To limit liability, or not to limit

In the next two issues of FD Legal, Peter Ashford will consider the limitation of liability to the client as part of a risk-management strategy.

In the current economic climate, with some firms suffering with the reduction in economic activity (especially conveyancing for the smaller high-street firms and M&A activity for the larger firms), with the prospect of bad debts from clients who themselves are suffering the economic downturn and increasing professional indemnity premiums, the ability to limit liability to clients is a vital part of a composite risk-management strategy. Of course, limitation of liability alone will not save a firm that should otherwise fail.

All well-managed firms will have systems in place to reduce the incidence of negligent acts and omissions, but however good those systems are, mistakes will happen and a client will have a grievance, and in some instances a claim. A claim in excess of the insurance cover, or a series of claims that are aggregated that exceed cover, can spell the end of an otherwise successful firm. The practice of limiting liability alone is unlikely to feed through into reduced premiums (especially as limitation of liability is fairly standard and cannot really impact on the primary layer), but insurers do consider an overall attitude to risk and the overall risk-management strategy of the firm as factors in assessing whether to offer terms and, if so, what those terms are. Where limitation is likely to arise and be applied in practice is where there is a substantial and genuine claim. A limitation of liability may make the claim easier to settle, it may make the settlement occur within the limit of indemnity (and hence partners not having to contribute other than by the excess) and, as importantly, make the prospect of obtaining cover in subsequent years on sensible terms, more likely. A claim settled at £3m due to a limit of liability will look fairly horrible on the claims record but still a lot better than one at £20m, which is what it would have been had the limitation not been in place. One enormous pay-out can make a firm effectively uninsurable.

In part one (to be published in the December/January issue) I will consider the legal and regulatory framework against which limitation can be introduced considering the Solicitors' Code of Conduct, the common law and Unfair Contract Terms Act 1977. I will also examine the application of limitation provisions in practice, and the use of more sophisticated limitation provisions.

In part two (to be published in the February/March issue), I will cover contentious business agreements, retainer creep, liability to non-clients and the use of LLPs as a risk-management strategy and why they might not be the panacea they are sometimes painted to be.

Peter Ashford is head of the commercial disputes team at Cripps Harries Hall LLP. He can be contacted at peter.ashford@crippslaw.com