Limiting liability for surveyors
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20 May 2020
Surveryors may be aware that, as of 1 May 2020, the minimum requirements for their Professional Indemnity Policies will see some significant changes. These relate not only to claims relating to fire safety and the EWS1 Form, but also to the requirements for the policy to provide cover for 'each and every' claim and for the surveyors' excess to exclude defence costs, which means that the surveyor may have to foot the bill for defending a claim, even if it is of no merit and is abandoned. It is therefore more important than ever for surveyors to think about how they can protect their position by limiting any liability they may have to those who might bring claims against them. There are various ways to achieve this: some are obvious but are often overlooked; others are less common, but are always worth considering.
One obvious way in which surveyors can limit their liability is by ensuring that their retainer letter clearly sets out who the client is and what services the surveyor will, and just as importantly will not, provide.
It is important to closely define who the client is, as that will determine to whom the surveyor owes a contractual duty of care and therefore who is able to bring a claim against them for breach of contract.
Clearly setting out in the retainer letter what the surveyor has agreed to do and what they have not agreed to do will help the surveyor to confine their liability to errors made in carrying out those specific tasks which they have agreed form part of their retainer. This is important because the first thing a court will look at when considering whether a surveyor has acted in breach of their contractual obligations will be the terms of their retainer.
In setting out the scope of services, surveyors should always try specifically to record any assumptions on which they are relying in providing their advice and any tasks that they will not be undertaking which might normally be expected to form part of the service they are providing.
If the scope of the services changes at any stage, the surveyor should ensure that this is also clearly recorded in writing.
Having set out the scope of the services which they are providing, the surveyor should then look to include limitations and exclusions in the contract, to help reduce their exposure in the event that a claim is made. There are three types of clauses that surveyors should consider and, if possible, include in all their retainers.
The first is a clause excluding personal liability of the individual surveyor and requiring the client to bring any claim only against the business. This is important because the courts have held that individual surveyors can be liable to clients where the retainer does not include a clause excluding personal liability.
The second clause which surveyors should include in their contracts is a proportionate liability clause. The purpose of this type of clause is to limit the amount the surveyor has to pay where both the surveyor and another party or parties (including the claimant) cause the loss which that claimant then seeks to recover.
“If the scope of the services changes at any stage, the surveyor should ensure that this is also clearly recorded in writing. ”
As an example, many of the claims which lenders made following the credit crunch involved allegations of negligence against both a surveyor and the solicitors who acted for the lender on the mortgage transaction. Often the lenders sued both the surveyor and the solicitors. However, they were not obliged to; where two parties have jointly caused a claimant loss, the claimant can sue either of them for the whole of the loss. If the lender sued the surveyor alone for its losses, perhaps because the solicitors were insolvent and their insurers had refused to cover the claim, then without a proportionate liability clause the surveyor would have to pay the whole of the claimant's loss. The surveyor would have a right to claim a contribution from the solicitors, but that right would be worthless. However, if the surveyor's contract contains a proportionate liability clause, then the court will consider the relative responsibility of all the parties who caused the loss before deciding what amount the surveyor should be ordered to pay. The claimant will only recover from the surveyor an amount representing the surveyor's just and reasonable share of the loss, with the claimant being left to pursue others for the balance.
In essence, including a proportionate liability clause in your contract transfers the risk of a party being unable to contribute financially to the loss from you to the claimant.
The third clause which surveyors should look to include is a simple liability cap. This is a binding contractual arrangement under which the client agrees that it can only recover damages up to a specified amount, irrespective of what its actual loss is.
Liability caps seek to allocate risk and reward between the surveyor and the client. The RICS is favourably disposed to them and recommends that surveyors use them were legally permissible.
Liability caps can take a variety of forms. They can impose a fixed maximum amount for any claim, which may be a multiple of the fee charged, an aggregate amount for all claims or a combination of the above. Surveyors can also limit the types of loss for which they are liable by appropriately worded exclusion clauses.
As a rule of thumb, the less a surveyor is paid for a job, the lower they will want the liability cap to be. A good example is residential mortgage valuation work, where the fees paid are very low but the potential liability where the surveyor gets it wrong can be disproportionately high.
“Liability caps seek to allocate risk and reward between the surveyor and the client. The RICS is favourably disposed to them and recommends that surveyors use them were legally permissible. ”
The point to keep in mind when considering the level and type of exclusion is 'Is it fair and reasonable?'. If it is, then in the event of a dispute, the courts will uphold the limit. If it isn't, then the clause will be unenforceable and the surveyor will have no contractual limit on their liability.
The test for reasonableness is set out in the Unfair Contract Terms Act 1977. Under this Act, any exclusions or limitations of liability in a standard term contract are of no effect unless they are reasonable. The factors that a Court will consider in determining reasonableness include the relative bargaining position of the parties; whether the customer knew about the limit when the contract was concluded; and which party is better able to protect themselves against the loss suffered, for example by taking out insurance.
Whilst in general there are few restrictions on the limits of liability which surveyors can incorporate in their contracts with other businesses, so long as those limits can be shown to be reasonable, extra care must be taken when seeking to limit or restrict liability in contracts with consumers. This is because any restrictions on liability in consumer contracts may fall foul of the provisions of the Consumer Rights Act 2015, which provides that any term which "causes a significant imbalance in the parties' rights and obligations" will be unfair and therefore unenforceable.
The Act provides an indicative and non-exhaustive list of terms that may be regarded as unfair, including any term that has the object or effect of limiting the legal rights of the consumer in the event of inadequate performance by the party supplying the services. The Act also makes it clear that, in order to be enforceable, any term must be 'transparent and prominent'. Where a surveyor is seeking to limit their liability when dealing with a consumer, they should not only record the terms of the limit clearly in their contract with that consumer, but should also discuss its effect with the client, so there can be no argument about whether the term meets the test of transparency and prominence.
The RICS has provided examples for each of the limitation clauses we have discussed in this article, in the Guidance Note entitled 'Risk, liability and insurance in valuation work', a copy of which can be accessed here.
All of these terms can help to limit the amount a surveyor has to pay if they are found to have breached their contract. Although it is perhaps an obvious point to make, it is important to ensure that the client has agreed to the retainer letter and the terms and conditions limiting liability before the surveyor starts work. Ideally, the client should be asked to sign a copy of the retainer letter and the terms and conditions confirming they have read and agreed to them and to return this to the surveyor before work starts.
Following these steps will not stop your clients making claims against you, but it may help to keep any claims within proportionate financial limits.
- By Alexandra Anderson, Partner RPC
- A version of this article originally appeared in the February/March 2020 edition of the Built Environment Journal
