Many firms include a cap on liability in their terms of business, often as a standard clause that nobody has looked at for years. A recent High Court decision is a timely reminder to dust them off.
In a claim brought by Dubai-based Convrgnt Value Engineering in relation to work carried out by law firm, Kennedys Dubai LLP, whilst the firm’s £3m liability cap survived (only because the court found that the Unfair Contract Terms Act 1977 (UCTA) didn’t apply, as the retainer was more closely connected to Dubai than England) the judge went on to say that it would have been unreasonable had UCTA applied. The reasons are worth noting: the firm had £30m of PII cover (ten times the cap); recovery in the underlying matter was expected to be “comfortably in excess” of £3m; the cap was never negotiated; there was no convincing explanation as to how the figure was arrived at; and the client had not actually read the terms. As the judge put it, “There would have been no cost to Kennedys Dubai in agreeing a higher cap.”
It is also worth remembering the SRA’s position. Its guidance on adequate and appropriate indemnity insurance is clear that you cannot limit liability below the minimum level of cover required under the minimum terms and conditions (£3m per claim for incorporated firms and LLPs, £2m for others), that any cap must be “fair and reasonable” in the circumstances of the client and the matter, and that the SRA would “not expect to see caps put on liability to clients as a matter of routine”.
Pro-tips
- Review your standard terms – are caps being applied routinely, rather than case by case?
- Where a cap is used, record the rationale, linked to the value and risk of the matter and your actual insurance cover.
- Draw the client’s attention to the cap specifically (rather than burying it in the small print) and keep evidence that you did.
- Never cap below the minimum terms, and take particular care with consumer clients.