UK: Three Steps To Limiting Liability

Last Updated: 12 August 2003
Article by Richard Dedman

How can solicitors before starting a client assignment take steps to limit the risk, or consequences, of being found in breach of duty? Richard Dedman focuses on three important approaches.

LIMITING THE SCOPE OF WHAT THE SOLICITOR AGREES TO DO

The engagement letter records what client and solicitor have agreed to be the solicitor’s assignment. Equally important it can help to remove dispute or ambiguity as to what the solicitor is not required to do.

Best practice is set out in paragraph 12.08(1) of the Law Society Guide to the Professional Conduct of Solicitors (8th Edition) ("the Guide"):- "It is essential at the outset for a solicitor to agree clearly with the client the scope of the retainer and subsequently to refer any matter of doubt to the client. If a solicitor limits the scope of the retainer it is good practice for the limits of the retainer to be precisely defined in writing to the client." Where this practice is not followed, the solicitor is exposed to the risk that he will be found to owe a wider duty to his client going beyond the discrete task on which he is instructed. In simple cases the solicitor is under no duty to go beyond his instructions by offering unsought advice on the wisdom of the transaction, (Clark Boyce v Mouat (1994)). However during the course of many instructions the solicitor will become aware of information or form views which might cause the client to revise the instructions. The solicitor has a duty to advise his client of risks which should be obvious to him but which the client may not appreciate (Boyce v Rendells (1983)) and it is especially difficult to argue successfully that a matter is not the solicitor’s responsibility when the client is inexperienced (Carradine Properties Limited v D J Freeman & Co (1999)); he also has a duty to pass on information he learns during the course of the instructions which may be important to the client (Mortgage Express v Bowerman (1996)). Even if the level of fees agreed reflects a limited task this will be unlikely to let the solicitor off the hook.

The courts can also be unsympathetic even if the client had other professionals involved, for example accountants, on whom the solicitor understood the client also to be relying. In many commercial transactions, the solicitor performs a coordinating role and is regarded as the lead advisor. The Courts will frequently hold the solicitor responsible in such circumstances, for example for failure to give tax advice, without a clear agreement putting responsibility for such advice elsewhere (Hurlingham Estates v Wilde & Partners (1997)).

LIMITATION OF LIABILITY BY CONTRACT

The Guide provides in relation to clients:- "Although it is not acceptable for solicitors to attempt to exclude by contract all liabilities to their clients, there is no objection as a matter of conduct to solicitors seeking to limit their liability provided that such limitation is not below the minimum level of cover required by the Solicitors Indemnity Rules." (Paragraph 12.11).

However, there are legal constraints upon a solicitor’s ability to limit liability by contract. Limitation is not permissible at all in a "contentious business agreement" under section 60(5) Solicitors Act 1974 (though this does not necessarily extend to all work carried out by "contentious" departments, such as most tribunal work) or in cases of fraud.

Attempts to limit liability for negligence in respect of non-contentious work are governed by s2(2) of the Unfair Contract Terms Act 1977 ("UCTA"). The contract term must satisfy the requirement of reasonableness taking into account the resources which the solicitor could expect to have available to him for the purposes of meeting the liability and how far it was open to him to cover himself by insurance. The fact that the solicitor could theoretically have obtained insurance above the cap is probably not fatal if the cost would have been disproportionate. In various cases, the court has considered in relation to both parties the ease and cost of obtaining insurance.

Most businesses – including professional firms – seek to protect themselves in this way. However, solicitors have been very slow to follow suit (see the Commercial Law Sub Committee of the City of London Law Society Survey 1999). For those who do, paragraph 12.11 of the Guide makes the point that "it is preferable that the client’s acceptance of the limitation should be evidenced in or confirmed by writing". In practice this should be dealt with in the engagement letter.

Paragraph 12.11(6) of the Guide says in relation to third parties: "As to the solicitor’s liability to persons who are not his or her clients, … it may be reasonable in some circumstances for a solicitor to seek to limit or exclude altogether the liability he or she might otherwise incur to such persons under the principle in Hedley Byrne & Co Ltd v Heller & Partners Limited [1964] AC 465".

Again, solicitors in the UK appear to make only limited use of such disclaimers to third parties (which are probably subject to UCTA) although they are seen, for example, in the context of opinion letters (e.g. Henderson v Merrett (1994)).

LIMITING LIABILITY THROUGH A CORPORATE VEHICLE

Paragraph 3.17 of the Guide allows solicitors to practise in corporate form, subject to compliance with the Solicitors Incorporated Practice Rules 2001 and rules of conduct applying to solicitors’ incorporated practices and to individual solicitors.

Although limited liability vehicles have not historically proved attractive to firms of solicitors (presumably because of taxation issues), the position may now be changing with the advent of LLPs under the Limited Liability Partnerships Act 2000 which provides a more favourable tax regime than that for limited liability companies.

A key issue for law firm LLPs is whether a negligent member of the firm may be subject to unlimited liability, even though the remainder, by virtue of its limited liability status, will not be. For both directors of a limited liability company and members of an LLP, the relevant question is whether they have assumed personal responsibility towards the Claimant, following the doctrine which originated in Hedley Byrne.

The House of Lords in Williams v Natural Life Health Foods Limited (1998) suggested that such assumption of personal responsibility by directors will be rare. However, current Law Society Guidance states that it "would be dangerous to assume that LLP status will protect solicitors from the consequences of personal negligence" as there is an argument that "a solicitor or other fee earner would often or always be liable to clients in tort, because the courts would regard legal advice given in the course of a solicitor-client relationship in a different light from representations made (as in the Williams case) in the course of arm’s length negotiations". Support for this view can be taken from Merrett v Babb (2001), in which the Court of Appeal held that an employee in a partnership of valuers was personally liable to the firm’s client for his negligent valuation.

However, Merrett was distinguished by Mackinnon J in Bradford & Bingley plc v Hayes Dunphy & Hayes Ltd (2001) where the negligent valuer’s employer was a limited liability company of which he was a director. Moreover, the government made it clear during the passage of the LLP Bill that it intended a "level playing field" for limited companies and LLPs alike.

In order to strengthen the argument that their members should not be personally liable, it is advisable for professional partnerships which decide to become LLPs to stipulate clearly in their engagement letters to clients that no personal responsibility is intended to be assumed by individual members of the firm.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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