Many firms are still unsure of whether they should be limiting liability to their clients, and how best to do so. This guide will help you ensure that any limitations of liability that you put in place are:
- appropriate to the nature of the work you do,
- reflect the relevant terms in your professional indemnity policy, and
- minimise the risk of a successful challenge by a client.
Fair and reasonable
A limitation or exclusion clause may be unenforceable if it is not fair and reasonable to your client. The following factors will help determine what is fair and reasonable in all the circumstances.
Do not seek to exclude liability
You cannot seek to exclude liability to your client entirely. Limit your firm's liability at a fixed amount in the engagement letter.
A cap set at a higher amount is more likely to be enforceable and to protect you. The amount should be proportionate to the nature of the transaction and the potential client loss.
Avoid Unfair or unreasonable limitations
You need to balance the importance of limiting liability, against the risk of any limitation or exclusion being seen to be unfair or unreasonable to your client.
You should take into account:
- the type of client,
- the type of work, and
- the commercial risk vs reward.
The importance of transparency
A cap on liability that has been discussed and negotiated is more likely to be regarded as reasonable than a non-negotiated cap.
You should flag the cap, along with other important elements of the terms of engagement, ideally by means of a covering letter or in a summary of key provisions at the front of the Terms of Engagement. Where possible, the client should be given sufficient time to consider the Terms of Engagement and/or take legal advice, if they so wish.
It should be made clear whether the cap is an aggregate limit on liability, or applies separately to each breach or each claim.
It is good practice to document any negotiations concerning liability limitation and to retain a record of them on the relevant file. Record any concessions made by your firm, for example, adjustment to a limitation amount initially proposed.
Drafting the limitation of liability clause
Firms should obtain independent legal advice on the drafting of any clause that purports to limit liability.
Please note: The validity of any limitation or exclusion clause is subject to various legal constraints. Some uncertainty as to the effectiveness of any particular clause cannot be avoided.