The recent decision handed down in Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Limited ( EWHC 2137 (TCC)) will be of great interest to all those charged with the management of risk within professional services firms and their insurers. A clause in the project manager's terms of engagement which purported to limit the extent of their liability was held to be unenforceable in light of a further term that required them to hold professional indemnity insurance at a much higher level.
In Trustees of Ampleforth Abbey the trustees alleged that Turner & Townsend had been negligent in their management of a construction project. As project managers, Turner & Townsend had failed to procure an executed contract from the building contractor and in doing so the Trust was unable to recover liquidated damages when the works failed to complete on time.
The court held that the project managers had been negligent in failing to try and ensure a contract was entered into. Turner & Townsend relied on the limit of liability clause contained in their terms of engagement. This clause provided as follows:-
"Liability for any negligent failure by Us to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms... and in no event shall Our liability exceed the fees paid to Us or £1 million whichever is the less"
The same terms also included an obligation on the project managers to put in place professional indemnity insurance. The relevant clause provided that:-
"We shall take out a policy of Professional Indemnity Insurance with a limit of indemnity of £10 million for any one occurrence or series of occurrences arising out of any one event"
The amount of the claim as determined by the court was £226,667. The liability cap, if effective, would have capped liability to £111,321; the fees paid to Turner & Townsend by the Trust. Turner & Townsend accepted their terms were "standard terms". This meant that s 3(2) of the Unfair Contract Terms Act 1977 applied, which requires an exclusion or limitation of liability to be reasonable (and if it is not, it will be unenforceable). Turner & Townsend claimed the liability cap was reasonable and therefore enforceable because:
- The terms were clear, unambiguous and would have been understood by their client, if the client had taken the trouble to read them.
- There was no inequality of bargaining position.
- Ampleforth Trust had not received an inducement to accept the terms.
- Ampleforth Trust had the time, opportunity and freedom to turn to an alternative project manager.
- Generally commercial parties should be left to apportion risks as they see fit (referring to Photo Productions v Securicor  AC 827).
The Judge decided the limit was unreasonable and therefore unenforceable. The 'central factor' relied on by the Judge was that Turner & Townsend had contracted to hold £10 million professional indemnity insurance, which far exceeded the limitation of liability cap. The Judge felt that the Ampleforth Trustees had in effect paid for access to £10 million of professional indemnity (PI) cover, and so it was unreasonable to deny access to that insurance:
"The effect of upholding the limitation clause would be that, although the parties had contracted for the insurance of the risks and (implicitly) for the Trust to pay for that insurance, far the greater part of that insurance would be rendered illusory."
This case highlights the perils of not dealing with insurance and liability caps/exclusion clauses in a consistent and connected way.
Accountants and suppliers of professional services should not contractually commit to hold professional indemnity insurance cover in excess of the liability cap. Clients will no doubt be encouraged to probe the supplier's insurance and use that to negotiate any limitation on liability clause. You therefore need to be on guard.
In our view it is, however, important to be wary of drawing too many conclusions from this case. The judgment runs to more than 200 paragraphs, of which just 11 deal with this point. It cannot therefore be said that this was the central issue in the case, nor was it dealt with in significant detail. Given the amount in play (£226,667 v £111,321), it is also unlikely this issue will be central to any appeal.
Furthermore, it should be noted that the parties involved had worked together previously on two earlier construction projects, when Turner & Townsend had also been engaged on their standard terms. Those standard terms were amended to include the limitation of liability clause and it was the amended terms upon which the project in question proceeded.
The Ampleforth Trustees were not informed of the changes to the standard terms and the Judge acknowledged there was 'force' in the argument raised by their Counsel that it was "wrong that, after building up a relationship of trust from two previous projects,... TTPM [Turner & Townsend] should introduce this Draconian term which was wholly inconsistent with the requirement for substantial professional indemnity insurance without specific notice and any discussion".
If this issue was assessed in more detail by a senior court, would the same decision have been made; that the limit on liability was unenforceable? Jumping from a contractual commitment to hold insurance, to making the liability cap unenforceable is quite a leap. Holding insurance is part of the service provider's risk management - why should its liability cap and insurance cover be the same? After all, even where insurance is on a per claim basis, a service provider will have a justifiable interest in keeping its claims down in number and amount, in order to keep its insurance premiums down (and in turn ensuring its charges to its clients remain at a lower level).
Insurance is often subject to an aggregate cap and any claim made will therefore reduce the insurance available for other claims. Accordingly, it is not wise for a service provider to commit all of its insurance to one client, as that could leave the insurance exhausted for other claims. There is, therefore, a perfectly fair and reasonable justification for a service provider to have a liability cap which is less than its insurance cover.
In any event, the case is not saying that suppliers of professional services cannot cap liability at less than their professional indemnity insurance. If Turner & Townsend had made no express contractual commitment as to the amount of its PI cover, or indeed had the amount of PI cover required been substantially less, the case may have gone a different way. There is an ongoing debate about whether professional service providers that cap liability substantially below their PI cover are risking liability caps being unenforceable. This case does not change that debate.