Earlier this year the Office for National Statistics (ONS) revealed that the average price of a home had risen GBP 17,000 over the past year, conversely the average wage had risen by just GBP 417; this puts average earnings at GBP 25,000 but the average house price in the UK more than ten times higher at GBP 254,000. If these conditions seem familiar it is because they are starting to mirror the pre-crash conditions in 2006/2007.
Whilst surveyors and valuers always face the risk of disputes arising and claims based on professional negligence being brought by clients or third parties, this risk increases significantly in a difficult market. One way of managing this risk is to limit or exclude liability in any contractual documentation using liability caps and/or net contribution clauses (NCCs), also known as proportionate liability clauses. But how effective are they in reducing surveyors and valuers exposure to professional negligence claims?
A cap on liability limits the amount of a firm’s professional liability to its client. The cap is often expressed as a fixed maximum sum payable, but can also be a percentage of the fee payable or similar. A liability cap is enforceable as long as it is properly incorporated into the contract and ‘reasonable’. If a Court is required to determine the reasonableness of a cap, it will usually consider a number of factors, including:
- The strength of the parties’ relative bargaining positions and whether the client was given the opportunity to negotiate/challenge the cap being imposed
- The extent to which the term was brought to the attention of the client and whether the client knew or ought reasonably to have known of the existence and extent of the term
- The resources available to the parties to meet the liability, including the existence or availability of insurance cover. In Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Ltd (2012), a construction dispute, the court held that the defendant was not entitled to rely on a limitation clause within its contract with the claimant because the clause was unreasonable pursuant to the Unfair Contract Terms Act 1977 (UCTA). The central factor leading the judge to that decision was that the effect of the clause, if upheld, would be to limit the defendant’s liability to substantially less than the level of insurance cover stipulated by the contract
If the Court deems the cap unreasonable the consequences are severe; the cap will be unenforceable in its entirety and, under UCTA, the Court cannot replace an ‘unreasonable’ cap with an alternative more ‘reasonable’ limit.
Care also needs to be taken in drafting a liability cap. The court is more likely to construe a widely drafted liability cap against the party seeking to rely on it. In SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd (2013), a dispute over delays in a construction project, the contract included a clause limiting the defendant contractor’s liability in the following way:
“the aggregate liability of the Contractor under or in connection with the Contract (whether or not as a result of the Contractor’s negligence and whether in contract, tort, or otherwise at law) … shall not exceed 20% … of the sum of the Contract Price”.
The Court held that the parties did not intend the cap to apply to the costs incurred by the claimant, notwithstanding the very wide wording of the capping clause which limited the defendant’s aggregate liability ‘under or in connection with the Contract’.
From the above it is clear that whilst caution is needed in setting the level of the cap and drafting the clause incorporating it into the relevant contract, liability caps are potentially a workable protection. In January 2013 the Royal Institute of Chartered Surveyors (RICS) strongly recommended their use to its members, as a way in which to manage the risk in valuation work, and to ensure the fair allocation of risk and reward between its members and their clients (RICS Guidance: PII Risk, Liability and Insurance in Valuation Work – known as The RICS Guide). Despite this, there is an ongoing reluctance (particularly amongst lenders) to agree to liability caps and surveyors and valuers are not in a strong enough bargaining position to argue.
Net Contribution Clauses (NCCs)
NCCs provide that, where a firm is jointly liable with one or more other parties for the same loss or damage, the liability of each party is limited to the amount that would be apportioned to that party by the Court. The aim of the NCC is to limit the professional’s liability to what is its proportionate share of the fault for any loss incurred by the client. Without an NCC, the normal legal position is that of joint and several liabilities, that is, the client can pursue just one party for 100% of its losses, regardless of the extent of that party’s responsibility. The party paying would then have to incur the cost of seeking to recover at least part of its monies from any culpable third parties – which may be insolvent/unable to pay their share. The NCC operates to transfer this risk – of a culpable third party becoming insolvent and being unable to pay – from the professional to the client. Needless to say, NCCs are therefore disliked by clients and have to be carefully negotiated.
Although NCCs are becoming increasingly popular with surveyors and valuers, and their indemnity insurers, until recently, there was not much judicial guidance on their operation. In West v Finlay (2014), a claim by consumer clients against a firm of architects, the NCC in the architect’s appointment read:
“Our liability for loss of damage will be limited to the amount that is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you.”
The Court of Appeal enforced the NCC in the architect’s favour and excluded from the architect’s liability those losses for which the main contractor was responsible. In reaching its decision, the Court provided some useful guidance on the general principles of NCCs. In particular, the Court focused on the fact that the meaning of the NCC as drafted was clear and unambiguous. The Court also held that, although the NCC caused an ‘imbalance’ between the parties, this was not significant because (a) the use of NCCs is prevalent, (b) the NCC would not be unusual in a commercial contract and (c) in this instance the clients took the ultimate decision to appoint the main contractor. Whilst the Court considered that it would have been preferable for the architect to have drawn the NCC to the client’s specific attention, a relevant factor persuading it to uphold the NCC was the client’s “savvy nature”. The Court concluded that the
NCC was ‘reasonable’ in that (a) the client was in an equal bargaining position with the architect and (b) the client ought to have known of the existence of the NCC which was prominently displayed in the appointment.
The Finlay decision is a milestone in favour of surveyors and valuers and their insurers. It will be particularly relevant in cases involving non-consumer appointments where the Unfair Terms in Consumer Contracts Regulations 1999 will be inapplicable and UCTA is unlikely to assist. There remains a risk that non-sophisticated clients or clients who are not “savvy” might successfully question the validity of an NCC, but if the relevant clause is drawn to the attention of the client and explained, this could go some way to alleviate this risk.
The only other hurdle is that some clients (mostly lenders) are still unwilling to dilute their legal rights, particularly in cases where non-insured parties are involved.
It is not just a question of making surveyors and valuers aware of both the usefulness of liability caps and NCCs, and how to ensure they are enforceable. If clients are not prepared to accept a limitation of liability of this type in their contract, then the protection they afford will remain out of reach. In relation to lender clients, until there is buy- in from the Council of Mortgage Lenders this position is unlikely to change.
Outside of the lender relationship there is scope for surveyors and valuers to make the most of the protection afforded by liability caps and NCCs. Please cut out and keep the practical tips set out on the next page and apply them when next negotiating and drafting your next contract.