It makes good business sense to seek to limit the extent of your liability to clients. If you act for consumer clients, from today (1 October 2015) things are a little more ‘interesting’ as they will have the protection of the Consumer Rights Act 2015 (CRA 2015). CRA 2015 doesn’t use the expression ‘limiting liability’ but it does talk about ‘excluding’ or ‘restricting’ liability and/or the client’s remedies. Does this mean you need to change your terms of business about limiting liability for consumer clients? It depends on your interpretation of section 57.
In this special report, we give you the heads-up on what we think.
Most firms have a clause in their terms of business capping liability to clients. It’s probably something along the lines of:
Our maximum aggregate liability to you in this matter will be £x including interest and costs unless we expressly state a different figure in our letter confirming your instructions. If you wish to discuss a variation of this limit, please contact the person dealing with your matter. Agreeing a higher limit on our liability may result in us seeking an increase in our charges for handling your matter.
From today (1 October 2015), the Consumer Rights Act 2015 (CRA 2015) replaces the Unfair Contract Terms Act 1977 in relation to consumer clients. Section 57 deals with limiting liability and it’s about as clear as mud.
We know, from s 57(1), that you can’t exclude liability altogether. So far, so good.
Section 57(3) says you can’t restrict liability in a way that would prevent the client from recovering the contract price—so, if your fees are £4m, you can’t limit liability to £3m. That’s probably fair enough.
The question is whether, in principle, capping your liability amounts to ‘restricting a remedy’ available to the client, ie damages for failure to act with reasonable care and skill. If yes, this appears to be prohibited by s 57(4), which doesn’t seem to fit with s 57(3), leading to the next question: is s 57(4) correctly drafted?
We’ve reviewed CRA 2015 itself, the short explanatory notes and the much longer CMA guidance, plus we’ve spoken to some of our compliance friends. Our preliminary view is that it’s not the intention of CRA 2015 to prohibit firms from fixing a liability cap. The legislation is not, however, clear and at some stage this issue will probably be resolved by the courts or perhaps clarified by further formal guidance.
If our interpretation of section 57 is correct, this doesn’t mean you have carte blanche to cap liability. Any cap will be subject to the new fairness test in CRA 2015.
In the meantime, the message is that if you’re using a standard clause capping liability (see above), don’t rush to make any changes unless:
- the cap is likely to be less than your fees on a particular matter, or
- the contract relates to digital content, as it’s clear from s 47 than you can’t exclude or restrict liability or a remedy in relation to a contract for digital content—this is unlikely to apply to most law firms.
Remember, this only relates to consumer clients. It’s business-as-usual for business clients.
A Practice Note explaining all this, is available exclusively to LexisPSL Practice Compliance subscribers. LexisPSL Practice Compliance is an online toolkit that makes risk and compliance easier to manage. It comes with everything you need to get your compliance house in order and keep it that way: practical guidance, templates, flowcharts, checklists and other time-saving tools. Find out more here.