With professional indemnity premiums set for a hefty rise, Peter Ashford weighs up the finer points of limiting liability

Recent reports that professional indemnity premiums are set for a budget-crushing rise later this year following a decision to double the minimum sum insured from £1 million to £2 million (see [2005] Gazette, 27 January, 1) are focusing minds across the profession. Law firms that already limit liability by means of special contract provisions will be reviewing the terms on which they do so; and those that do not will perhaps now have a reason to consider doing so.


A survey for the City of London Law Society in 1999 found just 20% of firms limited their liability to clients. Subsequent research in 2004 suggested that 50% of firms who responded regularly or occasionally limited liability and 75% did not think that in doing so they would damage the relationship with the client.


A proper consideration of a limitation clause will ensure compliance with principle 12.11 of The Guide to the Professional Conduct of Solicitors 1999 (eighth edition): 'Although it is not acceptable for solicitors to attempt to exclude by contract all liability to their clients, there is no objection as a matter of conduct to solicitors seeking to limit their liability provided that such limitation is not below the minimum level of cover required by the Solicitors Indemnity Rules.'


The guide explains that liability for fraud or recklessness cannot be excluded, that provisions limiting liability must be reasonable, that any limitation must be brought to the attention of the client, and that the acceptance of such a provision should be evidenced or confirmed in writing. Clearly the place to limit liability by contract is within the documentation that forms the contract - for a solicitor this will typically be the retainer letter. It is certainly better to have it in a specific retainer letter than in general terms of business, and for this additional reason it will be sensible to have the retainer letter signed as evidencing that the terms of the retainer are agreed.


A typical limitation of liability clause will usually limit liability to a specific sum usually linked to a level of indemnity cover. It may also be advisable to exclude indirect or consequential losses but the distinction is not as clear- cut as might be thought to be the case (see Hotel Services v Hilton Hotels [2001]) 1 All ER (Comm) 750.


It is also important to distinguish between a limitation of liability and an exclusion of liability. Again, the distinction may appear obvious, but it is not always so (see Lord Justice Chadwick's discussion in Watford Electronics Ltd v Sanderson CFL Ltd [2001] 1 All ER (Comm) 696 where the distinction is drawn between excluding a type of loss &150; indirect or consequential loss on the facts of the case &150; and restricting liability).


Sophisticated limitation clauses might also have a provision stipulating that claims must be made within a particular period. Such clauses will often have a provision for notification of claims within a first period and the commencement of claims within a further period. Such clauses are generally enforceable if reasonable, although they have not been tested in a professional rather than a commercial context (see generally Senate Electrical Wholesales Ltd v Alcatel Submarine Systems Ltd [1999] 2 Lloyds Rep. 423 (CA).



A still more sophisticated approach (found in particular in the context of the professional team in building projects) is to include a 'net-contribution clause'. The effect of such a clause is to short-circuit the effects of potential contribution claims and leave the professional with only that liability that it is fair for him to have bearing in mind the blame attached to any other professional.


Subject to the professional guidance and the provisions of the Unfair Contracts Terms Act and, where applicable, the Unfair Contract Terms in Consumer Contracts Regulations, there is a fair degree of latitude afforded to solicitors to limit liability.


However, under section 60(5) of the Solicitors Act 1974, there is a specific provision relating to the exclusion of liability in contentious business agreements. The sub-section provides: 'A provision in a contentious business agreement that the solicitor shall not be liable for negligence, or that he shall be relieved from any responsibility to which he would otherwise be subject as a solicitor, shall be void.'


It has widely been assumed that this provision is the authority for a complete bar on limiting liability in contentious matters. It is no such thing.


Firstly, it relates solely to contentious matters as defined in the Act. This immediately restricts the provision to work undertaken in relation to actual proceedings before a court or arbitrator.


Secondly, it relates solely to work undertaken under a contentious business agreement (CBA). These agreements are defined by section 59 of the Act. Although widely drafted, it is clear that the section is permissible - solicitors may enter into a CBA with the client.


It is not that all agreements relating to contentious matters are CBAs. Indeed the contrary is more likely - most retainers will be under the flexibility acknowledged by part 48.8 of the Civil Procedure Rules. It is unlikely that a retainer will amount to a CBA 'unless it is possible for the client... to calculate how much he is being asked to pay. An agreement as to the hourly rates to be charged will clearly be insufficient if the amount of time for which a charge will be made is not known at the time the agreement is entered into' (see Lord Denning in Chamberlain v Boodle and King [1982] 1 WLR 1443). It follows that most retainers for contentious work are, in any event, not CBAs and in consequence the restrictions in section 60(5) will not be relevant.


Thirdly, even in the unlikely event that the retainer is on a CBA, the first limb of the sub-section prohibits complete exclusion of liability for negligence rather than a limitation of liability. The second limb is more perplexing. Logically, the draftsman must have intended a responsibility other than not to be negligent and there are of course many such duties in the Act, and it is those responsibilities at which the section is directed.


Accordingly, it is possible to limit liability by contract for all sorts of work. As risk management becomes an important feature in the management of a legal business, practitioners would be advised to consider the use of such contractual limitations as part of a risk management strategy.


Peter Ashford is a partner in the commercial dispute resolution team at Kent-based law firm Cripps Harries Hall