Cap-it-all letters

Mike Willis, Leeds, believes it will not be long before capping agreements which limit a professional’s liability become not just accepted, but expected, by clients.

There is now an increasingly widespread recognition that professional advisers should limit their liability contractually by setting express restrictions both on the extent to which they assume responsibility for their actions, especially to third parties, and the amount of their exposure in damages in the event of liability.

The pressure to do this has intensified in recent years, given the continuing high number of successful claims, a much harder professional indemnity insurance market following 11 September, and the introduction of limited liability partnerships, in which individuals are having to face up to the possibility that limits to their partners' joint liability may leave them personally exposed for the consequences of their own mistakes, especially if under-insured.

Liability caps are more common in some areas - the accountancy and construction professions for example - than others. But even the legal professions are at last waking up to the value of them. Research last November among leading London professional indemnity practitioners reflected a view that caps on liability will improve firms' negotiating positions in the event of a big claim, even while they have yet to be tested in the UK courts. In a survey of more than 100 senior lawyers in February 2004, 71% responded that their clients "accept" liability caps as a commercial reality. Barristers' chambers too, following cancellation of advocates' immunity (Hall v Simons, HL 2001), are beginning ask for risk management commitments from their instructing solicitors (e.g. to store documents and even in some cases to underwrite some of their potential risk exposures to clients).

Yet there is still reticence and resistance in some quarters, with those against capping agreements broadly following two lines of argument: "The market will not stand for it and we shall simply lose clients to other firms who are prepared to risk unlimited exposure"; and "it's illegal and/or contrary to professional regulations".

In most cases, neither view is sound.

The law

Professionals' duties are primarily determined by the terms of their engagement, but unless excluded or varied by agreement within the law, there will always be an implied obligation of skill and care under s.13 Supply of Goods and Services Act 1982. There are abundant cases applying a similar duty in tort, the standard being that which a reasonably competent adviser would exercise in the type of engagement applicable to the subject case (Caparo Industries v Dickman 1990).

There are few absolute prohibitions in law against excluding professional liability: clauses limiting liability for fraud, death, or personal injury are void or unenforceable and terms purporting to limit liability for fraud may jeopardise the whole contract. For solicitors, provisions in a "contentious business agreement" - whatever one of those is, the Law Society is still unsure - purporting to exclude a solicitor from liability for negligence or to relieve him from responsibility, are void under s.60(5) Solicitors Act 1974. There are no such stringent restrictions for non-contentious matters. Subject to minimum requirements set by their respective professional bodies, however, these provisions do not prevent advisers from contractually limiting their exposure, or agreeing a cap to their quantum liability, albeit they will be subject to the general law relating to exclusion clauses.

Clear and reasonable clauses

Specifically, the clause must be clear: it will always be construed against solicitors under the "contra preferentum" rules (Houghton v Trafalgar Insurance 1953) and most professions will be adjudged to be wiser as to the terms of their engagement than their clients. It must also satisfy the reasonableness tests under the Unfair Contract Terms Act 1977, to which the subjective balances of resources and bargaining position, availability of insurance cover, the value of fees, and the scale of loss are all relevant.

There is no useful case law yet to give much guidance on what would or would not be construed as "reasonable". The only recent case focusing on exclusion provisions in a professional engagement is Keele University v Price Waterhouse (May 2004), in which the terms of the accountants' disclaimer clause were interpreted and construed, predictably, in favour of the University. Issues of legality and/or UCTA were not considered.

Apportioning liability

As mentioned, many professionals, especially larger firms, routinely try to limit their liability to clients, with adverse effects on the ability of a co-defendant adviser, sued for the same loss, to obtain a full contribution from them. Where this is a possibility, the professional needs to ensure that their terms of engagement include a proportionate liability (or ‘net contribution’) clause, effectively to exclude any amount which they would have been allowed to recover from another party but are unable to do so because the client has agreed a cap or exclusion of the other adviser's liability.

There are potential problems with that sort of arrangement, however. The legal 'liability' of the other professional may be different, creating ambiguities as to the applicability of the clause. If the victim's 'loss' resulting from the different defaults of the respective advisers is not the same, rights to a contribution under the Civil Liabilities (Contribution) Act 1978, which may often be the basis for applying net contribution clauses, may be undermined (Royal Brompton Hospital NHS Trust v Hammond, HL 2002). In Abbey National v Gouldman & Co (2003), the first defendant's solicitor settled with the claimant on terms that it would not have to pay a greater amount than the claimant eventually recovered from the co-defendant surveyors. Thus the solicitor's "contribution" was effectively capped at 50%; but the claim against the surveyors, based upon the solicitor's statutory entitlement to a contribution under the 1978 Act, was disallowed because the solicitor's agreement with the claimant effectively impeded the court's discretion under the Act to decide for itself what contribution would be "just and equitable". Care should be taken in light of this approach to ensure that the engagement terms do not purport to fetter the court's ultimate discretion.

Regulation

Principle 12.11 of the Law Society's Guide to the Professional Conduct of Solicitors states: "Although it is not acceptable for solicitors to attempt to exclude by contract all liability to their clients, there is no objection as a matter of conduct to solicitors seeking to limit their liability provided that such limitation is not below the minimum level of cover required by the Solicitors' Indemnity Rules" (currently £1 million). Further stipulations are that the limitation must be brought clearly to the clients' attention and be understood and accepted by them, preferably in writing. Express indications as to the limits of assumed responsibility are also encouraged.

Similar rules govern most other regulated professions.

The future

It cannot be long before "acceptance" of capping agreements becomes "expectation". The momentum towards a universal acquiescence among at least the larger firms and their clients seems unstoppable, and before long differences may be found between firms only in the amounts to which they are prepared to concede exposure. These will vary according to the nature and scale of the risks undertaken by both adviser and client and should rarely be agreed without careful review, including availability of insurance and other methods of transferring risk.

Professional & Financial Risks Focus is published on the basis that no liability is accepted for any errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances.

Beachcroft Wansbroughs
Professional & Financial Risks Focus, Issue 03, July 2004