RICS draft guidance note - Risk, liability and insurance, 3rd edition

Risk, Liability and Insurance - 3rd edition

2 The court's approach to professionals' liabilities

2.1 Breach of contract

2.1.1 The primary basis for a claim against a professional is for breach of contract. If the professional enters into a contractual obligation to do something, and fails to meet that obligation, either properly or at all, the other party (or parties) to the contract will be entitled to bring a claim for breach. Usually, this is a claim open exclusively to the professional's clients: only clients are party to the professional's contract and therefore only they may take action against the professional for breach of any obligations arising under that contract.

2.1.2 Whether its terms say it or not, a contract for professional services is usually considered to be subject to an 'implied term' that the services to be provided by the professional will not fall below the standards of skill and care expected from a reasonable body of the professional's peers. In effect, this means that the professional undertakes not to act negligently.

2.2 Negligence

2.2.1 In addition to claims for breach of contract, professionals may also be sued in 'tort'. A 'tort' (the term 'delict' is used in Scots law instead of 'tort') is an umbrella term for all civil wrongs recognised by the law, other than breach of contract. When referring to claims against professionals in tort, it usually means claims for the tort of negligence. In practice, a tort claim holds a professional to the same standard of care as the implied contractual term not to act negligently, as referred to above. The test the courts will apply when considering whether a professional person is in breach of their tortious duty is whether no reasonably competent professional would have acted in the same way, or provided the same advice, that the defendant professional did.

2.3 The differences between contract claims and negligence claims

2.3.1 As noted above, a claim for breach of contract can usually only be brought by a party to the contract, i.e. the client. A professional person can be sued in negligence by any third party (i.e. those who are not party to the contract) to whom they have expressly accepted a duty of care, or to whom the court says they have assumed a duty of care.

2.3.2 In English law, it can be a difficult legal question to know whether a duty of care is owed to any particular third party, particularly where a claimant argues that the court ought to impose such a duty on the professional person. When asked to consider whether a duty of care arises, the courts will see if a similar duty has been imposed in previous cases and, if not, they will consider whether:

  1. the damage suffered by the claimant was reasonably foreseeable as a result of the defendant's actions
  2. the parties were in a relationship of sufficient proximity, so the defendant could have anticipated their actions would cause loss to the claimant and
  3. it is fair, just and reasonable to impose a duty on the defendant.

2.3.3 The one situation in which members need to be particularly careful is where they are asked to permit third parties to rely on their advice. If the member does consent to reliance by a particular third party, they will probably be considered to owe that third party a duty of care, therefore enabling that person to sue the member for negligence if the member has not exercised reasonable skill and care in carrying out their work.

2.3.4 There are some technical legal differences between claims for breach of contract and claims for the tort of negligence, but the claims are similar, and it is therefore very important that a member does not lightly accept a duty of care to a third party, because in large part the practical consequence is to enable that party to have the same rights as a client. A third party who attains that status may also not be bound by the terms of the member's contract or terms of engagement, including any liability cap; and may have an extended period in which to bring a claim. See Section 4 for more information on third party reliance.

2.4 Damages

2.4.1 The remedy for breach of contract and for the tort of negligence is basically the same. If the claimant proves their case, damages will be awarded against the member to the extent necessary to put the claimant in the position they would have been in had the contract been performed fully and not been breached, or if the negligent act had not been committed. In order to be recoverable under a claim for breach of contract, the loss suffered must have been in the reasonable contemplation of the parties at the time the contract was agreed. For a claim in tort, the test is whether the nature of the loss suffered could reasonably have been foreseen at the time the professional acted in breach of duty. Any losses that fall outside the relevant test will not be recoverable. Generally speaking, claims will be for financial loss. There are circumstances in which other losses (i.e. loss of amenity) can be compensated but these are more unusual.

2.5 The purpose of the work

2.5.1 Although a member may not have full visibility of what a client hopes or intends to use their work for, they should record what they consent to it being used for. They should consider including wording along the following lines (secured lending is used as an example):

'Where you have explained to us the purpose for which you require our advice, we consent to its use solely for that purpose. If you rely on our advice for any other purpose, we shall not have any liability to you for any losses caused by you using our advice for that other purpose'.

2.6 The legal entity that provides the professional services/personal liability

2.6.1 In general, a claimant will bring any negligence claim concerning professional work against the entity that provided the services. If the client is bringing the claim, this will mean the claim will be brought against the entity that entered into the contract with the client. Usually, this will be the member's firm.

2.6.2 If a firm carries on practice as a partnership, and it is the partnership that enters into the engagement with the clients, the partners are individually responsible for the firm's liabilities, including claims. This means that, should a claim succeed against a partnership for, say, £500,000 in damages, the claimant can choose to enforce that award of damages against as few or as many of the partners as it wishes, until the full amount is paid. The partners are able to insist on sharing partnership liabilities according to their partnership agreement and partnership law, but vis-a-vis the claimant, they each have 100% liability. In Scotland, the position is different because, unlike in England and Wales, a partnership is a separate legal entity from the partners in the partnership. Scottish firms should take specialist advice about the implications of this.

2.6.3 By contrast, if the firm's business is conducted through a Limited Liability Partnership (LLP) or a Limited Liability Company, that should mean that the partners in the firm (strictly speaking, they are called 'members' in an LLP, but they are usually still referred to as partners) and the directors of the company, are not personally liable for the firm's debts. This should also mean that they are not personally liable for any liabilities the firm has for professional negligence claims. Therefore, from a risk perspective, the use of an LLP or a Limited Liability Company confers a significant advantage.

