Clauses limiting liability for professional negligence are now commonplace within the terms and conditions of business relied upon by professionals. In this article we examine the legal principles that apply to such clauses and the extent to which they can be relied upon.
The case for limiting liability
Historically, attempts at limiting liability were rare in professional circles. However, over recent decades they have become much more prevalent, as both the volume and the value of professional negligence claims have increased.
Instinctively, and to those intending to purchase professional services, often at significant expense, it may seem disconcerting and unreasonable that the provider of those services is seeking to rely at the outset on a clause limiting liability for the mistakes it might later make. Where the effect of such a clause is to limit liability to an amount significantly less than the total potential loss that could arise, this sentiment would seem all the more justified.
However, at a broader level, limiting liability can be of benefit to both professionals and their clients. When done conscientiously, consistently and conspicuously, limiting liability can enable professional firms, and the wider profession to which they belong, to avoid being unfairly burdened with a disproportionate degree of financial risk. In turn, and from a client’s perspective, this can ensure that not only does the professional service upon which they rely remain viable and available, but that the particular firm upon which they (and other clients) rely remains financially stable, capable of securing professional indemnity insurance cover at an affordable premium and, by managing its overheads in this way, able to offer more competitive rates.
Alternatives to limiting liability
When it comes to managing its exposure to financial liability for professional negligence, a firm is not confined to relying on provisions limiting liability. As an alternative, it can include provisions within its retainer that exclude liability and/or that serve to constrict its liability.
Although liability for negligence can be excluded altogether, provisions to this effect would be much more onerous and, for that reason, are relatively rare as between a professional firm and its client. In certain professions, such as solicitors, they can also be unlawful. More commonly, provision is made within the retainer for liability for certain types of loss, such damages for consequential loss, to be excluded.
Where provision is made for liability to be constricted, it is done by demarcating the scope of the professional’s retainer and associated duty of care, so as to avoid assuming responsibility for any losses arising from matters and events extraneous to it. In this way, no liability arises in the first instance which requires limiting or excluding.
It is because provisions limiting liability are by far the more commonly encountered that this article will focus predominantly on the law in this area.
Limiting liability at common law
Before a firm can rely on any clause limiting liability for professional negligence, it will firstly need to satisfy the court that the clause has been incorporated into its retainer. Where the clause is recorded as part of a retainer letter that has been sent to a client at the outset of an engagement, this requirement is more likely to be satisfied, whether or not the retainer letter is counter-signed by the client. However, where no retainer letter exists, and the firm seeks to rely either on a prior course of dealing or some other form of notice, it may prove more difficult to satisfy this criterion.
Even if a clause limiting liability has been incorporated into its retainer, the firm will still need to persuade the court that its terms clearly apply to the liability at issue. When interpreting such a clause, the courts will invariably do so ‘contra preferentum’, that is against the party seeking to rely on it.
Even if the clause limiting liability is clear and unambiguous, it may still be defeated where it can be shown that the firm seeking to rely on it misrepresented the nature or effect of it when the retainer was entered into. This will be so even if the misrepresentation was made innocently, as opposed to negligently or dishonestly.
However, even if it is established that the clause satisfies all the common law requirements, it must still then be tested against the statutory regime that has been introduced as an extra layer of protection for both commercial and consumer clients.
Limiting liability to commercial clients
Where the contact in question is between two commercial entities acting in the course of business, any clause limiting liability for professional negligence will be subject to the statutory provisions contained within the Unfair Contract Terms Act 1977.
By section 2 of the 1977 Act:
(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.
(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
To ascertain whether the clause satisfies the requirements of reasonableness under the 1977 Act, section 11(1) requires consideration to be given to whether the clause was a fair and reasonable one having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
In performing this exercise, and insofar as they are relevant, the court is also likely to have regard to the particular matters listed within Schedule 2 of the 1977 Act, which are:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.
Finally, and where the clause seeks to limit liability to a specified sum of money, the court will in assessing its reasonableness also have regard to section 11(4) of the 1977 Act and to:
(a) the resources which the person seeking to rely on the clause could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to the person seeking to rely on the clause to cover himself by insurance.
In the case of Marplace (Number 512) Limited v Chaffe Street (a firm), the High Court concluded that a clause relied upon by solicitors limiting liability for professional negligence to £20 million was reasonable. In so doing, it observed that in this case:
- The claimant was a sophisticated and wealthy consumer;
- The bargaining positions of the parties were equal;
- The claimant’s representatives were used to contracting with professionals on the basis of a limitation of liability;
- The claimant was aware of (and on its own case discussed) the limitation, and it was not imposed on it as a non-negotiable term;
- The defendant firm determined the £20 million limit on reasonable commercial principles, taking into account insurance cover and its expense and the circumstances of the transaction.
Limiting liability to consumers
Prior to 1 October 2015, clauses limiting liability for professional negligence in contracts for the supply of professional services entered into by natural persons acting other than in a trade, business or profession, were governed by the Unfair Terms in Consumer Contract Regulations 1999.
However, contracts for the supply of professional services entered into since that date and which are entered into by individuals acting for purposes that are wholly or mainly outside their trade, business, craft or profession, are now governed by the Consumer Rights Act 2015.
