Solicitors

Limiting your liability - is capping your liability to the client the answer?

Sam Pye 17 July 2024

Limiting your liability can be a useful tool to control your exposure in the event of a claim and deciding on the appropriate level of professional indemnity cover for your firm. However, it can be difficult to get this right and you need to be confident that the limitation will be valid and enforceable should it be challenged.

It is a regulatory requirement for firms to have sufficient insurance for the work they do notwithstanding any limitation of liability. Rule 3.1 of the SRA indemnity insurance rules states: 'an authorised body must take out and maintain professional indemnity insurance that provides adequate and appropriate cover in respect of current or past practice, taking into account any alternative arrangements the body or its clients may make.'

Therefore, you are required to undertake a realistic assessment of the potential quantum of a claim should things go badly wrong. See our article 'how to decide on the appropriate level of professional indemnity insurance'.

An SRA authorised body is not allowed to cap its liability to clients below the minimum level under the SRA's minimum terms and conditions. The view is that to do so defeats the underlying objective of the conditions. Simply limiting liability for everything a firm does at £2m or £3m, regardless of the nature of the matter in question, risks the limit being judged as unreasonable.

In 2021, the Solicitors Disciplinary Tribunal (SDT) imposed a fine on a firm for seeking to improperly limit liability and/or limit the timeframe for when a claim could be made. The SDT found these breached various provisions of the Solicitors’ Code of Conduct 2007 and the SRA Code of Conduct 2011.

Consider your client obligations

You should consider the following obligations in all instances when you seek to limit your liability to a client:

the duty not to abuse your position by taking unfair advantage of clients (see paragraph 1.2 of the SRA Code of Conduct)
the duty to give clients information in a way they can understand and ensure they’re in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them (see paragraph 8.6 of the SRA Code of Conduct).

Any such cap should therefore:

be fair and reasonable in the particular circumstances of the client and the case
reflect the balance of power and knowledge between the solicitor, REL or firm and that client
consider the best interests of that client (SRA principle 7) and must be communicated to the client in a way that they can understand the impact.

Legislative protections for clients – where limitations of liability may be ineffective

The nature of protections afforded to the client in law depends on whether they are an individual or a business entity. The terms of the Consumer Rights Act 2015 mean that restrictions on liability will not be enforceable if the court determines that they are not ‘fair’ – regardless of whether the client agreed to them or not.

Business clients are afforded protection under the Unfair Contract Terms Act 1977 (UCTA). Here are some key points to note.

1) Negligence

UCTA prevents any business from excluding or limiting its liability for death or personal injury resulting from negligence. Any limitation must satisfy the requirement of 'reasonableness'.

2) Implied terms

The act also regulates the ability to exclude or limit liability for breach of certain duties implied by law into contracts.

3) Standard form contracts

UCTA is particularly relevant where standard form contracts are used, as these are often not negotiated between the parties and the person agreeing to the terms often has little or no opportunity to influence their content.

4) 'Reasonableness' test

The act provides a test of 'reasonableness' to assess whether certain contract terms are fair and reasonable. It requires consideration of the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

5) Indemnity clauses

UCTA also regulates indemnity clauses, which are clauses that can require one party to compensate the other for certain events.

The SRA has said that they would not expect to see limits put on liability as a matter of routine. However, we are aware that many firms simply put in place a blanket cap on liability on every single matter which shows no thought and is very much just routine. Whereas, if the firm placed a limit of liability on every matter, but actively considered what was a sensible and reasonable limit in the circumstances of the case (and were able to evidence this and their rationale for the amount – say in an onboarding checklist), then we don’t think that is ‘routine’.

What firms can do

To minimise the risk of a successful challenge, limitations of liability that the firm puts in place should:

be appropriate to the nature of the work
reflect the relevant terms in your professional indemnity policy
be fair and reasonable.

To be considered fair and reasonable:

do not exclude liability entirely
do not impose a generic cap on liability across all your business; it should be proportionate to the nature of the particular transaction and the potential loss your client could suffer
discuss the cap with your client or flag it clearly in a covering letter – simply putting it into your engagement letter or terms of business without discussion may be more likely to lead to it being unenforceable
make clear whether the cap is an aggregate limit on liability or applies separately to each breach or each claim.

Avoid unfair or unreasonable limitations

You need to balance the importance of limiting liability, against the risk of any limitation or exclusion being seen to be unfair or unreasonable to your client. You should take into account:

the type of client
the type of work
the commercial risk vs reward.

General risk management guidance

Before considering taking on a transaction that may exceed the firm’s current PII cover, you need to carry out a full client and matter risk assessment to ascertain what, if any, additional insurance cover is necessary. Consider whether it is a one-off transaction, or whether the fees and any subsequent work will compensate for the number of years (probably at least six) that you will need to buy the additional cover.
Document any negotiations and/or challenges concerning a limitation of liability clause. Particularly where a proposed limit is significantly different from the total matter value or potential risk exposure, and/or where you are seeking to limit your liability at a level below your total level of PII cover (where you hold PII cover above the minimum £2m/£3m requirement). It is important that you detail the rationale, considering why it is fair and reasonable in the context of the particular client and therefore does not breach SRA Code of Conduct.
Consider your balance sheet - i.e. if a claim were to arise and it was beyond your limit of indemnity how much cash could you afford to lose? If you are not limiting your liability just pause and reflect for a moment.
Ensure that any limitation of liability is in a separate, standalone clause, rather than burying it within another clause of the contract. This reduces the risk that the limitation clause could be interpreted as applying only to the particular clause in which it is located. It also protects you from the allegation that the limitation was ‘hidden away’ within the contract.
You can’t exclude liability for fraud - some limitation of liability clauses will explicitly exclude liability for fraud or fraudulent misrepresentation. However, such liability cannot be excluded or limited by law regardless of whether this is stated in the contract.
Where possible, the client should be given sufficient time to consider the matter and/or take legal advice.

Important note

Limitation of liability clauses and the interpretation and application of UCTA can be complex and depends on the individual circumstances. This article in no way purports to be legal advice and it is always recommended to seek legal advice when it comes to limiting liability in contracts.

If you would like to discuss any points covered in this article, or anything connected to your PII policy, please get in touch.

Get In Touch

Sam Pye

Director - Professional and Financial Risks +44 (0) 20 7031 2305 [email protected] Read more

Limiting your liability - is capping your liability to the client the answer?

Consider your client obligations

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Legislative protections for clients – where limitations of liability may be ineffective

What firms can do

Avoid unfair or unreasonable limitations

General risk management guidance

Get In Touch

Sam Pye

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