Practical limitations
Making it effective
If the firm decides that a liability cap is appropriate/desirable in a particular transaction, then it is faced with the issue of how such a cap can be implemented effectively. When discussing limits on liability, any commercial organisation requires to take account of the Unfair Contract Terms Act (UCTA) and the Unfair Terms in Consumer Contracts Regulations. The concept of reasonableness of any cap is key.
In dealing with questions of “reasonableness” of liability caps, much will depend on the context in which such a cap is imposed. For instance, if the client is commercially sophisticated and is well used to dealing with professional advisers, this may help to indicate that the parties had an equal bargaining position and that a limitation liability was reasonable. The fact that the cap is based on relevant commercial considerations would also help to establish the reasonableness of the cap. Such commercial considerations could be the turnover of the firm in comparison with the transaction value, and the level of the firm’s insurance cover.
Combined with this, a firm would require to show that the client was aware of the liability cap and its effect. Ideally, there should be some evidence that the cap had been discussed in advance.
The Solicitors Code of Conduct 2007 published by the SRA in England (the same approach is used in the new risk-based code in force from 6 October 2011 – see chapter 1, “Outcomes” and IB(1.8)) specifically mentioned the issue of limiting liability and how this should be approached by solicitors.
The guidance in rule 2.07 (allowing limitation of liability by contract) stated: “The details of any limitation must be in writing and brought to the attention of the client. Because such a limitation goes to the heart of the agreement between you and your client, you should ensure that your client knows about the limitation and, in your opinion, understands its effect. Consequently, it would not be appropriate to include the limitation within a ‘terms of business’ letter without specifically drawing your client’s attention to it.”
This approach mirrors the UCTA requirement for transparency and discussion.
Limitations of liability contained in standard terms and conditions may stand up less well to a challenge than a bespoke limitation discussed with and clearly communicated to the client taking account of the particular engagement. The reason for this is that it could be difficult to demonstrate that such a cap was reasonable, given that it is imposed as a non-negotiable term, without any advance discussion with the client. If it bears no relation to the firm’s insurance cover or the value of the transaction at hand, the very fact of its standardisation across the firm’s business could detract from its effectiveness. One could, however, argue that if such a cap was in the engagement letter, any potential client would, at the commencement of the transaction, have the opportunity simply not to agree to the cap and instruct another firm.
While this may give rise to interesting legal arguments, from a risk management perspective, it would seem to be safer to consider the exposure on each transaction individually and deploy a liability cap in those cases where there is a genuine and serious concern that the firm’s risk exposure is raised to a level close to or in excess of the firm’s insurance cover.
Effect of incorporation
If a practice is incorporated, does that effectively protect against individual personal liability of partners and remove the need to concern itself about exposure and adequacy of PII cover?
Incorporation or conversion to LLP status clearly provides additional personal protection for partners/members. It does not, however, impact on a solicitor’s individual liability where acting in a personal capacity as trustee or director etc.
If a practice is unable to defend a claim which exceeds its insurance cover, the claimant’s recourse, following partial reimbursement from the practice’s professional indemnity insurance, is against the (now uninsured) practice. That would place the capital accounts/contributions in the practice at risk (although the personal assets of the partners/members will be protected).
Although incorporation/LLP status does provide a level of protection, it does not necessarily follow that there is any less need to have regard to the insurance cover levels and principles of good risk management. After all, risking the practice unit itself may have a long term effect on partners’/members’ cash flow (regardless of the asset protection afforded by these vehicles), and individual reputations.
Effect of disclaimers
Consider these scenarios:
We have had two situations recently where we required clients to acknowledge that they would have no claim against the firm.
In one case, without charging any fee, we agreed to give the client a style of lease for him to use, subject to his acknowledging a disclaimer of liability by the practice.
In the other case, we were acting for a client in a company reorganisation and the client wanted to go ahead with the transaction in the face of our advice about the risks. Since the client wasn’t prepared to accept our advice, we recorded in a letter (acknowledged by the client) that the firm would have no liability to the client.
Is this considered an effective approach to avoiding/managing liability?
It is important to approach both of these scenarios from a client engagement perspective rather than an exclusion of liability approach. While restricting the scope of engagement is good risk management practice and could provide a useful defence to any claim, purporting to exclude liability risks the solicitors approaching matters in a way where there could be difficulties in defending a claim. The law regarding exclusion clauses is voluminous. Apart from difficulties in enforcing these, excluding liability for advice given would be professionally inappropriate and likely always to be regarded as unenforceable by reason of UCTA.
In the first scenario, one can easily see how a client might adapt a lease but perhaps use it in the wrong circumstances, or fail to serve some ancillary documentation at the commencement of the lease which would be necessary to make it effective. The difficulty for the solicitor is establishing, at the time of supply of the lease documentation, how much information the client provided as to the circumstances in which it would be used. Where does the solicitor’s obligation to advise the client cease in these circumstances? When the client acknowledges that he has “no claim” against the solicitor, can he be said to have given “informed consent”?
In this type of scenario, appropriate risk management might be to provide a covering letter or email to the client explaining that the lease provided is simply a template, not a complete document; that each transaction will have its own specialities which should be taken account of in the lease; summarising the circumstances in which it would be appropriate to use the lease; and drawing attention to any other ancillary matters on which you have not been asked to advise but which might be relevant. Perhaps the client should also be advised that should they adapt the lease without seeking further prior legal advice, they do so at their own risk.
By delivering the lease with supporting information in context, the solicitor is effectively limiting the scope of the engagement, rather than simply attempting to exclude (or limit) liability.
In relation to the second scenario, where the client has refused to take the solicitor’s advice on board, the solicitor should simply make it clear in the communication that the client will be acting contrary to the solicitor’s advice and does so at their own risk. In this type of scenario, rather than excluding liability, the solicitor is confirming to the client that the solicitor has, in accordance with the express and implied terms of engagement, delivered legal advice to the standard of a reasonably competent practitioner which the client is now choosing to ignore. From a risk management perspective, the client is, by his actions, relieving the solicitor of liability.
The important issue is to have this properly documented on the file, since without an audit trail in relation to the advice, the solicitor would have difficulty in establishing his defence to any claim.
Considered approach
Limitation of liability, by way of a liability cap in engagement terms, is not, unfortunately, as simple as picking a number and inserting it in standard conditions. Getting it right and having effective risk management based on this approach requires a little effort and the use of bespoke engagement terms. However, if a firm is faced with an engagement that pushes at the boundaries of its tolerance to risk but which it wishes to pursue, a few minutes spent discussing limitation issues is likely to be beneficial.
In this issue
- The role for pro bono
- Rectifying trusts – a Scottish perspective
- Squeezing capital claims
- The many faces of mortgage fraud
- Welcome break or cause for concern?
- Opinion
- Reading for pleasure
- Book reviews
- Council profile
- President's column
- Beware what you register
- Justice inside and out
- Auto-enrolment: are you prepared?
- Power and authority
- Refining the message
- Seeing through the cloud
- Don't drag out child cases
- Up to the job?
- Permanence changes
- LGPS: sea change again
- Scottish Solicitors' Discipline Tribunal
- ILG takes on risk
- Real burdens revived
- Practical limitations
- CPD: how to comply
- Law reform update
- The learning curve
- Ask Ash
- Inside story