2.6.4 Occasionally, claimants try to bring claims against individual partners, or individual employees, even if the services are provided by an LLP. This means that it is prudent to include a clause in the terms of engagement excluding all personal liability; see section 5 for more information on addressing contractual terms.

2.6.5 In the majority of cases, the member/firm will of course look to its professional indemnity insurance to respond to any claim and this is addressed further in section 6.

2.7 How long after the services a claim can be brought

2.7.1 Statutory limitation periods control the time allowed for a claimant to commence court proceedings. Commencing court proceedings is what is meant by 'bringing a claim' - merely issuing a letter of claim will not suffice.

2.7.2 The limitation period for bringing a claim against a member for breach of contract will expire six years from the date on which the member performed the service required under the contract, for example by providing the survey or valuation report. Members in Scotland should refer to paragraphs 2.7.10-12.

2.7.3 Where the claim is brought as one for the tort of negligence, rather than for breach of contract, the period will often be longer, because the right to bring a claim will not arise until the claimant actually suffers a loss as a result of relying on the advice of the member. This requirement for a loss to arise almost always leads to a delay in the commencement of the six-year period.

2.7.4 By way of example, in respect of professional negligence cases relating to loan valuations the courts have held that a basic comparison should be made between:

  1. the amount of money lent by the lender that it would still have had in the absence of the loan transaction and
  2. the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.

The cause of action in tort arises (and the six-year period starts running) at the point at which the lender can be said to have suffered a loss due to the negligent valuation, because the amount owed (including any accrued interest) exceeds the value of the property and the borrower's covenant. By contrast, in contract the six-year period would start running earlier, at the point at which the valuation is undertaken.

2.7.5 In addition, in 1986, an important change was made to the Limitation Act 1980 to allow an extra period for a claim to be brought, because it was seen to be unfair that the six-year period could run out before the claimant realised they were legally entitled to bring a claim. Since then, a claimant who brings a claim in negligence has the opportunity to bring that claim up to three years after the date on which the claimant learned (or could reasonably have found out) about their entitlement to bring the claim. This three-year period applies even if it results in a period longer than the conventional six-year period referred to above, but it is subject to a 'long-stop' period of 15 years from the date of the negligent act. This is the position in claims for financial loss or property damage; a different statutory regime applies to personal injury claims. This also does not reflect the position in Scotland: members there should seek their own advice on the applicable limitation period for claims in tort.

2.7.6 These two points can lead to complex factual and legal issues, particularly in determining when the claimant actually suffered loss and when the claimant acquired the knowledge necessary to bring a claim. Those issues are beyond the scope of this guidance, but the important point to emphasise is that, in some situations, a claim relating to professional services can be brought more than six years after the member provided their advice to the client. Once the defendant has raised an argument about limitation, the burden then rests on the claimant to establish that the cause of action accrued on a date within the limitation period

2.7.7 Additionally, where a professional is retained to provide services under a deed (which is a special type of contract), the limitation period would be 12 years from the date of breach.

2.7.8 There are two important consequences arising from the limitation periods referred to above. The first relates to insurance. Section 6 is devoted to PII, but the fundamental point that must be made is that PII is provided to firms and members on a 'claims made' basis. This means that, in order for there to be insurance for a claim, there must be an insurance policy in place when the claim is made, regardless of when the services were provided. For example, for services provided in 2021, the firm should continue buying insurance every year until at least 2027. There is still a risk of a firm or its partners being sued if it ceases practice during that intervening period, which is why RICS requires firms to buy 'run-off' PII to cover the period after ceasing practice. RICS' regulatory requirement for run-off cover is contained in Professional Indemnity Insurance Requirements, Version 7, 2020.

2.7.9 The second consequence concerns document retention. Given the 'long stop' date of 15 years, RICS recommends that members retain their files for 15 years after providing any professional services, to ensure that they have the records necessary to respond to a claim. Any updated advice provided in connection with earlier services should also be retained for 15 years from the date of that advice, as a new limitation period will apply to each new piece of advice provided to a client.

2.7.10 In relation to claims in Scotland, the applicable period for claims in contract or for the tort of negligence is five years. As in England, this period does not begin until the claimant has incurred a loss, which may not be the point at which professional services were provided. However, the Scottish courts have taken a stricter approach to what is considered to be a 'loss' and there is no requirement for the claimant to recognise that something is a loss at the time so long as they are aware the loss has been incurred. For example, in the context of an overvaluation claim, the loss can occur (and so this time period begin to run) when the property is purchased for an excessive value even if the claimant is not aware it has been overvalued, because the claimant is aware of the purchase price having been paid. There is therefore less scope for Scottish claimants to extend the period in which a claim can be brought as described in paragraph 2.7.5. The loss must, however, be something more than just the fee paid to a professional for their services.

2.7.11 It has been recognised that this approach can produce an unfair result for claimants. This area is due for reform following the passing of the Prescription (Scotland) Act 2018, however, this has not yet come into force and, at the time of writing, it is not clear what the timescale for this is.

2.7.12 In Scotland, all claims for financial loss or property damage are subject to an overall 'long-stop' period of 20 years.