June 2016 ACE Briefing: Negtiating Limits f Liability and Guidance n Prfessinal Indemnity Cver 1. Part 1 - Limitatin f Liability A limitatin f liability clause is a prvisin within a cntract r agreement that allcates liability between the parties t that cntract in ther wrds wh carries what risk. Many prfessinal agreements and standard frms f cntract, including the ACE Agreements, prvide fr such limitatin. In many cases such prvisins must be negtiated. It is apprpriate fr cnsultants t limit their cntractual liability and engage in infrmed discussins with their clients with regard t the need t d s. This is ne key way in which t manage risks t the lngevity f the business. Bear in mind that, in the absence f any express agreement in the cntract, the cnsultant's liability is unlimited. Fr mst cnsultants the main business asset is intellectual rather than financial, s they can nly fund their prfessinal liabilities t the extent they are insured; this underlines the need t limit liability t a prprtinate level and aligned with a sensible level f prfessinal indemnity insurance cver fr the prject in hand. Clients, meanwhile, ught t recgnise the value t them f agreeing a limit n liability. It is nt in the client s ecnmic interests either t see their cnsultants frced ut f business due t liability fr disprprtinate claims r fr their cnsultants fees t increase due t the need t invest in disprprtinately high levels f PI insurance cver. This nte explres sme f the mst relevant ways in which a cnsultant may limit cntractual liability and then lks at the related issue f prfessinal indemnity cver. Please nte that this a risk management guide. It is nt intended t be an exhaustive nte n this subject and is nt t be read as legal advice. Independent legal advice shuld always be sught in specific cases. G t ACE s Resurce Hub ( http://www.acenet.c.uk/resurcehub/976 ) t find mre guidance and t find ut abut ur telephne risk management advice and ur legal and insurance affiliate referral service. Financial Caps n Liability The Assciatin is registered as a cmpany in England with the number 132142, it is limited by guarantee and has its registered ffice at the abve address
Managing liability thrugh financial caps is an essential part f risk management and prvides certainty t bth client and cnsultant. The case can be well made that bth parties benefit frm limiting the amunt f damages payable by the cnsultant as bth knw where they stand. Discussing the level f the cap is an pprtunity fr the cnsultant and the client t get t understand and seek t quantify the nature and level f risks assciated with a particular prject. Bear in mind als that any limitatin n liability must satisfy the test f reasnableness under the Unfair Cntract Terms Act 1977. Engaging in a prper discussin with the client with regard t the reasns fr a particular prpsed cap is a gd way t minimise the risk f the cap being successfully challenged n reasnableness grunds. Varius matters shuld be brne in mind when a cap r limit is being negtiated and include the nature and extent f the risks inherent in the prject (having regard t size, cmplexity etc) and the likely damages r cst f repair if there is a successful claim, the amunt f cver available t the cnsultant under his prfessinal indemnity plicy, previus business dealings between the cnsultant and the client and resurces available t the cnsultant. All these pints may be used by the cnsultant in negtiating limits f liability and justifying them as reasnable. A cap may apply t each and every claim, r n an aggregated basis, ie gruped accrding t the particular event that caused the lss r damage r it might apply as a ttal limit. Different cap levels may apply t specific types f liabilities, eg cntaminated land, asbests r terrrism. The parties t any agreement shuld frmally acknwledge any cap and the basis n which it applies. Examples - The fllwing are sme examples f ways in which financial liability may be capped. Hwever, please be sure t cnsider each case carefully n its wn merits, and seek prfessinal advice if yu are unsure abut the wrding. An aggregate cap T the maximum extent permitted by law, the ttal liability f the Cnsultant under r in cnnectin with the Agreement, whether in cntract, trt, negligence r fr breach f statutry duty r therwise, shall nt exceed in aggregate [amunt in figures] ([in wrds] punds sterling A default t a cap based n the multiple f the fee A variatin n the aggregate cap wrding abve. Fr example ACE s standard appintment (2016 Revisin) will cntain a clause in which the parties may agree a specific aggregate financial cap figure. Hwever, where n figure is inserted by the parties the cap will deemed t be ten times the ttal fee payable t the cnsultant under the appintment. Link t Level f PI Insurance t be maintained - Anther variatin that is smetimes emplyed is t link the financial cap t the level f PI insurance cver the cnsultant has agreed t maintain under the appintment Nte that a financial cap shuld nt be cnfused with a limit f indemnity included in the cnsultant s PI plicy. The PI insurance cver limit nly limits the amunt that can be claimed under the cnsultant s plicy, nt the amunt that the client may claim in damages under the terms f the appintment, which shuld be addressed in its wn right. Otherwise, there is a risk f being subject t unlimited cntractual liability (mre n which belw).
