Law firms have been slow to follow other advisers in limiting their liability. John Verry says a standard clause in retainers should be avoided and explains what to look for when negotiating limitations


Entering into an agreement with a client to limit liability makes sense. Taking any step to minimise the firm's exposure to risk in a particular matter has to be best practice.



However, it should not be dealt with on the basis that it is just another standard clause to be inserted in the firm's terms and conditions or retainer letter. In many cases, a standard clause may be inappropriate.



The obvious time to address a limitation of liability clause is at the creation of the retainer with the client. At this stage, several risk issues need to be addressed, and collectively these issues would form part of the client-vetting or client- acquisition process.



When considering the limitation of liability clause, the following specific issues need to be addressed by the solicitor.



Choosing a figure



When deciding what figure to select, you should note:

l Minimum cover: solicitors are not allowed to limit liability below the minimum level of professional indemnity insurance cover required by the Law Society, which currently stands at £3 million for a limited liability partnership and £2 million for other firms.

l The likely loss: any client-vetting process needs to include a full risk analysis of the matter. This would include the likelihood of an error arising, and its potential impact on the firm. In short, how much could it cost if it went wrong and the client sued? This calculation would in turn indicate a realistic level at which to limit liability, as well as assisting the firm in ensuring that it has sufficient indemnity cover in place for the transaction.

l Reasonableness: the figure settled on by the solicitor must be reasonable so as to comply with the requirements of the Unfair Contract Terms Act 1977. Each limitation clause would be judged on its own merits, taking into account all the relevant factors of that particular retainer. This reinforces the fact that it is probably unwise to simply rely on a standard clause containing a standard figure in a standard retainer letter.



Other factors



Additional areas that should be taken into account include:

l Client sophistication: it would be necessary to ensure that, where the client is an unsophisticated user of legal services, any clause endeavouring to limit liability is clearly set out and, where possible, explained in detail to the client.

l Aggregation: when considering the potential loss that may be incurred by the firm on a particular matter, care needs to be taken with regard to the aggregation clause set out in the Law Society's minimum terms and conditions. This clause enables an insurer to count a number of claims arising out of one or more transactions as one claim, and aggregate them together for quantum purposes. Therefore, what may be a relatively small figure on first sight, when aggregated with other claims, could become very substantial.



Professional conduct



You should also consider the Guide to the Professional Conduct of Solicitors. The relevant principle is 12.11, which sets out in detail the principles relating to the limitation of liability in contract on the part of the solicitor.



Particular features to take into account include:

l Liability for fraud or reckless disregard of professional obligations cannot be limited.

l Any limitation must be brought clearly to the attention of the client and be understood and accepted by him.

l Where the retainer may be affected by foreign law, such matters may need to be considered according to the law applicable. Multi-jurisdiction firms need to be careful here as limiting liability in some jurisdictions is prohibited.

l As to the solicitor's liability to persons who are not his or her clients, the Law Society Council takes the view that it may be reasonable in some circumstances for a solicitor to seek to limit or exclude altogether the liability he might otherwise incur to such persons under the principle in Hedley Byrne & C Ltd v Heller & Partners Ltd [1964] AC 465 (HL).

It is important that the principle is looked at in its totality as the above are only extracts.



The guide also states that 'it is preferable that the client's acceptance of the limitation should be evidenced in or confirmed by writing'. How realistic this is may be open to debate, but a sound recommendation may be to do this with less sophisticated clients.



The guide confirms that it is possible in certain circumstances to exclude liability completely to people who are not solicitors' clients. Again this should not be treated as standard, as each particular case would need to be considered on its merits - particularly where an opinion given is made available to another party.



A wise move



The limitation of liability is to be encouraged. Underwriters like to see evidence that a firm is alive to the risk issues confronting it, and is taking steps to limit the firm's liability and, in turn, limit the underwriter's potential liability. Do not look for a reduction in premiums though, as such actions are expected by the underwriter.



Another issue that is often raised in the context of limiting liability is the client's reaction.



Solicitors often make assumptions as to how a client will react without actually checking. Many law firms were slow to adopt limitation clauses on the basis that clients would refuse to accept them.



Contrary to that belief, many were surprised that it took solicitors so long to do something that their other professional advisers had been doing for years.



It is accepted that certain high-profile clients, such as banks and finance houses, generally do not readily agree to such limitations. However, do ask the client rather than simply guess.



John Verry is director of risk and compliance at Lockton International