How effective are clauses that limit a consultant鈥檚 liability to less than his or her total insurance cover? Until now this has been a grey area, but a recent decision has cast some light on how the courts will assess them.
Some standard forms of consultants鈥� appointments include clauses limiting liability. To be effective, these clauses have to satisfy the test of 鈥渞easonableness鈥� under the Unfair Contract Terms Act 1977.

Until recently, it would have been difficult to predict accurately whether a particular limitation would be effective. But the case of Moores v Yakeley Associates (Technology and Construction Court judgment, 28 October 1998) has provided valuable guidance as to the steps consultants should take and the matters they should have in mind when agreeing a limitation of liability with a client.

The case concerned a limitation of liability in the RIBA standard form of agreement for the appointment of an architect (the SFA/92 agreement), and the judge held that the limitation was 鈥渞easonable鈥�.

Mr Moores employed the architect, Mr Yakeley, in connection with a bungalow he was proposing to build. There were two draft letters from the architect proposing the terms on which he would act, and one stated that the appointment would be in accordance with the terms of the SFA/92 agreement.

A completed copy was attached and clause 6.2 was completed as follows:

鈥淭he liability of the architect for any loss or damage arising out of any action or proceedings referred to in clause 5 shall, notwithstanding the provisions of clause 6.1, in any event be limited to a sum not exceeding 拢250 000.鈥�

The amount was written in bold. The judge held that the offer contained in the two letters was accepted by Moores and that the SFA/92 agreement, and clause 6 in particular, was incorporated in the contract thereby created.

The relevant provisions of UCTA required the judge to have regard in particular to the resources which the architect could expect to have available for the purpose of meeting the liability, should it arise, and how far it was open to him to cover himself by insurance.

UCTA also provides that the judge was entitled to consider the strength of the respective bargaining positions of the parties; whether Moores had an opportunity to enter into a similar contract with other persons, but without having to accept a similar term; and whether Moores knew of the existence and extent of the term.

The factors that led the judge to conclude that the limitation was reasonable were:

  • The limit set for liability should be reasonable
  • The resources available to meet a liability must be taken into account
  • The bargaining positions of the parties should also be considered

  • The 拢250 000 limit was not an arbitrary figure 鈥� it was based on the architect鈥檚 assessment of the likely cost of the works. The judge accepted this was a reasonable figure and contrasted it with other cases where no rational explanation had been advanced for the ceiling figure. The judge said: 鈥淚t would take some quite exceptional circumstance, beyond the reasonable contemplation of the parties, to give rise to a liability for damages in a sum greater than the total estimated cost of the project itself.鈥�

  • Moores had accepted that if the limitation of damages clause was roughly sufficient to cover the total building cost, that was 鈥渇air enough鈥�.

  • The fees the architect would earn were in the order of 拢20 000. The ceiling of 拢250 000 was more than 10 times that amount.

  • Moores was in a stronger bargaining position than the architect 鈥� he could have instructed any architect. The contract was entered into at a time of severe recession. He was in no particular hurry to enter into this contract and had a solicitor to protect his interests.

  • Both Moores and his solicitor were aware of the existence of clause 6.2 and had had ample opportunity to object to it. Instead, they both said they were happy with the proposed agreement.

  • A comparison of their respective resources showed that the architect had none and that Moores was a very wealthy man.

The architect鈥檚 insurance cover was for 拢500 000 in respect of each and every claim and was thus substantially in excess of the ceiling figure of 拢250 000. This did not make the limit 鈥渦nreasonable鈥�, however. The judge explained: 鈥淭he fact that the insurance cover was in excess of the ceiling figure cannot be determinative 鈥� An architect might have an insurance cover of 拢10m and be engaged to carry out a small project with an estimated contract value of 拢10 000. It would be absurd in such a case to say that any ceiling figure lower than 拢10m would be unreasonable.鈥�

Two other points arose. First, the SFA/92 agreement also contains a net contribution clause. The judge did not have to consider whether this was 鈥渞easonable鈥�, but he did say that he considered the clause dealt only with liability for breach of contract.

Second, Moores鈥� claim was not only for damages for negligence and/or breach of contract but also for 拢132 680 in restitution for repayment of money paid under a mistake of fact. The judge held that an agreed limitation applying to damages for breach of contract cannot be circumvented by formulating a claim on some other basis if the claim could be made for breach of contract.

Postscript

Rachel Barnes is partner at solicitor Beale and Company.