Understanding Liability Caps in Business Contracts

Discover the common misconceptions and errors associated with liability caps, including the risks of setting the cap too low or hiding it from clients. Learn the importance of communicating effectively with clients regarding liability caps to avoid potential legal and financial repercussions.

• Liability Caps
• Risk Management
• Business Contracts
• Client Relationships
• Legal Responsibilities

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1. Liability Caps- a discussion for the RiskBites Club 14 November 2022 kareneckstein.co.uk

2. Liability caps- what we will cover Common misconceptions and errors with liability caps Getting the cap wrong The impact of getting the cap wrong Handy tips to help you get the cap right Using the cap to get your relationship with the client off to a good start kareneckstein.co.uk

3. Common Misconceptions and errors I don t need a liability cap as the client won t sue me A liability cap of a multiple of fee is appropriate A fixed liability cap is appropriate in all cases Putting the liability cap in the terms of business works Setting the liability cap too low Hiding the liability cap Saying the cap has been negotiated when it hasn t kareneckstein.co.uk

4. Getting the Cap Wrong(1) Choosing the cap- consider the risk of the matter going wrong, The likely value of loss arising if the matter went wrong The assets the client has to cover the loss The insurance cover you have to cover the loss Terms have to be reasonable Do you discuss the cap with the client first? If not, don t say so in the letter! If you do, is there a file note? kareneckstein.co.uk

5. Getting the Cap Wrong(2) Hiding the cap in the terms of business Implies it can t be negotiated Isn t drawing it to the client s attention Not advising the client that they can object to the cap Not advising the client that they should consider the clause Not advising that they can take advice on the cap if they want to before signing Failing to draw attention to the significance of the cap kareneckstein.co.uk

6. The Impact of getting it wrong If the cap is not drawn to the client s attention or is not capable of negotiation or the relevant factors are not taken into account (mainly, that it is too low) then The cap is more vulnerable to being struck out, meaning that you face unlimited liability. This means that a claim could exceed the limit of your PII policy You could face personal liability or the firm could be required to pay substantial sums which it had not budgeted for. You could go bankrupt or the firm could go into liquidation. At the least, the firm could face cash flow or profit issues. kareneckstein.co.uk

7. Handy tips to help get it right Document any discussion before the engagement letter Choice of caps and pick the option (maybe have 3 standard options?) Below your PII limit (only go above if client agrees to pay the top up cost- documented- very costly) In the engagement letter and in bold State the factors taken into account when deciding the cap Don t state the limit of your PII! (although you can say it is a factor) State that client can object and discuss if not happy Remind client it is an important term and can take legal advice kareneckstein.co.uk

8. Using the Cap to get the Relationship off to a good start Instead of we will restrict any liability for work done to 5x our fee Say something along the lines of we pride ourselves on the quality of the work we do and want to ensure that we give a good service, but in the event that we do not perform to the standards that are expected of us, our liability to you . will be limited to xxxx [a high sum] which we consider [or we agree] represents a suitable figure to compensate you for any losses you may incur # I.e. making the point that if the client is let down, they will be suitably compensated- a completely different message. # this is not formal wording to be followed, just the flavour! kareneckstein.co.uk

9. Liability Caps- a discussion Karen Eckstein 07973 627039 kareneckstein.co.uk karen@kareneckstein.co.uk kareneckstein.co.uk