In the July newsletter - Effective Dispute Resolution Strategies - I discussed briefly standard form clauses in commercial contracts. One of the clauses was a limitation of liability clause.
During a recent presentation to an accountants’ forum on professional negligence I was asked several questions on the topic of disclaimer, exclusion and limitation of liability for accountants in respect of written terms of engagement. Clearly, this is an area of concern and is equally applicable to all professional advisors. Whilst a detailed analysis of the various issues that must be carefully considered, not least the governing rules and regulations for professionals’ retainers, is beyond the scope of this article, there have been two recent cases which illustrate the Courts’ interpretation of and approach to exclusion and limitation clauses.
The first case is a construction dispute (The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited (July 2012)). The case principally concerns the issue of professional negligence and letters of intent. There was an additional consideration for the Court, namely, if negligence was established against Turner & Townsend Management Ltd (T&T) on the facts, could T&T rely on the benefit of an effective limitation clause? The first issue that arose in respect of the clause was whether it was incorporated into the contract between the parties and second, if it was incorporated whether it was deprived of effect by reason of Section 3 of the Unfair Contract Terms Act 1977 (UCTA).
The terms of appointment or contract between the parties were not signed and the terms of the fees payable to T&T were not discussed and agreed expressly. The Court held that the fact that the terms of appointment were not signed did not mean that there was no acceptance of them on an objective basis. It therefore followed that the limitation clause was incorporated into the contract between the parties.
The clause read as follows:
“ Liability for any negligent failure by us (T&T) to carry out our duties under these terms shall be limited to such liability as is covered by our professional indemnity insurance policy terms. Liability is also limited to such a sum as it would be equitable for us to pay having regard to the extent of our responsibility for any loss or damage suffered by you on the basis that all other consultants, contractors and subcontractors who also have a liability shall be deemed to have provided contractual undertakings to you on terms no less onerous than these terms and shall be deemed to have paid to you such sums as it would be just and equitable for them to pay having regard to the extent of their responsibility for any such loss or damage and in no event shall our liability exceed the fees paid to us or £1 million whichever is the less. ”
T&T stated that it would take out a professional indemnity policy with a limit of indemnity of £10 million which it would maintain for 6 years from the date of completion of the services.
SOME LAW
The material parts of sections 2, 3 and 11 of the UCTA 1977 provide as follows:
“ 2. NEGLIGENCE LIABILITY
(2) In the case of other loss or damage [i.e. other than personal injury or death], a person cannot [by reference to any contract term] exclude or restrict his liability for negligence except insofar as the term ... satisfies the requirement of reasonableness. ”
“ 3. LIABILITY ARISING IN CONTRACT
(1) This section applies as between contracting parties where one of them deals… on the other’s written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term -
(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach ...
except insofar as ... the contract term satisfies the requirement of reasonableness. ”
“ 11. THE ‘REASONABLENESS’ TEST
(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act ... is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
(4) Where by reference to a contract term ... a person seeks to restrict liability to a specified sum of money, and the question arises ... whether the term… satisfies the requirement of reasonableness, regard shall be had in particular ... to -
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
(5) It is for those claiming that a contract term ... satisfies the requirement of reasonableness to show that it does. ”
The Court held that the limitation clause would result in a limit of liability equal to the fees paid to T&T which was approximately £111,000. In the absence of any explanation as to why T&T should have stipulated insurance cover of £10 million despite a limitation of liability to less than £200,000, the Court considered it unreasonable that the contract purported to limit liability in this way.
The second case involves the purchase at auction of a painting which was described in the catalogue as the work of a Russian artist, Boris Mikhailovich Kustodiev (Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd (2012)). The auction house, Christie’s, stated that its catalogue descriptions were based upon “careful study” and represented “the opinion of experts”. The buyer paid Christie’s a substantial premium in addition to the hammer price for the painting.
Although authenticity was hotly disputed, the Court found that the painting was probably not by Kustodiev. Therefore Christie’s was in breach of warranty based on the incorporated conditions of sale in the catalogue. Christie’s express warranty was given for 5 years from the date of sale and that the description of the painting which was stated without qualification to be the work of a named author, was “authentic and not a forgery”. The buyer was therefore entitled to cancel its purchase and recover the price under the express terms of the contract. The Court rejected the buyer’s claims for negligence and misrepresentation.
On the question of whether the exclusions of liability were reasonable, on the facts of the case, the Court held it was reasonable to include conditions limiting the buyer’s claims to breach of a 5 year warranty and its remedies to undoing the sale and refunding the price. The Court considered the UCTA reasonableness test set out above. The Court held Christie’s had a rational basis for excluding potential claims and remedies by the buyer and furthermore it was reasonable that Christie’s should not have to pay compensation without getting the painting back. The commercial context of the contract was also important and the fact that the parties had similar bargaining power, real choice of contracting partner and could be expected to know of the terms.
COMMENT
The Christie’s case demonstrates that if a party is seeking to limit liability it should do so on a coherent and justifiable basis rather than attempting to exclude all potential liability. The Court upheld the reasonableness of the disclaimers of liability limiting liability to a 5 year warranty and whilst Christie’s did not escape liability, it did restrict the extent of their liability to a specified sum.
The Christie’s case may be contrasted with the T&T case. In the T&T case, the decision of the Court to limit the liability to the contract price was less coherent and based on the level of insurance and that it was unreasonable for T&T to introduce a draconian term which was wholly inconsistent with the requirement for substantial professional indemnity insurance without specific notice and any discussion with the claimant.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Monday, 26 November 2012
Friday, 2 November 2012
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