In Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd, a limitation of liability clause was found to be unreasonable and therefore unenforceable. The court held that although incorporated into the contract and in plain English, a limitation of liability clause was unreasonable because it sought to cap the professional’s liability to the level of its fees when the contract required it to hold significantly higher professional indemnity (PI) cover. However, courts will continue to look at each case on its merits. Following this case, we expect that most limitation clauses will be held to be unreasonable if the limit they apply is inconsistent with the level of insurance cover the professional is contractually obliged to hold.
The Trust was awarded £220,000 in its successful claim against a project manager relating to their management of a construction project. The project manager attempted to rely on a clause in its standard terms which sought to limit its liability to the level of its fees for the particular project (£110,000) or £1 million, whichever was the lower. The clause also sought to limit the project manager’s liability for negligence to ”such liability as is covered by our Professional Indemnity Insurance”. In a separate clause, the project manager agreed to maintain £10 million in PI cover.
The court did not allow the project manager to limit its liability to the level of its fees as envisaged by the limitation clause. It found that the Trust had effectively purchased access to the £10 million in PI cover when appointing the project manager and that cover would be “rendered illusory” if the liability cap was applied.
When a dispute arises in relation to a limitation of liability clause appearing in a commercial party’s standard terms (as was the case here), the court is required to consider whether or not it meets the “reasonableness” test in the Unfair Contract Terms Act 1977 (UCTA). UCTA expressly states that two of the matters to be taken into account when assessing reasonableness are (1) the resources available to the party seeking to impose the limitation which would be available to him to meet the liability; and (2) how far it was open to him to cover himself by insurance.
In the absence of an explanation for the discrepancy between the insurance cover and the proposed limitation of liability (which was hundred times lower), the court found in this case that the limitation clause was unreasonable.
The Court of Appeal in Moores v Yakeley Associates found that a limitation clause limiting the defendant’s liability to half its insurance cover (£250,000) was reasonable, where there was no contractual agreement between the parties as to how much cover the defendant would obtain. A court is less likely to find a limitation clause reasonable where (as in Ampleforth Abbey Trust) the parties have expressly agreed how much PI cover the professional is required to hold, and the limitation clause is significantly below this. As the judge said in Ampleforth Abbey Trust, where the parties have agreed the level of the professional’s insurance cover, the other party could be said to have contracted to have the benefit of that cover.
To some extent this claim was decided on its own particular facts and we doubt that courts will always require a professional’s proposed limitation of liability to match the level of cover it contracts to obtain. For example, there are circumstances where there may be a coherent reason for the discrepancy. This might, for instance, be the fact that insurance cover to a certain limit is a requirement of the professional’s professional or regulatory body. Alternatively, the discrepancy may reflect the fact that, although the professional has insurance to a certain level, this is subject to an aggregate limit which could be exhausted if more than one claim were to be made against the professional.
What can be learnt from this decision is that a professional wishing to impose a limitation of its liability, which is less than its agreed insurance limit, should ensure that it records the reason for the discrepancy so that there is evidence to support the reasonableness of the limitation clause if it is challenged. The professional should also bear in mind that the court will look at all the circumstances (not just the insurance position) to determine whether a limitation clause in its standard terms is reasonable.