- Give the client sufficient time to consider the matter and/or to obtain legal advice (if so desired). A cap on liability or limitation clause that has been discussed and negotiated is more likely to be held reasonable than one that has not. Take care not to take unfair advantage of clients who might be unsophisticated or not commercially aware or the Court will hold the limitation clause unenforceable.
- Consider whether, in all the circumstances, the limitation clause or liability cap is fair and reasonable, keeping in mind the factors which the Courts will consider when assessing what is fair and reasonable. This may require a careful analysis considering the nature of the client and the engagement, commercial risks and rewards. A liability cap based simply on a multiple of the fee charged may be too simplistic and is vulnerable to challenge.
- Make sure the level of any cap is proportionate to the risks and rewards for you and your client. What does this mean in practice? Do not cap liability to an amount less than the anticipated fee as this is not considered reasonable. There is also no reason to set the level the same as your firm’s PII limit, although the court does take this limit into account when considering the reasonableness of a cap. For obvious reasons it would be imprudent to agree to a cap in excess of your firm’s PII limit.
The engagement letter & agreed scope of work
- Set out any limitation of liability and/or liability caps that have been agreed clearly (preferably in bold) in the engagement letter with the client. Where standard terms of business are used, specifically draw the client’s attention to the existence of the limitation clause/cap by referring to it in a covering letter.
- Ensure that the engagement letter is signed by the client and returned prior to commencing any work.
- Ensure that all work undertaken is covered within the engagement letter. If a firm acts for a client outside the scope of its engagement letter, the liability cap/ limitation will most likely not apply to that additional work and the adviser’s exposure will be unlimited.
- Draft the limitation of liability clause/cap in clear, unambiguous language.
- Make sure it captures any basis upon which a claim might be made, including breach of contract and negligence. Avoid using wording that is broader than the law will permit (SABIC v Punj).
- Be clear as to whether the cap is an aggregate limit on liability or applies separately to each breach or each claim that arises. Remember to take into account any aggregation provision in your firm’s PII policy.
- Set out any terms containing limitations or exclusions in separate parts of the engagement letter to ensure that if one provision is held unreasonable, this does not affect the enforceability of the other clauses.
- Be mindful of the interaction between NCCs and other limitations of liability in the contract, such as a liability cap. Whether an NCC is applied before or after a cap on liability may have a substantial impact on the extent of loss for which you are liable. It may be advisable to specify in the contract how different limitation provisions are intended to interact, and which has priority.
- Exclude liability for certain types of loss, for example types of liability that are also excluded under your firm’s PII policy.
Limiting liability to third parties
- Consider situations where third parties may be involved and address this appropriately. If it is known that a report (eg: a valuation report) will be shown/disclosed to a third party, an appropriate disclaimer of liability should be included in the contract. If the professional is agreeing to a valuation being disclosed to a third party, it should be made clear in writing to the client and the third party that this is without assumption of legal liability to the third party. Also, where third party reliance is agreed to, be as specific as possible about the class of third parties that are entitled to rely.
- Consider appropriate PI cover when deciding whether to agree to third party reliance and whether to make third parties subject to any liability cap.