Als be aware that the duratin f ptential liability under a cnsultant s appintment r a cllateral warranty will differ depending n whether the cntract was signed as a deed (nrmally 12 years) r signed under hand (nrmally 6 years). Take care in agreeing any cllateral warranties that is expressly clear that the perid f liability is expressed nt t exceed the perid arising under the cnsultant s appintment. N frmal cntract: There was n time t agree the cntract, the client needed me t start wrk immediately It is always advisable t put a frmal cntract in place in respect f services t be prvided befre yu start the wrk. There are a number f reasns fr this, nt least f which is that withut a cntract yu lse the pprtunity agree a cap n liability, which means ne s ptential liability t the client is unlimited! Whilst yu may agree terms at a later stage in the prject, yur negtiating psitin may by then be weakened. Alternatively, the need fr a frmal cntract may be frgtten altgether beneath the ther pririties surrunding the prject. Hwever, if a situatin arises where it is cmmercially imperative t cmmence wrk befre the cntract is frmally agreed, then we suggest that the cnsultant shuld specify at the utset, eg in its scpe and fee prpsal, the terms and cnditins under which it will cntract pending the agreement f any ther frm f cntract. Fr example, the cnsultant may refer t its wn standard terms r t an industry standard frm. A cpy f the terms shuld be enclsed and the financial liability cap and level f PI insurance cver and ther key terms such as price and scpe f wrk shuld be stipulated. It is advisable t reinfrce the reference t the cnsultant s terms in any subsequent discussins regarding the scpe and pricing f wrk in case the client has alluded t any ther preferred terms. Yu may, fr example, say: Yur cntinuing instructins in this matter will be treated as deemed acceptance f ur standard terms and cnditins. It may als be useful t pint ut that the agreed fee fr the wrk has been calculated n the assumptin f that yur standard terms and cnditins are being adpted n the prject. Whilst there may subsequently be arguments as t which terms apply depending n the circumstances, having set ut yur wn terms at the utset can give yu a strng argument t wrk frm in the event that a dispute r claim arises. Net Cntributins Clauses A net cntributins clause is an attempt t address by cntractual means the legal principle f jint and several liability. In essence, jint and several liability means that where tw r mre persns (eg a cntractr and a cnsulting engineer) have cntributed t the same lss, each f them is respnsible t the claimant t the full extent f the lss. In the event f a claim fr lss by a client, the client will have the chice f which party t pursue fr the claim. This will ften be the ne perceived as best able t pay damages fr the lss suffered. In practice, this expses the cnsultant, wh nrmally maintains prfessinal indemnity cver, disprprtinately t cmpensatin claims. Having had a claim made against it, the cnsultant must then separately pursue the ther respnsible parties fr their share f the liability. This may be a significant burden r even impssible, fr example if a cntractr wh was partly respnsible fr the lss becmes inslvent after the event giving rise t the claim ccurred.
