If the cap don’t fit – dealing with contractual caps on liability

I know the normal saying is ‘if the shoe don’t fit’, but caps on liability are as sticky as gum stuck to the bottom of your boots. This is because the parties’ interests often conflict at the point of contractual drafting: the consultant or contractor seeks to limit their liability as much as possible whilst the client wants to ensure that damages can be recouped as far as possible should things go wrong.

We flag this now, not because the law has changed a great deal, but the insistence on caps on liability in the current market has increased.  This is particularly so with the professional team, no doubt driven by PI insurers.  The reverse of this is clients (and often funders in the background) are refusing such caps.

Overall, the law remains very fact sensitive.  Before we look at the legal position, it is important to understand the difference between two key clauses. A cap on liability clause limits the amount a consultant could pay out in the event that things go wrong. A clause imposing a requirement to maintain professional indemnity insurance relates to the amount of insurance a policyholder (the consultant) has access to. The professional indemnity insurance clause does not represent the maximum amount that can be claimed, it just imposes an obligation to maintain a certain level of insurance.

It is typical to set as a minimum, a cap on liability set to the same level as the professional indemnity insurance – so the two different clauses align.  However, pushing for too aggressive caps can backfire.Firstly, a client is unlikely to accept such terms – often driven by its funder.  Secondly, and more importantly from a legal perspective, a cap on liability set at a level too low may fall foul of the “reasonableness test” under the Unfair Contract Terms Act 1977 (UCTA).

Although decided nearly 10 years ago, the leading case on where a consultant’s liability was capped too aggressively is Trustees of Ampleforth Abbey Trust v. Turner & Townsend Management Ltd [2012]. Turner & Townsend set a cap in its appointment at the level of its fees – circa £115k.  Within the same appointment it had an obligation to maintain professional indemnity insurance in the sum of £10 million. The Court decided that the cap was unreasonable, primarily as the requirement to maintain professional indemnity insurance of £10 million was seen as illusory. The result was that the clause was struck out and left the consultant with no cap whatsoever.  It may be more able to justify a cap much lower than a PI level if it is an aggregate policy, as it could be argued that policy is there to cover a range of projects.  With an each and every form of PI policy, such an argument fails.

However, as with all legal principles, there is always another side to the story.  The Court is loathed to interfere with contractual agreements between commercial parties. As Clarke J said in Balmoral v. Borealis [2006], “commercial parties habitually make agreements amongst themselves that allocate risk; and the Court should not lightly treat such agreements as unreasonable”. Another case, Allen Fabrications Ltd v. ASD Ltd, in the same year as Ampleforth made exactly the same point.  While not directly related to PI clauses, where the relationship between the parties does not suggest an inequality of bargaining power, more aggressive limitation clauses may be acceptable.

So what is the answer, where there are some cases saying parties can agree ‘aggressive’ commercial terms, yet others saying it has to be seen, particularly with consultants, in the light of other provisions and specifically levels of PI insurance?

The answer is to make sure the cap fits.  Don’t insist on a cap that is wholly unreasonable, particularly in light of the size of the project and any professional indemnity insurance requirements.  And look to cap specific losses (such as loss of profit, indirect or consequential losses). Each project has to be considered on its own merits – there is no one size fits all approach, but with a bit of thought caps on liability can be successfully negotiated and enforced.

This article is from December 2022’s edition of Aggregate. To read the complete newsletter as a PDF click here.