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Limiting and excluding liability in your professional appointments

The recent challenges the industry has experienced are expected to continue into 2022. Coupled with the issues some consultants are facing with securing insurance for project risks and the risk transfer we are seeing at contract negotiation stages, it is now more important than ever to understand any imbalance of potential risk and negotiate the best terms possible in your professional appointments. This article by Victoria Kempthorne considers the importance of including appropriate limits and exclusions of liability for breach of contract in your professional appointments.

 What is a limitation of liability clause?

A limitation of liability clause limits the amount and types of compensation an employer can recover from you if you are in breach your contractual obligations.

Why limit liability?

Limitation of liability clauses are used to manage the risks attached to a professional appointment. If there is no limitation of liability clause, there is no financial limit on the damages a party can recover. If you wish to reduce exposure to the risks of a professional appointment you should seek to agree clauses that exclude or limit liability for certain types of losses.

What liability can you exclude?

 You can exclude certain categories of damage. Providing the drafting is clear, you can exclude liability for negligence, misrepresentation, issues relating to quality and fitness for purpose.

Parties commonly exclude liability for 'consequential’ or ‘indirect' loss. The reason for excluding liability for ‘consequential’ or ‘indirect’ losses is that the financial consequences of a breach of the professional appointment may be considerable. For example, if a consultant does not perform their obligations under the professional appointment, the employer may suffer losses such as remedial costs, loss of profits, loss of business and loss of revenue.

You cannot exclude liability:

  • for death or personal injury caused by negligence;
  • for fraud or fraudulent misrepresentation; and
  • for breach of statutory implied terms e.g. of satisfactory quality of goods in consumer contracts.

What level can you cap liability at?

The amount of any cap on liability will depend on factors such as the:

  • amount of professional indemnity insurance cover available;
  • value of the professional appointment;
  • type of services being provided;
  • level of risk involved in providing the services; and
  • parties' bargaining positions.

The amount of the cap may be expressed:

  • as a fixed amount;
  • as a percentage of the fee; or
  • a multiple of the total fee

and will often exclude liability if a claim is not made within a certain timescale.

Consultants often limit their liability to the level of professional indemnity insurance cover they have, so that they have no exposure beyond that.

 When a limitation / exclusion clause may be unenforceable 

 Limitation and exclusion clauses are subject to the ‘reasonableness’ requirements of the Unfair Contract Terms Act 1997. When considering whether a clause is reasonable, the courts will take into account factors such as the parties’ relative bargaining position or the information available to the parties when the contract was made.

Careful drafting is required to ensure limitation and exclusion clauses are enforceable and limits and/or excludes what it is supposed to.

This article first appeared in Architecture Magazine