Parties commonly agree to limit liability under a contract. The aim of this is to create certainty in the event of a claim connected with that contract. These limitations are commonly supplemented by insurance cover. One would think that this is a reasonable and commercial approach by the parties; however, it seems that this approach will not always be effective.
In the recent UK case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd (2012), a consultant’s liability to his client (the trustees) was limited to the fees (£111,321) the client paid to the consultant. The consultant was, however, obliged to hold professional-indemnity cover of £10 million. The contract considered in this case came within the scope of UK legislation which prohibits certain unfair terms in consumer contracts. The comparable Irish legislation dealing with unfair contract terms in Ireland is the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995. Both the Irish and English legislation derive from a common EU Directive on unfair terms in consumer contracts. Under this legislation, any exclusion or restriction of liability in the contract must be “reasonable”.
The court decided that, given the level of professional indemnity insurance that the consultant was required to hold, the limitation of liability was unreasonable. The judge considered that the cost of the insurance cover was, in reality, passed to the trustees in the fee charged for the works. The judge said that, in the circumstances, to enforce the limitation of liability would render the greater part of that insurance illusionary. The consequence of this was that the limitation clause was not enforceable and the plaintiff was awarded the full amount of its claim.
This judgment provides guidance on the factors that a court will look at when considering whether the limitation of liability in a consumer contract is reasonable. These factors include: (i) the resources which could be available to meet the relevant liability; and (ii) whether insurance is available to cover such a liability.
UK judgments are not binding in Ireland, but can be used as persuasive precedent before the Irish courts. Whether the Irish courts will follow a similar approach to contractual limits of liability remains to be seen. The legislation that exists in Ireland is, however, quite similar. Irish insurers therefore ought to be aware that the existence of insurance cover may render an express contractual liability-cap ineffective.