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25/05/18 – Is your liability unlimited?

The bad news is that, yes, it probably is.

The default position for all of us is that, if our work is negligent or otherwise in breach of a legal duty, there is no limit or “cap” on the amount of compensation we can be required to pay. So long as the loss is caused by our default, and is not too remote, our liability can add up to tens or hundreds of millions of dollars.

However, there are some ways we can place a “cap” on our liability:

  • Professional standards legislation, administered by the Professional Standards Councils. A representative body for a profession can apply for a “scheme” for its members. Once approved by the government, the scheme then provides an automatic limit of liability to members for all their work. As a condition of this protection, members must fulfil certain insurance and education requirements, and disclose their limited liability status in communications. However, apart from valuers, very few bodies in the construction industry have schemes in place.
  • Contractual limits, where a consultant includes a clause in their services agreement with their client stating that the consultant’s liability is limited to a monetary amount or a time period, for example. These clauses have been upheld by courts – for instance, an engineer limiting their liability to 1 year post completion, or an architect limiting their liability to $300,000. These limits are only effective against the client who is the other party to the services agreement. Other parties, who are not bound by the services agreement, can still make claims for an unlimited amount.

Importantly, insurance on its own does not function as a cap. Say that a project manager has professional indemnity insurance of $5 million, but makes a mistake that costs their client $7 million in losses. The project manager’s insurance pays the first $5 million, and the remaining $2 million needs to come out of the project manager’s own pocket. (Unless, of course, they have a contractual limit of liability in place.)

Because of this risk of large claims that exceed insurance, many consultants prefer to have a contractual limit of liability that is no greater than the limit of their professional indemnity insurance. From the client side, limits of liability that equate to professional indemnity insurance cover are arguably a relatively low risk, because a medium-sized consultancy business probably could not pay tens of millions of dollars above their insurance cover, so practically speaking the client’s ability to recover compensation is very likely limited to insurance proceeds in any case.

It can be a great benefit to consultants to have a significantly lower limit, but the lower the limit, the more client resistance is encountered. From a client perspective (and also when you are a consultant engaging others as sub-consultants), one of the greatest dangers is very short time limits, such as 1-5 years. These can see the negligent consultant wholly absolved of liability for expensive and serious errors during the exact period where defects are most likely to manifest themselves.

Examples of limit of liability clauses can be found in AS 4122-2010 (clause 29) and in many pro forma contracts circulated by consultant representative bodies.

Our new Contracts Intensive course (60 min) covers limits of liability, unfair contracts, and execution (signing) of contracts and deeds. Or you can combine our short course Limits of Liability Explained (20 mins) with two other short courses to build your own hour of tailored CPD. Made for computers or devices, our online courses have assessment questions to meet formal CPD requirements, and can be paused and watched in sections, making them ideal for breaks and commutes.

Wendy Poulton
Risk Manager

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