In ACE s view this is nt a just situatin as the cnsultant is nt nrmally respnsible fr chsing the client s prject team members; the client itself will nrmally be much better placed t assess each party s cmpetence and financial strength. A net cntributins clause will seek t address this situatin by stating that where mre than ne persn is liable fr the same lss r damage, the cntracting party s liability will be limited t the fair and reasnable amunt that a curt wuld apprtin against it. Whilst it will depend n the circumstances and the specific wrding used in each case, there is a trend tward the curts uphlding net cntributins clauses. Many standard frm prfessinal appintments, including the ACE frm f prfessinal appintment, cntain net cntributins clauses. If the detailed f the clause cmes under negtiatin, we recmmend yu take legal advice as it is a reasnably cmplex area. Sme clients and/r funders will refuse t accept a net cntributins clause, as they will wish t pass dwn t the supply chain as much risk in the prject as pssible, including inslvency risk. Whilst ACE des nt supprt that view, we nte that in the event that a net cntributins clause is nt agreed, many cnsultants will cncentrate n at least securing a reasnable financial cap n liability. We wuld agree that this is a sensible cmprmise. 2. Part 2 - Prfessinal Indemnity Insurance (PII) T an extent the terms f any PII plicy will be tailred t the cnsultant/cnsultancy s requirements but essentially such insurance indemnifies the hlder in respect f claims made by third parties (ie the client r smene wh may step int the client s shes). PII plicies are generally renewable annually. Such plicies are written n a claims made basis meaning that any claim, r circumstances that may give rise t a claim, must be ntified under the plicy in frce current at that time and nt under the plicy that was in frce at the time the errr that led t the claim was alleged t have been cmmitted. It is fr this reasn that yur brker will cmmnly stress the imprtance f nt allwing yur PII cver t lapse. It is als essential t ensure that all wh are t be insured under the plicy are clearly and crrectly described. Cver may nt nrmally be autmatically prvided fr partnering arrangements and the plicy shuld be checked accrdingly if this is t be part f the client s requirements r an expsure t yu as this may need t be declared t, and agreed with, yur insurer in advance. Extent f Cver and Exclusins The fact that PII is an annually renewable plicy als means that future terms, cnditins and limitatins may change. This is an imprtant cnsideratin when yu cnsider that prfessinal appintments and/r warranties may be enfrceable fr perids up t 12 years and are unlikely t be negtiable within that perid. S prir t negtiating the extent f cver required by a client it is essential t check and fully understand the extent f the cver held and any exclusins and limitatins that may apply. Whilst nt exhaustive, sme cmmn issues t bear in mind when negtiating with clients are:
avid any agreement t insure fr any liability fr which cver may nt be available in the future r may be t expensive t prvide; As mentined abve, be aware f any exclusins frm cver and keep this in mind during negtiatin; Fr example liability fr fitness fr purpse bligatins are ften excluded frm PII cver; certainly speak t yur brker if yu are unsure; If yur firm is carrying ut wrk verseas check fr any gegraphical r jurisdictinal limitatins in yur plicy; If yu are ging t be required t give a cllateral warranty t a party ther than yur client, ensure that the plicy cvers any liability arising frm the warranty adequately, fr example in the event that the warranty is subsequently assigned t anther party. Limits f Indemnity Prfessinal indemnity plicies are always subject t limits f indemnity (the maximum that the insurer will pay in respect f the claim if prved). When negtiating make clear what is cnsidered t be a reasnable limit fr any ne claim r series f claims riginating frm the same riginating cause, bearing in mind the type f prject and the likelihd f what might ptentially arise and the extent f any lss yu may be expsed t. Als, be aware f any sub-limits in yu PII plicy, eg in respect f liability frm asbests, pllutin r cntaminatin, as these may be different frm the general limits cntained in the plicy. Generally, make it clear t the client that the cst f cver is reflected in the fee and that it is in n-ne s interests t pay fr smething that is mst unlikely t arise and that a cap n liability wuld, in such circumstances, be apprpriate. Excesses All plicies are subject t a self-insured excess (the amunt f any claim that will nt be cvered by the plicy and will be payable by the insured) and which will be payable in respect f each claim that may arise. As insurers may increase the required excess (which can be as a result f an increase in fees r a wrsening claims recrd) in subsequent plicies it wuld be prudent in negtiating with yur client nt t agree t any stated excess which may nt be available n subsequent renewal f the plicy. 3. Part 3 Cnclusin - Ptential Benefits f Negtiating Simply discussing limitatin f liability with the client can prvide the pprtunity t identify and explre risk management issues and risk allcatin n a prject. It has been said that negtiating limitatin f liability can assist in client evaluatin as well as enhance future cmmunicatin frm the cmmencement f a prject assuming the parties agree cntract terms. A deeper insight can be gained int the client s requirements and practices leading t bth the cnsultant and client being better infrmed. Discussins n liability issues may lead t the scpe f services being bradened t cater fr ptential risks leading t the ability t reduce r mitigate them. Time permitting, there is every incentive fr such discussins t take place even if agreement is nt always achieved.