Section 49(1) of the 2015 Act provides that every contract to supply a service is to be treated as including a term that the trader must perform the service with reasonable care and skill.
Moreover, and by section 62(1) of the 2015 Act, any term within a consumer contract which is found to be ‘unfair’ will not be binding on the consumer.
Whether or not a clause limiting liability is unfair must be determined under section 62(5) of the 2015 Act by:
(a) taking into account the nature of the subject matter of the contract; and
(b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.
Further, and under section 62(4) of the 2015 Act, a clause limiting liability will be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.
Limiting liability to a third party
Claims against professionals by non-clients are relatively common in professional negligence. The nature of these claims and how they can and do arise is explained in our related article: Third party claims for professional negligence
An interesting issue that sometimes arises in this context, is whether a professional firm can rely on a clause limiting liability in a retainer entered into with one party, in a claim that is pursued against it by another party, who is not a party to that retainer and, therefore, not a client of the professional.
This issue can arise in a variety of different situations, such as where a solicitor is instructed to prepare a will on behalf of a (later) deceased client which, because of the solicitor’s error or omission, excludes a gift to an intended beneficiary, who may in turn pursue a claim for damages for professional negligence against the solicitor as a third party.
In such cases, and in the absence of evidence to confirm that the third party was alive to and accepting of any clause limiting liability to that third party, it is doubtful that such clauses would be lawful or effective, there being no contract between the professional firm and the third party into which the clause can be incorporated.
A related and perhaps more vexing issue, is whether a professional can lawfully disclaim any liability for negligence to a third party. Again, this might arise in a variety of different situations, such as where an accountant prepares a valuation of shares in a company for one potential investor which is erroneous and which is later relied upon by another investor to its financial detriment.
This very issue arose for determination by the House of Lords in different circumstances in the case of Smith v Eric S Bush (a firm). Here a professional negligence claim was pursued by the purchaser of a modest residential property against the surveyors who were directly instructed by, and who had reported in error to, the intended mortgagee.
Mrs Smith had paid a fee to the mortgagee for an inspection and had signed an application form which contained a declaration and notice which stated that the valuation report would be supplied without any acceptance of responsibility by the surveyors to Mrs Smith.
Having concluded that the surveyors had been negligent and that the disclaimer was subject to the provisions of the Unfair Contract Terms Act 1977, the House of Lords held that it was not fair and reasonable in all the circumstances to allow the surveyors to rely on the disclaimer. In so doing, Lord Griffith confirmed that the matters which should always be addressed by the court as part of any determination were:
- Whether the parties were of equal bargaining power;
- If it was reasonable and practicable to obtain advice from an alternative source;
- The difficulty of the task being undertaken for which liability is excluded;
- The practical consequences of the decision on the question of reasonableness.
However, the Court of Appeal reached a different conclusion in McCullagh v Lane Fox And Partners Ltd. Here a professional negligence claim was pursued by the purchaser of a substantial residential property against the estate agent retained by the vendor to market and sell the property.
Mr McCullagh had been advised by the agent by way of a magazine advertisement, by an oral representation and in detailed sales particulars, that the property had gardens of approximately one acre, when in fact the gardens extended to only half an acre. However, the sales particulars were accompanied by a standard form disclaimer which stated, amongst other matters, that all statements contained within them were made without responsibility on the part of the agent and that none of the statements were to be relied on as statements or representations of fact.
Having found on appeal that Mr McCullagh had suffered a loss as a consequence of the error made by the agent, and that the disclaimer was subject to the provisions of the Unfair Contract Terms Act 1977, the Court of Appeal held that it was fair and reasonable in all the circumstances to allow the agent to rely on the disclaimer. In so doing, Lord Justice Hobhouse observed that:
- This was a transaction which involved a sophisticated and experienced individual;
- The claimant had more than an ample opportunity to inform himself of the disclaimer;
- The claimant had ample opportunity to obtain an independent check of the acreage;
- The claimant could reasonably have been expected to have made enquiries of the vendor as to the acreage, acting through his solicitor and as part of the conveyancing process;
- The use of disclaimers by estate agents was commonplace and the normal basis upon which house sale transactions were conducted.
Simply because a clause limiting liability for professional negligence is contained within a firm’s engagement documents does not mean that it can be relied upon to reduce or defeat a claim of this nature. That determination will require careful legal analysis, taking into account all the circumstances of the case, including the capacity in which the claimant is acting.
Nevertheless, prevention is often better than cure and when presented with terms and conditions of business, it is always advisable for a potential client not only to read and consider them carefully, but also to raise any concerns that may arise as to the extent to which liability for professional negligence has been expressly limited, or even excluded.
There may well be sound economic reasons why a firm may not be willing to relax the limitations that it has proposed on its liability and, once cognisant of them, a potential client may be much more willing to accept those limitations. Alternatively, and in the absence of good reason, a potential client may draw appropriate inferences from the fact that the professional firm is unwilling to ‘back’ itself and do more to safeguard its client’s interests. In that event, and where possible, it may be wise for the client to engage a different provider, even though this may give rise to an additional, short-term cost.
Further legal assistance
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