The idea of law firms restricting their liability to clients is taking hold.

Such a mechanism helps to dilute risks posed by time constraints.

But not all lawyers agree that setting limits on the quality of their work - especially at night - is the way forward, reports Nigel Hanson

The professional culture of solicitors is changing as firms appreciate the scope for restricting their liability to clients.

Increasingly, solicitors are financially capping their liability or, in the case of urgent instructions, explaining to clients the limits of what can be achieved to a professional standard in the time available.

With some firms having to spend millions annually on indemnity insurance premiums, this determined approach is gaining currency.

In particular, liability for mistakes made during graveyard shifts has come under the spotlight (see [2004] Gazette, 19 February, 5).

Commenting on a recent development that City firms may attempt to restrict their liability for night-time errors, Richard Dedman, senior partner at Barlow Lyde & Gilbert, suggested such moves might be deemed reasonable under the Unfair Contract Terms Act 1977 (UCTA) if clients insisted on work being completed in an unrealis-tically short space of time.

Novel approaches to limiting liability appear to be flourishing as the insurance landscape evolves.

From 1977 to 1986, the entire solicitors' profession had cover under a single master policy.

That then transformed into the Solicitors' Indemnity Fund (SIF), which existed until 2000.

Since then - following pressure from those who took the view that they could get a better deal from the open market - cover has been provided by a group of about 25 approved insurers, and the SIF now only operates in 'run-off'.

Katherine Rees, a partner in City firm Reynolds Porter Chamberlain's professional liability department, says it is now common for firms to cap liability or define the limits of their retainers.

A survey by the City of London Law Society's commercial law sub-committee found, as early as 2000, that nine of the firms approached were capping, compared with 33 that were not.

Ms Rees maintains that capping has become more widespread over the past four years.

She suggests that setting limits by specifying a maximum sum payable may be preferable to citing a multiple of the case fee because fees often bear little relation to the monetary value at risk in a transaction.

Restrictions on liability may also be used to neutralise risks posed by time constraints, so long as the UCTA 'reasonableness test' is satisfied.

'If you were given three weeks to do six weeks' work, if solicitors think their retainer is limited in that way, there's nothing to prevent them making that clear to the client,' Ms Rees says.

'But it's their duty to make the scope of the retainer clear and ensure the client has understood it.'

Clarity proved vital in a professional negligence case that her firm handled recently.

'It involved solicitors who were brought in to replace other solicitors late in the day,' Ms Rees explains.

'The client, who had limited funds, wanted agreement reached quickly and everything wrapped up in a week.

The solicitors wrote a very clear letter saying there was a limit to what they could do in the situation.

Then, five and a half years later, a claim came in.

The solicitors were able to refer to their letter and we were able to stop the claim in its tracks.'

Conversely, in the case of Coudert Brothers v Normans Bay Ltd [2003] EWCA Civ 215, solicitors who advised on a botched commercial transaction in Moscow in the 1990s, were unable to prove that they had adequately informed the client of the limitations the lawyers considered they were working under.

As a result, the court held they had no defence to a negligence claim.

Ms Rees warns that the new insurance landscape sometimes gives rise to complications when firms split or merge.

Under the SIF, only one insurer (the fund) was involved, but now it is often difficult to decide who should meet a claim where several different insurance companies are potentially involved.

Ms Rees says: 'Firms have got to think carefully about the consequences of merging or being joined by a sole practitioner, and whether it would make them the successor practice for potential claims.'

By rule 12.11 of the Guide to the Professional Conduct of Solicitors, firms are relatively free to limit by contract certain aspects of liability to their clients, so long as such limitation is not below the minimum level of cover required by the Solicitors' Indemnity Rules - currently I million.

Despite such freedom, Trevor Chamberlain, litigation client services partner at national firm Beachcroft Wansbroughs, is sceptical about talk of limiting liability for night-time work.

'It was quite an interesting story, but I haven't seen it in practice,' he says.

'It would be interesting to see whether a client would be prepared to agree to it.

I would question it.

'There's no reason why it shouldn't happen, provided the exclusion doesn't go below the Law Society's I million figure.

But a client may say, "why should I agree?" and take the work elsewhere.'

Mr Chamberlain says night shifts are not necessarily more error-prone than normal office hours so long as the work is 'professionally managed'.

In the drive to restrict liability, some firms such as Clifford Chance and Withers have opted to form LLPs - limited liability partnerships - to protect partners' personal assets.

These tend to be firms that have alliances with lawyers in the US, where a more litigious society and the availability of punitive damages add to the risks of practice.

However, as Mr Chamberlain points out LLPs offer little protection against a large, 'melt-down claim'.

'The firm itself would still be wiped out,' he says.

Peter Farthing, a partner at City firm Clyde & Co and chairman of the Law Society's indemnity insurance committee, is scathing about the prospect of lawyers drafting restrictions regarding the quality of work clients are entitled to expect.

'It's the sort of thing that accountants do,' he jokes.

'Solicitors are professionals.' And he is particularly sceptical about night-time limitations.

'I cannot imagine any client with that sort of business being prepared to accept it, knowing the level of competition between commercial firms,' he says.

'Any firm that attempted it would be signing their own death warrant.

Even the Americans don't do it.'

With some City solicitors charging up to 650 per hour, 24-hour excellence is perhaps a reasonable expectation.

Mr Farthing adds: 'Clients who are involved in transactions that require these through-the-night negotiations expect to pay the top hourly rates and expect to get the top service - and they do.'

Pay rates may be lucrative but indemnity insurance premiums can also be substantial.

Mr Farthing speculates that many City firms are spending millions annually on premiums and some may have purchased up to 1 billion of cover.

So where does most risk lie? Commercial property, mergers and acquisitions and tax advice are areas where errors can be particularly costly.

But across the profession, residential conveyancing has proved to be a minefield.

The SIF's 16th annual report, published last month, revealed that almost half of all claims against solicitors involved conveyancing cases (46% by number; 49% by value).

The next most significant tranche of claims involved personal injury cases (16% by number; 14% by value).

Mr Farthing maintains that conveyancing spawns the most claims because intense competition makes it badly paid and the work has to be done so quickly that mistakes are common.

However, overall he is satisfied that the profession's insurance cover is in good shape to cope with the challenges.

'From the solicitors' point of view, there's a healthy competitive insurance market,' he says.

'Premiums are reasonable.

They aren't rising as insurers would like.

We don't have any insurance problems.

The situation is fine at the moment.'

He contrasts this with the predicament of independent financial advisers, more than half of whom he says are practising without insurance because the cost of cover for potential claims they face for investment advice is astronomical.

Many large accountancy firms are also uninsurable, he suggests, because of their liability to wider classes of people through auditing company accounts.

Paula Johnson, director of insurance brokers The Blackfriars Group, says accountants have for a long time been aware of the scope for limiting their liability to clients.

But she says that many solicitors are not aware of their freedom to follow suit under rule 12.

Similarly, insurers themselves have tended not to consider limiting liability to solicitors' clients, she says, concentrating instead on firms' internal procedures for avoiding risk.

'It is my experience that insurers have not to any great degree considered limitation of liability matters or asked the question,' she says.

'It will, or should, become a feature in the future, when it is appropriate for it to be in place considering the rules.

And why not?'

Meanwhile, she suggests, firms should continue to focus on the basics by introducing routines and control systems, concentrating on continuing professional development and appointing a risk manager or committee.

'The appointment of a risk manager should never, of course, detract from responsibility from others in the firm.

It should start at reception and work the whole way through.

It's about shaping the culture in total.'

Nigel Hanson is a freelance journalist