To cap it all
28 June 2004
20 May 2013
12 July 2013
9 April 2014
5 March 2014
10 June 2013
The slowness of the solicitors’ profession to follow the lead set by the larger accountancy firms in capping their liability by contractual agreements has been extraordinary. This is perhaps because, while there have been many successful actions against lawyers, few have been on such a scale as to exceed insurance limits or threaten the survival of the larger firms. More recently, however, the personal risks being run by lawyers are beginning to match those of the accountants.
The last few years have seen a continuing high number of successful claims against solicitors, a much harder professional indemnity insurance market following 11 September and the introduction of limited-liability partnerships (LLPs), in which individuals are having to face up to the possibility that limits to their partners’ joint liability may leave them personally exposed to the consequences of their own mistakes, especially if they are underinsured. The need for curbing at least the amount, if not the ambit, of their exposure by means of express agreements with their clients now has a much higher profile.
Yet there is still reticence and resistance to do so, with those against it broadly following two lines of argument: our market will not stand for it and we shall lose clients to other firms who are prepared to risk unlimited exposure; and it is illegal and/or contrary to professional regulations.
Neither view is sound.
Solicitors’ duties are determined primarily 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 Section 13 of the Supply of Goods & 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 only two absolute prohibitions in law against solicitors excluding liability: as for all professional engagements, 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. Provisions in a ‘contentious business agreement’ – in effect, a retainer to provide services in connection with contentious business such as litigation – purporting to exclude a solicitor from liability for negligence, or to relieve them from any responsibility to which they would otherwise be subject, is void under Section 60(5) of the Solicitors Act 1974 (but there are no such stringent restrictions for non-contentious matters).
Subject to minimum requirements imposed by the Law Society, however, these provisions do not prevent solicitors 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. Specifically, the clause must be both clear (it will always be construed against the solicitor under the contra proferentum rules (Houghton v Trafalgar Insurance (1953)), and it must satisfy the reasonableness tests under the Unfair Contract Terms Act 1977 (UCTA), 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 as 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 (19 May 2004), in which the terms of the accountants’ disclaimer clause were interpreted and construed, predictably, in favour of the university. But issues of legality and/or the UCTA were not considered.
Apportioning liability where other professional advisers are also involved
As mentioned, other professionals, especially large accountancy firms, routinely try to limit their liability to clients, with adverse effects upon the ability of a co-defendant solicitor, sued for the same loss, to obtain a full contribution from them. Where this is a possibility, the need arises for the law firm to ensure that its terms of engagement include a proportionate liability clause, effectively to exclude any amount that it would have been allowed to recover from another party but is unable to do so because the client has agreed a cap or exclusion of the other adviser’s liability.
There is potentially a significant problem with that sort of arrangement, however. In Abbey National v Gouldman & Co (2003), the first defendant solicitors settled with the claimant on terms that they would not have to pay a greater amount than the claimant eventually recovered from the co-defendant surveyors – thus the solicitors’ ‘contribution’ was effectively capped at 50 per cent. But the claim against the surveyors, based on the solicitors’ statutory entitlement to a contribution under the Civil Liabilities (Contributions) Act 1978, was disallowed because the solicitors’ 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.
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 at £1m]”.
Further stipulations are that the limitation must be brought clearly to the client’s attention and be understood and accepted by them, preferably in writing.
Express indications as to the limits of assumed responsibility are also encouraged.
As discussed above, the issue of contractual liability caps is gathering profile. In research last November among leading London professional indemnity practitioners, their view was that caps on liability, and other agreed limitations to exposure, will improve law firms’ negotiating positions in the event of a big claim, even while they have yet to be tested in the UK courts.
In February 2004, a survey of more than 100 senior lawyers revealed that 14 per cent had agreed limits on their liability often or all the time, and 39 per cent had made such arrangements “sometimes”. Less than half were prepared to rule out cutting liability to their clients altogether, and only a minority feared reputational damage. A high proportion (71 per cent) responded that their clients “accept” liability caps as a commercial reality.
It cannot be long before ‘accept’ becomes ‘expect’. The momentum towards a universal acquiescence among at least the larger firms and their clients to clauses capping liability 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 solicitor and client and should rarely be agreed without careful review, including the availability of insurance and other methods of transferring risk.
Mike Willis is a professional risks partner in the Leeds office of Beachcroft Wansbroughs