Limitations on liability for law firms?

Guest article written by DWF Law LLP

When solicitors are considering the terms of their engagement with clients, the spotlight and focus is often (understandably) on defining the scope of the particular engagement and the services which are to be provided.  

There is perhaps less focus at that time on the financial limitation of the solicitor's liability to clients in the event that something unexpected happens and a client makes a claim for Professional Negligence against the solicitor .Clauses seeking to limit liability to clients are by their nature, often only looked at with hindsight but as set out in more detail below, these clauses warrant specific attention at the outset of a retainer in each case.  

The Background

As is well known, solicitors' practices are obliged to take out a minimum level of insurance cover compliant with the SRA Minimum Terms and Conditions for Professional Indemnity Insurance in England and Wales ("MTC"). The minimum levels are currently:

• £3m any one claim for practices which are incorporated including LLPs, and 

• £2m any one claim for partnerships and sole practitioners.

Solicitors cannot in any circumstances exclude or attempt to exclude liability below this minimum level of cover.  This restriction has been moved from the Code of Conduct and transferred to the SRA Indemnity Insurance Rules at paragraph 3.2

https://legalservicesboard.org.uk/Projects/statutory_decision_making/pdf/2019/SRA_Indemnity_Insurance_Rules_wit

Responsibility for complying with these rules' rests with the firm and with each of the principals.

It is important to be aware of the provision because not only will such a clause be held ineffective as against the client but using this type of provision may well have regulatory consequences including the imposition of a fine or other penalty at the SDT^[1]

SRA Guidance on Limiting Liability 

The SRA has provided guidance on capping liability in its Guidance Document headed "Adequate and Appropriate Indemnity Insurance SRA | Adequate and appropriate indemnity insurance | Solicitors Regulation Authority

The key points made in this document in relation to capping liability are that:-

• An SRA authorised practice cannot cap its liability to clients below the minimum level of cover in any circumstances ( see above). 

• Solicitors should bear in mind the provisions of the Code of Conduct for Solicitors and for firms including:

  • the duty not to abuse your position by taking unfair advantage of clients (Paragraph 1.2 of the Codes of Conduct for Solicitors and Firms). 

  • the duty to give clients information in a way that they can understand and ensure that they are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them – paragraph 8.6 of the Code of Conduct for Solicitors and 7.1 of the Code of Conduct for Firms. 

•  Any cap should:

  • Be fair and reasonable in the particular circumstances of the client and the case

  • Reflect the balance of power and knowledge between the solicitor or firm and the client.

  • Take into account the best interests of that client (SRA principle 7).

  • Must be communicated to the client in a way that they can understand the impact.  

Interestingly the SRA suggest that in addition to the above they would not expect to see caps put on liability to clients as a matter of routine.  

Certain clients will be subject to additional statutory stipulations and protections for example if they are "Consumers" under the Consumer Rights Act 2015 or more generally under UCTA 1977.  

Practical Considerations

In order to stand the best chance of being upheld as being valid and reasonable, the wording of any clause attempting to limit liability should be focussed on at the "front end" of any retainer before terms of engagement are signed by the client.

Ideally any clause seeking to limit liability would be negotiated with the client with those negotiations and the client's agreement being recorded in writing.

The wording of the clause and the limit imposed to liability will be extremely fact sensitive to the particular circumstances of the retainer including:

• the nature of the client, including its sophistication, 

• the relative bargaining position of the parties 

• the nature of the retainer,

• the anticipated financial consequences if things were to go wrong.

Whilst liability cannot be limited below the minimum levels prescribed by the SRA, merely limiting liability at these levels may not be effective if the financial consequences of an error could reasonably have been anticipated to have exceeded this level.  
If a clause limiting liability is included in any retainer letter which has not been specifically negotiated with the client, best practice would be:

• to highlight this particular clause amongst other key clauses at the outset of the retainer,

• to discuss this with the client and 

• ideally having agreement to the clause signed by the client 

This avoids the argument that the clause was "hidden" in a long letter of engagement.  

Another possibility to consider if the relevant term is a "standard" term, is offering the client the option of discussing a variation to the proposed limit on liability.

Clear language should be used so that any clause is easily understandable.

[1] In 2021 the firm and a Solicitor were fined for attempting to exclude liability and for trying to shorten the time limit available to Clients for bringing a claim under the Limitation Act 1980. Cases Archive - Solicitors Disciplinary Tribunal (solicitorstribunal.org.uk)

This article has been written by Sheona Wood of DWF Law LLP and the opinions and views stated in this article are those of Sheona Wood and not Howden Insurance Brokers Limited (“Howden”). Howden is an insurance broker and is not authorised or regulated to advise Limitations on liability for law firms. Howden shall not (i) owe or accept any duty, responsibility or liability to you or any other person; and (ii) be liable in respect of any loss, damage or expense caused by your or any other party’s reliance on this article.