Risk, Liability and Insurance - 3rd edition

3 Liability caps

3.1 A liability cap is a contractual agreement that a client can only claim damages up to the amount agreed, even if the law would otherwise award a greater sum in damages.

3.2 As a profession, surveyors have been slower than some to embrace the use of liability caps, but liability caps are now used more and more frequently by members. One of the most important purposes of this guidance is to explain what liability caps are and how they work, and to encourage members to use them.

3.3 RICS recommends to members the use of liability caps, where legally permissible and following the principles of good practice set out in this guidance note, as a way to manage the risk in professional work, and to ensure that there is a fair allocation of risk and reward between members and their clients.

3.4 This guidance note contains some additional, more specific guidance about capping liability in valuations in both the residential and commercial context in Appendices B and C.

3.5 Capping liability is a common way to regulate risk in a client relationship. Legally, liability caps are enforceable as long as they are properly incorporated into the contract, and they are at a 'reasonable' level. Extra care is required when dealing with a consumer, particularly as any contract between a business and a consumer will fall within the jurisdiction of the Competition and Markets Authority, which has wide powers to challenge the conduct of any business that is seeking to impose terms that cause unfair detriment to consumers. Members must also ensure that any liability cap does not contravene the rules about acting with integrity and having proper regard to standards of service in the RICS Rules of Conduct.

3.6 If it is drafted properly, a liability cap specifically applies even where a member has conducted their work negligently. RICS recommends using a liability cap along the following lines:

'RICS recommends the use of liability caps to members as a way in which to manage the risk in professional work. Our aggregate liability arising out of, or in connection with, these services, whether arising from negligence, breach of contract, or any other cause whatsoever, shall in no event exceed £[x]. This clause shall not exclude or limit our liability for actual fraud, and shall not limit our liability for death or personal injury caused by our negligence.'

3.7 It is important to distinguish between a liability cap and a firm's professional indemnity insurance limit:

  • The insurance limit is set out in the firm's insurance policy and is fixed on the annual PII renewal; it is the maximum amount insurers will pay in any particular claim.
  • A liability cap is an agreement between a member and their client, fixed when they enter into an engagement for professional services.

3.8 The two are not really related, and there is no legal or regulatory reason why a liability cap needs to be anywhere near as high as the insurance policy limit. It would be unwise to agree a liability cap greater than the insurance policy limit, but it would still be better from a risk perspective than not agreeing one at all.

3.9 If a claim arises for an amount greater than the agreed liability cap, and the client tries to challenge the liability cap, the court will need to ask:

  1. whether the liability cap was properly incorporated into the contract and
  2. whether the level of the cap was at a 'reasonable' level when it was agreed.

3.10 Some of the factors the court will consider in determining reasonableness are set out in 3.11, but essentially, in a contract that has been freely negotiated between two commercial parties, the court will usually find liability caps to be enforceable.

3.11 The level of a liability cap is a matter for each member to negotiate with their client. In doing so, some assistance can be derived from the key factors the court will look at in deciding whether a cap is 'reasonable', some of which are set out below. All of these are to be judged as at the time the engagement was entered into between the member and client:

The level of risk in the engagement. This includes the purpose of the instruction, the time available to complete the work, the scope and complexity of the instruction and the parties who may rely upon the work.

The level of fees. Seeking to cap liability to an amount less than the anticipated fee will generally not be reasonable. However, there is no reason for the liability risk to be disproportionate to the reward.

The limit on the professional indemnity insurance policy, and the cost to the firm of buying the insurance. The limit of PII cover is a factor the court may take into account when considering the reasonableness of a cap but, as stated previously, there is no need for the cap to be the same level as the insurance limit, or even necessarily near it. For obvious reasons, it would be unwise to agree to a cap in excess of the insurance limit.

The potential liability that might be incurred without a cap. This factor should cause members to consider what loss their client may incur if their work is negligent, but again, there is no need for the cap to be at or necessarily near that figure. The guiding principle is reasonableness, and parties are free to negotiate any figure that together they consider to be reasonable.

The degree of sophistication and the relative bargaining position of the parties to the contract. If the court forms the view that the provider of services has imposed a liability cap on a customer who had limited or no bargaining power, that will increase the chance of the cap being held to be unreasonable. In the valuation context, this may require particular consideration if the client is a domestic consumer, but it is less likely to be an issue if the client is a commercial organisation that has a similar bargaining position to the member firm, or a stronger one.

How effectively the cap is brought to the client's attention. Best practice is to draw a client's attention to a liability cap, particularly the first time it is incorporated into a contract; it should not be 'buried away' in fine print.

3.12 The level of the liability cap can be negotiated on different bases, including, for example, as a multiple of the proposed fee, a percentage of the anticipated level of value to be reported, or a percentage of the amount intended to be loaned (in the case of valuations for loan security purposes). In construction projects the level of the cap may be related to the value of the construction contract. Some further guidance is given in Appendix B (residential) and Appendix C (commercial). In Appendix B it is noted that particular caution must be exercised when setting liability caps with 'consumers' (i.e. those who are not acting in the course of a trade or profession, which may include buy-to-let clients). RICS recommends that members obtain legal advice when seeking to impose a liability cap in a contract with a consumer, particularly given the potential involvement of the Competition and Markets Authority.

3.13 The terms of master contracts that seek to set a liability cap at the same level across differing instructions from a particular client should be considered very carefully, because the question of what level of liability cap is reasonable may vary from one instruction to another.

3.14 If a liability cap, or the basis for calculating the liability cap, is included in a firm's standard terms and conditions, rather than being included in an engagement letter that is specific to a particular instruction, it should be in a prominent position. RICS recommends that members refer to any liability cap in the engagement letter, to ensure it is given sufficient prominence to satisfy the rules on enforceability. It may improve members' position further to refer to the existence of the liability cap in the body of any report or written advice.

3.15 There are some circumstances in which the use of a liability cap is limited or prevented by law. For example, valuation reports prepared for inclusion within prospectuses under the FCA Listing Rules may not exclude liability to parties other than the addressee of the report (see UK VPGA 2 of the RICS Valuation - Global Standards 2017: UK national supplement). Specialist legal advice may be required in such situations. See above and Appendix B1 in relation to 'consumers'.

3.16 In law, any clause that attempts to exclude liability for personal injury or death or fraud will be unenforceable and members should make clear that caps do not extend to these liabilities.

3.17 Where members are asked to provide multiple pieces of work (for example valuations or surveys) under one instruction, the engagement letter should set out whether the agreed liability cap applies to each piece of work, or to the whole engagement 'in the aggregate'. A cap expressed to be 'in the aggregate' provides more certainty to the member as to the maximum liability for the whole instruction.

3.18 In some situations, the law permits a professional to go beyond capping or limiting liability by excluding legal liability altogether. The most common situation in which members do so is if they provide advice without charging a fee. Members who are no longer able to obtain insurance for risks relating to fire or where they are providing a valuation in reliance on an EWS1 form may also seek to exclude liability for any claims that would be caught by such exclusions. It may also be reasonable to exclude liability altogether in other client contracts, but this would usually be possible only where your client is a business user, not a consumer. To maximise the chances of such a complete exclusion being enforceable, RICS recommends that members should ensure the exclusion of liability is in writing and is specifically drawn to the attention of the recipient of the advice. (Where a member provides advice free of charge, they should still ensure that the advice given falls within the scope of their business services, as defined by their policy, or they may have no insurance in the event that the person who received and relied on their advice makes a claim.)