method of Defense

In practice, government project-owners tend to submit a draft contract in one transaction to the OAG to be approved only once, then use that work precedent as the model and template in other subsequent similar transactions without having to go back to the public prosecutors again.

Those contractors and suppliers in the subsequent transactions can wonder out loud why they must, in effect, be bound by a contract of a previous transaction, to which they were not a party. The pressure will be on you to accept others’ contracts for this reason.

In some cases, where the contractor or supplier’s standard contracts are required  (yes,  you read it right!) and limits of liability inherently appear in those contracts, the OAG might not comment on the limit of liability clause at all and will leave it to the discretion of the project owner.

If the project-owner chooses to have the state legal advisers review any of these contracts—no project owners of large projects are required by law, not even the Public Procurement Act of 2017, to submit their draft construction contracts to the state legal advisers for review—the public prosecutors will warmly oblige. It’s purely the project owner’s choice.

Who Has the Power to Decide?

First and foremost, in any state-sponsored project, the project owner has every power to decide on all business and legal matters related to its project.

If they cite the name of a third party state agency that sounds so overwhelmingly powerful as a potential obstacle to any issue, it means the project-owner is tactically using the Hand of God to defeat you in a debate that you cannot win.

In the event the project owner does not want to make a decision on whether or not it will permit an inclusion of a clause on a limit of the contractor’s liability, one other agency that can make that decision on behalf of the project owner is surprisingly not the OAG but the Comptroller General’s Department, which directly administers the Public Procurement Act and the laws and regulations related to budget disbursements to issue payments of construction fees and expenses.

Have Limits of Overall Liability Been Done Before?

Absolutely. Some state contracts carry a provision on a maximum liability for the contractor or supplier.

An allusion to the words, “public prosecutors” by government project-owners in various agencies will, however, be very effective in scaring most contractors and suppliers off, who will likely give in to the owner’s insistence for the construction contract or sale contract to be completely silent on the issue, exposing the contractor and supplier to a full extent of liability—however far Thai law can carry it—potentially exceeding the economic benefit that the contractor/supplier could have brought under its contract.

Only a small number of big-ticket international corporations are successful in limiting their overall legal liability in construction, supply or other service contracts. Their success is based on the very high levels of sophisticated skills and technology that the contract calls for. If there is no limit of their liability, these high-tech companies just simply won’t sell into the country, a denial of its access to world-class know-how and high science and a disservice to the nation in process of development.

Ceiling of Daily Liquidated Damages More Likely

Neither does any of the bidding announcements in the high-speed rail project refer to any limit of the 0.10% daily liquidated damages, which could run into eternity. This daily penalty could keep multiplying past the contract price the employer paid to the contractor.

Is it possible to limit these liquidated damages?

Yes, of course. The Ministry of Finance Procurement Regulation of 2017 promulgated under the Public Procurement Act even expressly permits such limit. The procurement regulation says the government project-owner may impose a maximum of daily liquidated damages in accordance with the rules laid down by the Procurement Policy Committee. To date the policy committee has not issued any rules on limits of contractors’ liability, for the provision is already widely believed to grant a blanket approval to a limit of liability.

What is the limit?

What is the norm for the contractor’s limit of liability on daily liquidated damages?

10% of the contract price is normal.

It’s absolutely reasonable for the contractor and supplier in any state-sponsored project to limit its legal and monetary liability up to 10% of the contract price stipulated in the contract. Or even better: 10% of the contract price it has actually received from the government project-owner.

Compared with the limit of your overall liability, a limit on daily liquidated damages is more likely.

Again, expect to encounter a fierce resistance from the project owner, but the possibility is there. Your success in inserting this provision into the construction and supply contract depends on how much leverage you have with the owner, rather than a hindrance by law.

Wirot Poonsuwan is Senior Counsel and Head of Special Projects at Bangkok law firm Blumenthal Richter & Sumet and can be contacted at wirot@brslawyers.com.

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