RICS draft guidance note - Risk, liability and insurance, 3rd edition

Risk, Liability and Insurance - 3rd edition

4 Third party reliance

4.1 As explained in section 2, a third party is any party who is not party to the member's contractual engagement, i.e. parties other than the firm's client. By way of example, if the firm's client is a lender, third parties may include the borrower, or another lender or investor who is investing in the lender's loan. If the client is a purchaser or property owner they may wish for successors in title to be able to rely on the professional's advice.

4.2 Members are regularly asked by their clients to agree to permit third parties to rely on their advice. RICS members should appreciate the risks in permitting third party reliance, and make a decision to permit third party reliance only on an informed basis. In particular, members should be aware that third party reliance can come in different guises. For example, it could be incorporated within the original terms of engagement for an instruction (including by way of obligations to provide reliance letters or collateral warranties to third parties in future) or could arise subsequently where members agree (expressly or impliedly) that a third party may rely on their advice.

4.3 This guidance note contains some additional, more specific guidance about third party reliance in valuation generally and in the residential and commercial contexts in Appendix A.

4.4 Permitting third party reliance is different from merely permitting a third party to 'see' or to have 'disclosed' to them the advice, as it does not automatically give rise to a legal duty to the third party. However, members should still take care even in allowing this, because there is a risk this might be construed as the same thing as permitting reliance, particularly if it is obvious that the third party will in fact be relying on the advice. If members do agree that advice may be 'shown to' or 'disclosed' to a third party, they would improve their position by making it clear( in writing), not only to their client but also to the third party, that this is being permitted without assumption of any legal liability to that third party. It is recognised this may not be possible in all circumstances, but it is important that members understand the risks entailed. Members should also make clear in their contracts/engagement terms that their advice may only be relied upon by the named client so as to ensure that they are aware of and have control over future requests for third party reliance.

4.5 Client relationships should be based on mutual trust. Permitting third party reliance can expose members to third parties whom the firm does not know, who might look on the advice very differently, and who might have a different attitude to bringing claims against a firm.

4.6 Permitting third parties to rely on advice has the effect of permitting them to be treated as the member's client. There are the following risks:

  • Permitting reliance by third parties who are in a different position from the client (such as the property owner, where the client was the lender) may expose members to claims of a different type.
  • Members' contractual terms of engagement (including the terms set out in this guidance, such as a liability cap) may not be binding on the third parties. In addition, some of the legal defences members might be able to raise if faced with a claim from a client may be more difficult to raise in response to a claim from a third party.
  • Some of the third parties with whom advice is shared might be based in different jurisdictions, and may try to bring claims before the courts of those jurisdictions, with very different laws from the laws that govern the relationship between members and their clients. It is also possible that such claims may not be covered by the member's PII if they are brought in jurisdictions that do not fall within the geographical limits of the PII policy.
  • Members should think carefully about whether they had communications with the client at the time of providing the advice that might affect the way in which the advice should be used. It may be necessary for those communications to be passed to the third party so that the advice is placed in the proper context. If so, members should try to influence the way in which the advice is passed to the third party, to ensure that, where possible, the advice is passed on together with those other communications only.
  • Members' PII may impose specific conditions concerning third party reliance and may exclude indemnity in relation to certain third-party claims - see paragraph 4.10.

4.7 If members do agree to permit third party reliance, they should be as specific as possible about who the permitted third parties are - permitting an entire 'class' of third parties to rely on the advice will add greater risk. Appendix C8 comments on what members should do if asked to issue a fee invoice to a third party.

4.8 Where RICS members do permit third party reliance, this should be done in a way that ensures:

  • the member will not have a liability to the third party greater than that it would otherwise have had to its client and
  • the third party understands and acknowledges (if it is the case) that the firm has not provided fresh advice and the effective date has not changed simply by the act of permitting third party reliance
  • the third party is bound by the terms and conditions of the firm's contract with its client (including the liability cap) and any liability cap is in aggregate in respect of claims by the original client and third parties
  • the purpose for which the advice has been provided has not altered simply by permitting third party reliance
  • that if there have been any changes to the advice given these are communicated clearly to the third party as well as the original client.

4.9 In considering whether to permit third party reliance, it is important for members to bear in mind the scope of their PII. The RICS Minimum Terms permit PII insurers to limit the cover available for claims brought by third parties to whom the contract has been assigned; the Minimum Terms require cover for assignments only where given to a financier or funding party and for only two successive assignments. Members should take specialist advice from insurance brokers or solicitors if they decide to permit third party reliance in the course of their practice, as they may need broader insurance cover.

4.10 This is particularly important if members permit reliance on valuations for the purposes of the securitisation of loans, loan syndication, stock exchange listing and other investment memoranda. Depending on their structure, those processes may entail transfer of loans, and assignment to the buyer of the loans of the ability to bring negligence claims against the original valuer. If a firm has only the 'two assignments' cover of the Minimum Terms, that may not be enough. Members should therefore review their individual insurance arrangements to verify whether they are suitable for their practice.

4.11 If a fee is being paid by a third party, it is important that members consider whether their client requires that third party to be entitled to rely on the advice. If not, the engagement letter and advice should make that clear, because otherwise the third party may seek to argue that they are entitled to rely on the advice by reason of having paid the fee.

4.12 Like all decisions involving risk, members should consider whether permitting third party reliance should, where practical or possible, command an additional fee to cover the relevant insurance cost and any additional risk.