Historically solicitors have rather lagged behind other professions (notably the accountants) in employing measures to limit their liability. Limiting liability is now commonplace, at least amongst the larger fi rms. A 2008 survey1 of the top 100 fi rms revealed that all limited their liability at least some of the time, and 45% did so routinely. The numbers are likely to be even higher now.
Although accountants have been employing sophisticated liability limitation and capping measures for many years, these types of terms have only rarely been considered by the courts. A recent decision in Dennard & others v PricewaterhouseCoopers2 is therefore of interest as the court considered (albeit obiter) the effectiveness of a limitation of liability provision in an accountancy fi rm’s letter of engagement.
The case concerned the alleged negligent valuation of shares. The detail of the action is not important, but the judge found that the accountant’s valuation negligently fell short of the lowest fi gure in the range of reasonably competent valuations. The claimants’ loss was assessed at £427.5k – some way below the liability cap of £1m in the fi rm’s engagement letter. Although the question of whether the liability cap applied was no longer relevant, the judge nevertheless considered whether or not the cap met the test of reasonableness under section 2(2) of the Unfair Contract Terms Act 1977.
Section 2(2) of that Act provides that a person cannot “exclude or restrict his liability for negligence except in so far as the term or notice satisfi es the requirement of reasonableness”. Schedule 2 to the Act sets out guidelines for the application of the reasonableness test. The factors to be taken into account include the relative strength of the parties’ bargaining positions; the extent of the client’s knowledge of the liability limitation; and whether the client was offered any inducement to agree to the limitation.
The judge concluded that the limitation of liability clause would have been reasonable. He cited two reasons in particular:
- The parties were not of equal bargaining position. The defendant accountant was in the stronger position, but the claimants were also powerful and experienced business people, and the companies in which the claimants were controlling shareholders had considerable commercial infl uence. The claimants were fully aware of the possibility of going elsewhere for the advice. They had chosen to use the defendant fi rm for a number of reasons and knowing that it employed limitation clauses.
- The claimants knew or ought reasonably to have known of the limitation of liability term. They could not be regarded as “innocents abroad” and were entirely capable of protecting their own interests. They knew and understood that accountancy fi rms customarily limited their liability by clauses of this kind, but chose not to discuss or negotiate the limitation.
Solicitors are, of course, subject to certain restrictions on limiting liability that do not apply to other professions. Solicitors are not able to cap their liability at a level below the minimum professional indemnity cover threshold prescribed by the Law Society, and there are restrictions on the circumstances in which solicitors may limit their liability in relation to contentious business3. That said, the considered use of limitation caps is now a fairly standard part of most solicitors fi rms’ risk management practices. This decision is a welcome confi rmation that the courts will uphold a liability cap or limitation that has been properly considered and which complies with the applicable legislation, in particular the 1977 Act.