Why the change?
There are several reasons for this trend:
- Pressure from insurers for consultants to be more rigorous in the way they approach risk management.
- Consultants becoming more businesslike in their operations. This goes hand in hand with many consultants’ adoption of the LLP corporate structure.
- The inclusion of limitation clauses in standard forms of professional appointment, such as the RIBA and ACE standard forms.
Blame the market
The state of the market is another reason. Before the downturn, consultants took advantage of their strong bargaining position to seek limits on their liability. The downturn in the market shifted this bargaining position and clients are now able to demand lower fees from consultants. However, can clients have their cake and eat it? Consultants take the view that if they are being pressured on fees, clients should accept a limit on their liability: it does not make business sense for a consultant to accept high levels of risk for a small reward.
What to consider when deciding whether or not to accept a cap
The type, terms and nature of any proposed cap on liability is critical. However, there are also a number of commercial factors to consider in deciding whether or not to accept a cap on a consultant’s liability:
- The consultant’s role.
- The financial covenant strength of the consultant.
- The nature of the project.
- The procurement route. In a design and build project, agreeing a limit of liability with a consultant whose appointment will be novated to the contractor may lead the contractor to demand a limit on its own liability or a higher price to reflect the risk it is taking with that consultant.
- Whether professional indemnity insurance cover is on an each and every claim basis and to be renewed on an annual basis.
- The impact on negotiations with other consultants.
- Whether there are third parties involved, such as a funder. If the appointment contains a cap on the consultant’s liability this will affect the terms of any protection granted to third parties through third party rights or collateral warranties.
Clients need to be realistic when considering whether to accept a limits of liability in appointments. Adopting an inflexible approach and being unwilling to entertain negotiations on limits of liability is unlikely to lead to a successful negotiation. There is no stigma attached to agreeing a cap on a consultant’s liability.
Equally, this should not set a precedent in relation to a particular project or a particular consultant. All projects are different, with different risk profiles and different commercial considerations. What is appropriate for one project and one consultant may not be appropriate for others.
Consultants also need to be realistic. Many clients will only agree to caps on liability on certain terms, for example, appropriate carve outs from the overall cap.
This issue is not likely to go away: different clients operating in different sectors take different views as to the acceptability or otherwise of caps on consultants’ liability. In my view, the issue needs to be assessed on a risk basis. Both clients and consultants should bear these factors in mind from the outset when negotiating professional appointments.
This blog was first published by PLC Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. Please select the link for other PLC Construction blogs.